The Energy Space



 | Dec 18, 2012 | 8:18 AM EST
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Energy Price Outlook 

WTI futures bumped up against resistance from the 50-day MA at the day's high yesterday, but the rally was assisted by favorable news on the Seaway pipeline and some progress made on the fiscal cliff. A breakout above the 50-day will likely require further progress on cliff negotiations as well as signs of economic growth and improving oil fundamentals. At the moment, neither appears to be building momentum as the Empire State survey fell yesterday, and negotiations could go down to the wire at year-end. In the background, pressure will come from growing oil production, elevated oil inventories, and lackluster demand. The positive side will look to improving economic growth in China and Europe and toward weakness in the dollar. We would continue trading oil markets as a trading affair in the near-term, as the market remains fairly priced.

The oil markets traded alongside the stock market through the first half of the day, but remained firm in the second half after stocks weakened somewhat. The initial boost came from weekend reports that House Speaker Boehner had offered Pres Obama a tax hike on incomes over $1.0M, and an extension of the debt ceiling for one year. An increase in the Medicare eligibility age was also said to be removed from the offer, but the White House reportedly rejected it altogether. This was the closest that the two sides have come to reaching a compromise, however, the rejection of the deal may suggest that one or both sides want to keep negotiations going until the end of the year so as to appear as though they are working hard for constituents interests.

WTI received an additional boost yesterday from the announcement by Enterprise Products Partners that its Seaway pipeline was on schedule to begin operating at flow rates of 400,000 b/d in early-Jan. It didn't provide a specific date for the ramp-up, however, the news helped the Brent-WTI spread narrow by $1.01/bbl. WTI settled +$0.47/bbl while Brent closed -$0.54/bbl.

The downside will be countered by a mixed picture on the economic front. Weakness in the Empire state index was reported yesterday, which fell to -8.10 in Dec from -5.22 previously. It was the fifth month in the last six that showed a contraction. The Nov level compared to -6.16 in Oct, so while there wasn't a direct impact from Hurricane Sandy. A supplemental question in the survey asked about the effect, and respondents said they anticipated no effect. Weakness in the U.S. may be countered by Japan and China, however, where the Japanese election over the weekend resulted in a new PM who favors fresh stimulus efforts. The Chinese PMI number reported on Friday improved to 50.9 from 50.5 previously. India's growth forecast for Q1 was cut yesterday, however, the market expects that to open up new chances for stimulus.

Natural Gas

January futures settled 4.4 cents higher yesterday, with the front-months outperforming the back months. The market gained most of its support in the first half of the session, when it reacted to weekend forecasts showing colder weather. NOAA's weekend maps had the area of above-normal temperatures in the central portion of the country shrinking and becoming less warm. They were confirmed yesterday afternoon, where an area of below-normal temperatures are now forecast to cover the west coast and the northern plains. Snow is forecast to reach Chicago on Thursday and lows in the teens could be seen for the five days after. The HDD numbers from last week imply that a draw of 66 bcf could be reported this week and fall short of the 144 bcf seen in the five-year average. However, focus could turn toward next week's below-normal temps creating a drawdown that's potentially closer to the five-year average.

Yesterday's strength was countered by potential longer-term fundamental pressure from Japan and Congressman Markey. Japan's election over the weekend saw LDP candidate Abe win with a large margin. He has run on the platform of encouraging more central bank stimulus as well as returning the country to nuclear power. All but two of the country's 50 nuclear reactors are idle due to the March 2011 earthquake and the disaster at Fukushima. The plan since the disaster was to phase-out nuclear power by the end of the 2030s. Massachusetts Congressman Ed Markey could offer longer-term pressure after he said yesterday that the DOE's study on natural gas exports released two weeks ago was flawed and should be repeated with updated data. He said that given the important role that the study may play in determining natural gas export policy, the study's methodology should be reevaluated in some key areas. If excess gas remains bottled up in the U.S. because of either of these events, it could present longer-term pressure on prices.

In the short-run, we think that the market could rebound slightly. Friday's trade moved within a penny of the 100-day MA on the continuation chart at $3.25. Just below that is additional support from the Sep 7th low at $3.20. Prices are close to the $3.05/mmbtu equivalent of coal, and Total signed a 20-year agreement to purchase LNG from Cheniere yesterday. The market is oversold and due for a bounce. We could see the market bouncing toward $3.60 in the next few days, and favor buying at $3.30 while risking $3.20.

Global Economic & Dollar News

» Japan's LDP won a victory by a wider-than-expected margin in the weekend election. New PM Abe has argued in favor of more economic stimulus as well as restoration of nuclear power.

» The Japanese Election Result is expected to prompt the BOJ to ease again in Thursday's meeting.

» Chinese Officials pledged to take actions to ensure appropriate loan growth in 2013.

» India's Growth Forecast was cut by the government. It also expects lower inflation in Q1, which could open up the potential for new stimulus.

» Speaker Boehner offered a tax increase on incomes over $1M and pledge to extend the debt ceiling one year. He also said he will not try to raise the Medicare eligibility age and will instead settle for cost-of-living adjustments. The White House rejected the offer.

» Empire MFG Index fell to -8.10 in Dec vs. -1.00 expected and -5.22 previously.

Energy News

» Massachusetts Congressman Ed Markey said that the DOE's study on natural gas exports released two weeks ago was flawed and should be repeated with updated data. He said that given the important role that the study may play in determining natural gas export policy, the study's methodology should be reevaluated in some key areas.

» Motiva's Port Arthur crude unit (325 kb/d) attempted to restart over the weekend, but experienced a fire.

» The Seaway Pipeline may begin operating at flow rates of 400,000 b/d in early-Jan, according to a filing from Enterprise Products Partners. The company added that it will further increase its shipping rates to 850,000 b/d during Q1 2014.

» North Dakota's Oil Output increased by 18,000 b/d in Oct to 750,000 b/d. Production from Bakken increased 19.31 mb/d to 682,390 b/d.

» Total agreed to purchase LNG from Cheniere and its Sabine Pass facility in Louisiana in a 20-year agreement. Deliveries are expected as soon as 2018.

Upcoming Energy Events

Tue - NAHB Housing Index

Tue - API Inventories (4:30pm EST)

Wed - Last Trade Jan WTI

Wed - Housing Starts

Wed - EIA Weekly Oil Inventories (10:30am EST)

Thu - Philadelphia Fed Index

Thu - Natural Gas Inventories (10:30am EST)

Jan 16th - Iran-IAEA Meeting

May 31st - OPEC Meeting


EIA Inventory Preview

We anticipate a decline of 1.0 MB in oil stocks this week. Oil stocks typically fall 13.54 MB between the w/e Nov 23rd and Dec 28th, as holders of oil typically try to liquidate more expensive oil purchases made later in the year and report the less expensive oil acquired earlier. That wasn't necessarily the case this year, however, as oil prices have generally declined throughout the year. At the same time, it's been difficult to determine whether oil holders are in fact liquidating, since stocks gained 0.8 MB last week, but fell 2.4 MB the week prior. Oil imports have been relatively firm in the last few weeks, and could make up the difference in terms of prompting only a small drawdown. Demand has been week and oil production high, and could also prevent declines as large as the 5.6 MB shown in the five-year average. A key comparison will likely be oil stocks with their five-year average. It reached 45.04 MB last week, which was the highest divergence in the series since Apr 24th 2009.

Oil products could increase again, as refiners have been processing increasing amounts of oil in order to reduce bloated stock levels. Utilization has increased more than 5.0% in the last five weeks, which has meant that an additional 900 kb/d of oil has been refined into products. Pressure on gasoline stocks will come from the divergence currently in place with API statistics, which show that the EIA has to fall or API has to rise 7.9 MB in order to converge again. We anticipate 2.0 MB being added to gasoline stocks and 1.0 MB added to distillates. Additional difficulty in predicting the products and utilization numbers this week will be the impact of BP's Whiting refinery problems. The facility shut its largest crude unit in November, however refinery inputs have increased since that time.

Natural gas inventories may fall 66 bcf this week which is significantly less than the 144 bcf drop shown in the five-year average. HDD readings were 163-170 this week, compared to around 120 last week, and were driven by cooler temperatures on the east and west coasts. While such a reading would normally be seen as bearish for the market given its comparison to the five-year average, the question now will be how much these data have been priced-in after the 75 cent selloff in the last three weeks. Prices are oversold and weather is turning colder, which could offer support to the market overall.

*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures

Grains Commentary

Published Monday morning, 12/17/12

The overnight markets seem to show that things are starting to move more into a "holiday mode" as ranges are small and overall volume is shrinking. The bean along with old/new crop spreads seem to be doing most of the work as the old crop beans are trading up 7-10 while new crop is unchanged, meal has a similar structure, oil is unchanged, corn is virtually unchanged after trading both sides of unchanged and wheat is up 2-3.

It's hard to believe in December that new crop prices are paying so much attention to US weather, but given the fact that soil moisture is at or near record low levels the only way it changes is that it improves. The forecast for a good portion of the US is shifting to a stormier pattern with multiple snow storms predicted over the next 2 weeks. The SA weather has a little bit for everyone as we saw late last week that Argentina is dropping production figures to 53.0mmt for beans and 24.0mmt for corn after the excessive wetness has an overall acreage reduction. The forecast is improving for Argentina as rains will come at a more normal pace. There are parts of Brazil that could show some concern but the overall sentiment is that record production will still be seen and with the forecast of continued chances of rain there is no reason today to think that anything will change production.

The basis levels for beans remain very robust as demand is still seen from both the domestic crusher as well as the exporter, another 151.0mt of beans were sold to unknown this morning. The pace that the US is on for exports is not sustainable and something must change, its either flat price needs to rally significantly or business must be curtailed. The fact that the US already has more than 100% of the bean oil exports on the books and massive meal on the books one would think that it's the export market that eventually lose out. The problem is that both US and global crush margins remain profitable.

The OI in corn fell by 4734, wheat increased by 2884, and beans were down 581, meal is up 5211 and oil is down 3420.

The outside markets are mixed with stocks lower, crude oil is down .02, natural gas is up .04, RBOB is up .40, gold is down $4, cotton is up .36, DCE is higher in all markets, the MDEX is up .04 ringgits, and Matif markets are also trading higher as of 8CST.

The January options expire on Friday and as we have seen the markets tend to gravitate towards the largest OI'd strike price, the SF 15 strike is the largest in beans and the 730 is the largest in corn. The market does not have a lot of influential news coming out anytime soon but shortly after the first of the year the focus will quickly shift to the USDA report on January 11th, and over the past few years this report has created a significant wake. The corn vs. wheat has some interesting plays since corn is at a 4-5% discount, looking to own corn puts vs. wheat puts is something to monitor since the future spread is at its lowest levels in months. The world wheat prices vs. US levels seem to show that the US is at least competitive, if this is the case may be looking to own some type of calls or call spreads might be worth pursuing. The meal/oil continues to run off the rails, looking to own oil calls for protection might be worth pursuing since they are in the upper teens.

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