*Inventory report schedule during the holidays:
API report will be released at 4:30 pm EST Thursday Dec. 27 and Jan. 3.
EIA petroleum report will be released at 11 a.m. EST Friday Dec. 28 and Jan. 4.
EIA natural gas report will be released at 10:30 a.m. EST Friday Dec. 28 and Jan. 4.
Energy Price Outlook
The oil markets may trade higher again in the near-term, however, the fundamental picture still remains somewhat weak at the moment. Support may come from signs of progress in fiscal cliff negotiations, yesterday's advance in WTI above the 50-day MA on the continuation chart, a weaker dollar, and speculation about stimulus in Japan and China. Economic data has been mixed in the U.S. recently, but some are looking past it by attributing it to Hurricane Sandy. Pressure on oil prices should be offered by high levels of inventories, growing oil production, and lackluster demand. Additionally, Brent futures are still around a full dollar below their 50-day MA at $109.85/bbl. We'd look to continue trading the oil markets as a trading affair in the near-term and expect that prices will remain fairly range bound through year-end.
Brent finished +$1.20/ bbl and WTI +0.73/bbl yesterday with WTI managing a small advance above its 50-day MA at $87.63. Brent seemed to outperform WTI based on the announced restart plans for Motiva's crude unit in Port Arthur Texas by Dec 23rd. The new crude unit opened in May after installation but quickly shut down due to pipe leakage. It attempted to restart last weekend but experienced another fire. Part of Brent's outperformance may also have been an unwinding of WTI's outperformance on Monday which was caused by Seaway's confirmation of an early-Jan ramp-up of its new 400,000 kb/d capacity. The last trade in Jan WTI futures is today.
The market also rallied yesterday on the perception of progress in fiscal cliff negotiations and expectations that the Japanese central bank will add further stimulus. The deal-making on tax cut extensions took place late on Monday and went from $250K from the president to $1M from the speaker, and then to $400K from the president. The speaker dropped his demand of a hike in the eligibility age for Medicare and the president accepted a change to make cost-of-living adjustments based on chained CPI. The differences appeared small at the beginning of the day, but progress later seemed to stop and a republican "Plan B" was later discussed which would prevent tax hikes on as many people as possible. That vote could come tomorrow, but the White House has said it would be against it.
We believe a big portion of yesterday's rally was caused by excitement over the cliff as well as expectations that the Japanese would engage in more QE. The election over the weekend increased the odds that the BOJ would adopt a 2% inflation target and print as much money as possible to get there. Its most recent CPI number was -0.4% y/y. The Chinese may also add stimulus, after a government economist yesterday said that there is more room to cut RRRs in 2013.
January futures settled 6.0 cents higher yesterday, as strength was broadly seen across the futures price curve. The rally was sparked by a shift in weather forecasts toward the colder side, with Earthsat saying that the New Year may start with below-normal temps in the Midwest and mid-Atlantic regions. NOAA's maps also have colder-than-normal temps moving eastward from the west coast, which could indicate higher gas demand going forward. The market will keep an eye on tomorrow's long-term forecast update by the CPC.
Near-term trade may rebound slightly with resistance offered between $3.51 and $3.60. Friday's trade moved within a penny of the 100-day MA on the continuation chart at $3.25, and just below that was additional support from the Sep 7th low at $3.20. The market is oversold and due for a bounce. We could see the market bouncing toward $3.60 in the next few days. We're unable on our buy recommendation made Tuesday at $3.30, with a $3.60 target and $3.20 risk.
Global Economic & Dollar News
» Japanese Stocks rallied as speculation grew that the BOJ would adopt a 2% inflation target and pump enough liquidity into the economy to reach it. A target announcement could be made at this week's BOJ meeting or within the next month.
» China will set a 7.5% GDP target for 2013 and is in-line with 2012 expectations, according to press reports. The report also said that the gov't will lower its inflation target to 3.5% from 4.0% in 2012.
» A Chinese State Economist said that there is more room to cut RRRs in 2013.
» Fiscal Cliff Talks showed more progress on Monday evening when Pres Obama countered Speaker Boehner's offer to raise taxes on incomes over $1M and not try to raise the Medicare eligibility age. Pres Obama proposed moving the goalposts up to $400K in income. Entitlement liabilities may be tied to chained CPI to slow their growth rather than raising the eligibility age. Pres Obama may give up on extending the payroll tax cut.
» NAHB Survey rose to 47 in Dec from 45 previously. It was the highest since April 2006.
» Speaker Boehner had a press conference mid-morning yesterday where he said that the president is asking for
$1.3T in revenue and only $850B in spending cuts. He said that that is not balanced and that he wants $1T in cuts for $1T in revenue increases.
» Republicans are working on a "Plan B" where they would shield as many Americans as possible from a tax hike. Speaker Boehner may bring it up for a vote as early as Thursday.
» Eagle Ford Oil Production increased 76% y/y in October to 323,098 b/d.
» Motiva's Port Arthur refinery reported that it is operating at reduced rates. The new crude unit which experienced a fire and was shut down over the weekend (325 kb/d) will attempt to restart by Dec 23rd.
Upcoming Energy Events
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)
Thu - CPC Long-Term Forecast Update
Thu (27th) - API Inventories (4:30pm 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
Natural Gas Commentary
Published Tuesday afternoon, 12/18/12
Natural Gas traded higher settling $3.418 up $0.06 1.8%. The curve was weaker, 13/16 down $0.08 (16-20 up btwn $0.08-$0.13). Hub cash was firmer, ~$0.08 back this morning, Z-6 up $0.15 to $3.55. The 12z was warmer Midwest and South and much cooler West Coast/Plains during the 6-10 day. The 11-15 day was significantly cooler West and South-Central U.S. Thursday we anticipate a withdrawal from storage ~75 Bcf, bearish vs last year's 100 Bcf withdrawal and 5-yr average 143 Bcf withdrawal. This week will further widen to the YoY and 5-yr surplus to ~100 Bcf and 300 Bcf.
Vol was offered in F13 but firmer overall: (F13 340 14.00 15.00 34.05% -2.13% G13 345 35.50 36.50 38.59% 0.43% H13 345 45.00 46.50 38.01% 0.34% J13 350 51.50 53.00 36.18% 0.53% K13 355 57.00 58.50 34.39% 0.09% M13 360 63.00 64.50 33.49% 0.30% N13 365 68.00 69.50 32.92% 0.01% Q13 365 73.00 74.50 32.78% 0.63% U13 365 78.50 80.00 32.96% 0.14% V13 370 83.00 85.00 32.67% 0.20% X13 380 85.50 87.50 31.02% 0.18% Z13 400 88.50 90.50 29.23% 0.50%). Technically we are neutral, we look for $3.25 (100dma) to hold. Resistance is found at $3.47, $3.58, $3.70. On the downside we see support at $3.36, $3.25.