*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
It's difficult to say that yesterday's rally and breakout above the 50-day MA in WTI and Brent will create an environment of bullish euphoria in the near-term, because the same conditions have played themselves out several times in the last two months. At least three other rallies in that time have fallen victim to strong resistance in WTI at the $90.00/bbl price level and in Brent at $112.00/bbl, and the current rally could do the same, as there wasn't much bullish fundamental change yesterday.
We wonder too how much of yesterday's rally was backward-looking, because the Dow rallied 115 points on Tuesday but WTI gained only 73 cents. The Dow fell 99 points yesterday, but WTI gained $1.58. Some of the recent strength in the Dow had been due to signs of progress on the fiscal cliff and a new easing program by the Bank of Japan possibly to be initiated at today's meeting. That changed yesterday after speeches by Pres Obama & Speaker Boehner. The inventory report was mixed yesterday, but some support for prices was given by signals that next week's report will be bullish. Such forward-looking reasoning on inventories is a bit rare, and we would look for the two-month sideways consolidation to continue.
WTI settled $1.58/bbl higher yesterday while Brent finished +$1.52/bbl. Jan WTI futures had their last trade yesterday, but it didn't seem to matter to the futures price curve. Oil markets made most of their advance in the wake of the weekly oil market report, which showed a smaller-than-expected decline in oil stocks. Oil stocks also grew to 49.64 MB above the five-year average, which was the highest divergence with the average since the w/e Apr 24th '09 when it peaked at 50.92 MB. Prices were on the upswing in Apr '09 as the economy was still recovering from the financial crisis. Distillates fell more than expected in yesterday's number, however, it was likely the fact that the improvement in subcomponents signaled better numbers ahead that energy prices rallied. The 1.1% increase in refinery utilization, for instance, implies that inventories will fall sharply next week. Similarly, the strong gains in demand for distillates and gasoline would suggest that their inventories will fall again next week. Some support to energies may also come from today's BOJ meeting, if fresh quantitative ease reignites the yen carry trade.
The selloff in stocks yesterday afternoon, however, will show that there are still negative influences on oil markets. Worry about the fiscal cliff gained momentum yesterday after both Pres Obama and Speaker Boehner made speeches that suggested that the other side's plan to avoid the cliff is unacceptable. Speaker Boehner said that he will hold a vote on a plan to keep tax cuts in place for incomes less than $1M today and that if the president vetoes it, he will be responsible for the largest tax cut in American history. The president said that the GOP plan would actually cut taxes for the wealthy and raise them for the middle class. The two sides moved further apart yesterday, and could pressure energy prices if it continues. We think both sides want to be seen as "fighting" for their constituents and that a deal will be made within a day before or after the New Year.
January futures settled 9.8 cents lower yesterday as the front-end of the curve performed the worst. The broad consensus behind the decline was that weather forecasts turned warmer in the Midwest and Northeast, thereby reducing heating demand. Interestingly, NOAA's 8-14 day map below shows the opposite conditions, whereby the area of below-normal temps that had covered the western half of the country on Tuesday is now projected to extend all the way between the west and east coasts. Perhaps the temperature readings did become warmer in some spots overnight, however, NOAA's map may suggest that yesterday's selloff may have been overdone. Fresh long-term monthly maps will be published by the CPC today.
Despite the selloff, the market held above Friday's low at $3.26. That low was made as trade tested and held at the 100-day MA at $3.25 and moved within six cents of the Sep 7th low at $3.20. The selloff fulfilled our buy recommendation made Tuesday at $3.30 with a target at $3.60 and a risk at $3.20. Consensus on inventories today is -72 bcf and our estimate is -66 bcf.
Global Economic & Dollar News
» German IFO Business Climate was 102.4 in Dec vs. 102.0 expected and 101.4 previously.
» U.S. Housing Starts were -3.0% to 861K vs. 872K expected and vs. 888K previously (revised down from 894K).
» The White House said that the GOP "Plan B" is not balanced and the president would veto it. Said that the plan would cut taxes on incomes over a million and raise taxes on the middle class.
» Speaker Boehner said that the president is not being serious with $1.3T in revenue hikes and $850B in spending cuts. Said that the House will vote on maintaining tax cuts for incomes under $1M today, and if the president vetoes it, he will be responsible for the largest tax hike in American history.
» Saudi Arabia's Oil Production was unchanged in Oct from Sep levels of 9.72 mb/d, according to the Joint Organizations Data Initiative (JODI).
Upcoming Energy Events
Thu - Philadelphia Fed Index
Thu - Natural Gas Inventories (10:30am EST)
Thu - CPC Long-Term Forecast Update
Thu (27th) - API Inventories (4:30pm EST)
Fri (28th) - EIA Weekly Oil Inventories (10:30am EST)
Jan 16th - Iran-IAEA Meeting
May 31st - OPEC Meeting
EIA Inventory Review
The EIA reported inventories that on the surface were slightly bearish for crude oil prices and marginally bullish for distillates. The gasoline number was close to expectations and neutral at first glance. The oil figures did in fact fall, which was anticipated by the consensus, but they didn't fall as much as the 1.8 MB expected or as much as the 4.1 MB drop shown by the API on Tuesday afternoon. Oil prices rallied regardless of the report, but only by a small 50 cents or so in the first 10 minutes after the report. Gasoline performed the best by gaining about 1.5 cents compared to heating oil's 0.8 cents.
The numbers were at odds with the underlying components to a large degree, and may have been the result of trends that had developed in previous weeks. Demand for oil surged from consumers, refineries increased their utilization levels, and oil imports declined. Exports of gasoline increased but wasn't reflected by the 2.2 MB increase in inventories. These factors may have helped energy prices rally as the day progressed on the belief that next week's inventories will reflect this week's favorable developments in the subcomponents. The data and our analysis follow below.
*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures
Crude oil inventories were -1.0 MB vs. -1.8 MB expected. The difference between current inventories and the five-year average jumped to 49.64 MB from 45.04 MB last week and reached the highest divergence since the w/e Apr 24th '09 when it peaked at 50.92 MB. It also surpassed the previous peaks made earlier this year at 42.08 MB and 44.33 MB. The drop in oil stocks seemed to be related more to events in previous weeks than this week, where imports and production had been surging and end-user demand had been falling. That changed in yesterday's report where demand increased 1.13 mb/d and imports fell 100 kb/d. Production gained 11 kb/d and reached the highest level since Jan 28th '94. Demand is historically volatile, and this week's number essentially moved from the average of the last two years up toward the top of the range. Over the last few months, it's been around 500 kb/d below the five-year average. Overall, the build in inventories and relatively weak demand is a long-term negative for oil prices, but yesterday's data showed some signs of improvement.
Gasoline stocks were +2.2 MB compared to consensus of +2.0 MB. Inventories are now 7.10 MB above their five-year average compared to 5.97 MB above it last week. The increase was helped by factors that have been in place in prior weeks including production gains caused by higher refinery utilization and weakness in demand. Both categories reversed this week, along with imports, and argue for a decline in gasoline stocks and a potentially bullish number next week. Perhaps that's why the market traded as well as it did. Gasoline demand increased 130 kb/d, imports fell 64 kb/d, and production fell 20 kb/d. Another part of the explanation for the good performance in gasoline prices was the increase of 124 kb/d in exports in our view.
Distillate stocks were -1.1 MB vs. +1.0 MB expected. It was perhaps the most positive aspect of the report, with distillates still 27.85 MB below their five year average compared to 27.80 MB below it in the previous week. A huge 714 kb/d increase in demand was to blame for the decline, and was complemented by a 37 kb/d increase in exports. The drop in distillate stocks was countered by a 118 kb/d gain in refinery output and a 51 kb/d increase in imports. Overall, we view the distillate numbers as supportive for heating oil prices.