The Energy Space

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EOXLive

 | Dec 21, 2012 | 8:52 AM EST  | Comments
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*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

Oil prices rallied slightly yesterday in WTI, but fell in Brent. Wednesday's breakout above the 50-day averages in both markets thus witnessed little upside follow-through. The market may find difficulty advancing further due to the unresolved fiscal cliff, uncertainty in the global economy, and a potential that recent strength has been partly fueled by expectations of additional QE in Japan which was granted yesterday. Oil inventories remain elevated and the divergence with the 50-day MA is nearing record levels (we analyze the negative effects of this in the Analysis section on pages 4 & 5). The bullish case is being built on expectations of fiscal cliff resolution and sporadic signs of economic growth tied to recovery from Hurricane Sandy in the northeast (i.e. improved Philadelphia Fed vs. higher jobless claims). Given the triple failure near the $90/bbl level in WTI in the last two months, we would anticipate the sideways consolidation continuing in the near-term.

WTI settled 15 cents higher while Brent fell 16 cents. Despite making a new three-week high, markets were fairly range-bound through the majority of the session, as WTI had trouble with the $90/bbl level once again. Brent's trouble spot is the $110-$112/bbl range. There was support offered early by the report that North Sea BFOE loadings would fall 7% in Jan to 1.83 mb/d from 1.97 mb/d in Dec. Prices were boosted further by improvement in the Philadelphia Fed index and the existing home sales report, which both indicated that the economy may be improving. The support was fairly limited, however, as the jump in unemployment claims and Wednesday's drop in new home sales may imply that the recovery may be focused more in the Northeastern U.S. where rebuilding is taking place after hurricane Sandy. Dueling speeches by Senator Reid and Speaker Boehner cast a negative light on fiscal cliff discussions, and pressured the market in the second half of the session. The House vote on "Plan B" is scheduled for Thursday evening and is unlikely to be approved by the Senate.

It's tough to join on the bullish bandwagon in oil prices. It seems that every time there was a chance for recovery in the last two months, the rally lost momentum and prices eventually fell. One of the key negatives in the market recently has been the growth in oil production and rising inventory levels. We discuss both on pages 4 & 5 below, and can see that there's an inverse correlation between inventories and oil prices. The near-record level of inventories above their five-year average implies that prices should fall once again. Granted, distillate stocks are much lower than they were in 2009 when the current record was set. However, refinery margins are too low at the moment to encourage refiners to convert oil stocks into distillate products.

Natural Gas

January futures settled 14.2 cents higher yesterday, and the front end of the futures curve performed better than the back end. The rally began overnight after NOAA's weather forecasts on Wednesday afternoon showed growth in the area of below-normal temperatures across the country. Wednesday's 9.8 cent selloff had largely cited above-normal temperatures as the reason, so perhaps NOAA's forecasts caught some traders off guard. About 6.0 cents of yesterday's rally was made in the few minutes after the inventory report showed a drop of 82 bcf. The drop compared to consensus expectations of around 72-75 bcf and also caught the market leaning the wrong way. NOAA released its long-range forecast maps, but the changes appear to be somewhat minimal as shown below.

The market still appears as though it may have some upside momentum to it, however, the volatility that has existed is likely to remain. Technical support will be offered by Friday's test and hold at the 100-day MA at $3.25, and Friday's hold above the Sep 7th low at $3.20. Wednesday's selloff fulfilled our buy recommendation made Tuesday at $3.30 with a target at $3.60 and a risk at $3.20. We favor raising the risk to our $3.30 entry point.

Global Economic & Dollar News

» The BOJ pledged to expand its asset purchase program for the third time in four months, and will reconsider its objectives for inflation at its next meeting on Jan 21-22. Asset purchases will rise to ¥76T from ¥66T.

» Italy's Monti is expected to get his budget passed soon, and clear the way for him to step down.

» U.S. Q3 GDP was revised up to +3.1% from +2.7% in the first revision and compared to +2.8% expected.

» Jobless Claims were 361K vs. 344K previously. Continuing claims were 3.225M vs. 3.212M previously (revised up from 3.198M).

» Philadelphia Fed Index was +8.1 vs. -3.0 expected and vs. -10.7 previously. The rebound likely reflected the recapture of activity following hurricane Sandy.

» Existing Home Sales were +5.9% to 5.04M vs. 4.90M expected and vs. 4.76M previously.

» Senate Majority Leader Reid said that the Senate won't take up any House fiscal bills. He said that republicans have wasted an entire week on pointless stunts, and added that Boehner "can't get enough votes together to pass much of anything."

» Speaker Boehner said that the president's plan doesn't fit the definition of balanced and that he is unwilling to stand up to his own party.

» House Republicans Will Vote on their Plan B approach around 7:30-9:30pm EST, which would raise taxes on incomes over $1.0M.

Energy News

» North Sea BFOE Crude Oil Exports in Jan will fall 7% to 1.83 mb/d compared to 1.97 mb/d in Dec.

» Natural Gas Inventories were -82 bcf vs. -72 bcf expected. Inventories are 345 bcf (10.21%) above the five-year average vs. 283 bcf (8.03%) above it last week.

» Goldman Sachs Adjusted its Brent-WTI Spread Target to $14/bbl in three months from $4/bbl previously.

» Exxon will shut the FCC unit at its Beaumont refinery on Jan 6th for about 30 days. The capacity of the entire refinery is 345,000, while the FCC's capacity wasn't disclosed.

Upcoming Energy Events

Thu (27th) - API Inventories (4:30pm EST)

Fri (28th) - EIA Weekly Oil Inventories (11:00am EST)

Thu (28th) - Natural Gas Inventories (10:30am EST)

Jan 16th - Iran-IAEA Meeting

May 31st - OPEC Meeting

Analysis

Effect of Building Oil Inventories

The EIA issued a report yesterday that discussed the possibility of U.S. production of crude oil and liquid fuels surpassing that of Saudi Arabia, but didn't specify when. The liquid fuels definition expanded beyond crude oil to also include condensate, natural gas liquids, biofuels, and refinery process gains. The U.S. is projected to produce 11.0 mb/d of liquid fuels in 2012 and compares to 10.13 mb/d in 2011. Saudi Arabia's production has averaged 11.6 mb/d so far this year, compared to 11.2 mb/d in 2011. But the report suggested that surpassing Saudi Arabia may not matter because while the difference is 0.6 mb/d when comparing liquid fuels, it is 3.5 mb/d when looking at just crude oil. Surpassing Saudi Arabia may also not matter because Saudi Arabia is the only producer in OPEC with significant spare production capacity, and thus the only one that can react to changes in supply or demand. Regardless, U.S. liquids production is expected to peak around 13.0 mb/d in the 2018-2020 period, as shown in the chart below.

The surge in U.S. production that the EIA discussed has been reflected in the weekly production statistics as well, which have averaged 6.20 mb/d this year. The year began with production at 5.8 mb/d and is ending with output near 6.98 mb/d as of last week's report. Increased oil output has helped oil inventories reach the widest divergence with the five-year average since Apr 24th '09 (chart 1). The current divergence is 49.64 MB and compares to the record of 50.92 MB on Apr 24th '09. Given that the five-year average will fall by only 1.06 MB this week, anything less than a build of 0.22 MB is needed to avoid setting a new record. Excess inventories will offer a negative impact on prices going forward. Chart 2 below uses data since 2007 to show that the widening divergence with the five-year average correlates with prices on an inverted scale. Oil prices were around $51.50 in Apr '09 when the record divergence was made, and were still recovering from the bottom in prices made in late-2008 due to the financial crisis. The current inventory cushion doesn't suggest that oil prices should be back down toward 2009's $51.50, but does imply that pressure could be applied.

Tightness in distillate inventories can prevent a fall in crude toward $51.50, as they are currently around 28,000 bbls below the five-year average compared to 35,000 bbls above it in April 2009. That 63,000 bbl swing will help offset the bearish indication given on the oil side, but only to a small degree. The excess oil still needs to be processed, and current refinery margins aren't creating the incentive to do so. Either oil prices need to fall or distillate prices need to rise to fix the imbalance.

Grains Commentary

Published Thursday morning, 12/20/12

The writing is on the wall...the grain markets are bearish and have very little bullish influence that can be seen right now. The beans are now down over $1 this week, meal is down over $20, corn has lost nearly 50 cents and wheat is down over 30 cents. The markets path of least resistance is lower.

The SA harvest is now only weeks away and it appears that crop sizes will be exceeding the record books not only in size but as the date of availability. The Chinese continue to cancel US bean purchases with another 540.0mt cancelled this AM bringing to total to just shy of 1.0mmt cancelled this week. The sales data next week very easily could be the first week that shows a net negative figure. The corn demand remains dismal, the weekly sales were only 114.0mt and weekly ethanol grind was down again yesterday.

The basis is the other concern, both beans and corn eased yesterday even with the flat price falling, nightly inquiries are drying up as even the consumer sees the finish line in SA product and knows that they will be online earlier than any other time.

The outside markets are mixed equities higher, crude oil is down .21, cotton is down .29, $index is weaker; Matif is lower in all markets as is the DCE.

The OI increased by 7899, wheat is up 3979, beans fell by 6898, meal was down 5788 and oil increased by 3795.

This past week's activity shows why it's good to stay close to the shore at this time of year as liquidity along with unknowns can move the markets more than normal, it's difficult to believe that corn is now back at levels of mid-summer, beans are pushing back to levels that were seen in July, the markets have become very comfortable with limited supply of product, is this the new world?

The option markets have quickly shown a pulse again as movement has picked up, corn has finally broken out of its doldrums of the 730-770 range (ADM is still short 10k CF 730 puts) and even at these prices it doesn't seem to be attracting any interest of ownership, but look at wheat it's still too cheap vs. corn trading under $1 premium. The downside SG puts are now trading at a premium to the calls in SG which shows that the market is positioned poorly for a further break. The bottom line to all of these options is that it is very likely that the market will have more moves like what has been seen this week over the next few weeks and once the first of the year hits the market will quickly shift its attention to the USDA report on the 11th which has a limit move potential.

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