The Energy Space

*On December 27th, EOXLive published a 2013 outlook for crude oil and natural gas. If you have not received it or would like a copy, please email tpawlicki@eoxlive.com.

Energy Price Outlook

The short-term trend of the energy markets has been on the upside for nearly a month now, but prices are approaching levels that have traditionally caused problems for rallies. The weekly chart below suggests that WTI may be able reach the falling trendline near $101/bbl without creating any appearance of excess, however, demand would then become a concern as rationing will eventually return. Additional pressure will come from Friday's inventory report which showed that demand finished the year fairly weak and that product inventories grew once again late in Dec. But the market may remain short-term focused, with positive factors on the radar including improved Chinese PMI data, the S&P 500's close at a new 5-year high on Friday, modest improvement in payrolls, the grounding of Shell's oil rig in Alaska, and the ramp-up of the expanded Seaway pipeline this week. Environmental groups have already called on the president to suspend drilling permits in the Arctic. The pipeline expansion should help WTI against Brent crude, and we entered a spread recommendation in June futures at -$14.25 on Friday morning, with a target at -$8.00.



Friday's trade in WTI settled 17c/bbl higher while Brent finished 83c/bbl lower. The differential was affected by news late Wednesday regarding the ramp-up of shipping capacities on the Seaway pipeline between Cushing Oklahoma and Freeport Texas. This week, the pipeline will begin transporting 400 kb/d of WTI crude to the Gulf Coast rather than the 150 kb/d that was the case previously. The market also gained support from the non-farm payroll number which rose 155K vs. 150K expected, and more importantly, broke the string of ADP over-estimation that was the case in the January reports in the last two years. The ISM non-manufacturing report didn't offer much impact on Friday, but its 1.4 point increase to 56.1 could be beneficial to oil. The chart on the next page shows that the two series have had a decent correlation since 2009 as oil prices have been focused more on economics than pre-2009 issues such as strong Chinese demand and weak supply growth.

General support may continue to be seen from economic improvement in China and Europe as well. Recall that the HSBC manufacturing PMI numbers reported on Dec 31st suggested that the economy has continued to improve. The Shanghai Composite has attracted more attention due to its strong performance in Dec, and could be a favorable indication of future oil demand from the country. We analyzed this recently to show that Chinese oil demand has tracked manufacturing activity in recent years. Europe has been improving too, and after Friday's release of the composite PMI, Markit's economist said that the worst of the economic downturn may be behind the region.

The negative side will focus on the prospect that the $8/bbl rally in the last month will begin to ration demand for oil products in the months to come. Gasoline prices have gained 20c/gal in the time, and is about six weeks away from the ramp-up that takes place in anticipation of the summer driving season. Another worry for oil prices could come if economic data is bringing forward activity from the spring and summer months. Construction jobs gained 30K on Friday likely due to work being done at a time of year when seasonal adjustment factors don't anticipate it being done. That was the case last year, as warm winter weather helped employment and other economic data in the U.S. show solid improvement in Q1 only to see weakness set in during Q2....1162 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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