The Energy Space

Energy Price Outlook

It was deja vu all over again for the oil markets yesterday, as both WTI and Brent made small losses within inside-day trading ranges. The incremental information in yesterday's session basically included pressure from weak oil demand and increasing worries about the upcoming German local elections, while support came from increased speculation about accommodative monetary policies in Japan and China. In the background, pressure will remain in place from the likelihood of upcoming gains in DOE crude oil stocks, and from Tuesday's monthly EIA report which showed 2014 supply growth outpacing demand 1.7 mb/d to 1.35 mb/d. The upside will continue to focus on improving economic data, managed money account buying, increased regulation of Arctic drilling permits in the wake of Shell's incident, and refinery issues at Motiva's Port Arthur facility. Chinese trade data will be released Wednesday evening and will give the latest read on the strength of oil imports. We would maintain our June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00. The ramp-up of the Seaway pipeline to higher capacities this week should narrow that spread.

Brent finished 18c/bbl lower yesterday while WTI ended down 5c/bbl. Both markets weakened initially on the stronger dollar, which has been reacting to increasing concern in Germany. Local elections will take place on Jan 20th, and could see Chancellor Merkel's coalition partners suffer defeat. Ms. Merkel herself remains popular, but the prospect of a diminished coalition could present difficulties in the ongoing effort of European leaders to assist Greece and Spain. The euro has generally fallen over the last week or so on the prospect. The U.S. debt ceiling debate is receiving only scant attention, but may see Senate Leader McConnell take the helm from Speaker Boehner after the fiscal cliff episode. The debt ceiling is only a minor negative, in our view, as it's unlikely that it won't be raised. Oil demand in yesterday's DOE numbers provided a fresh wake up call, as it fell 1.14 mb/d on the week. It may have been influenced by year-end factors and could rebound next week, however, it's still just 137 kb/d above the two-year low and a sign that the economy remains weak. The fiscal cliff and the weakness in investment assets that occurred in late-Dec may have scared some consumers into not spending or traveling, so at least a partial rebound is justified next week. Oil stocks didn't gain as much as anticipated, but product stocks exceeded expectations due to higher refinery utilization in mid- and late-Dec. We would expect those trends to reverse, and for oil stocks to resume building at a healthy pace in the weeks to come.

The fresh bullish news mainly came from expectations of fresh stimulus in Japan that could be announced as soon as this Friday. The new gov't has been undertaking efforts to expand growth, and could push the BOJ to announce fresh QE at its Jan 22nd meeting. The market is also focusing on the potential that the Chinese central bank cuts its reserve requirements, although there isn't a timeline for such an action. Shell's drilling in the Arctic may be on ice in the near-term, as the company is receiving fresh scrutiny from the U.S. Interior Department following the Dec 29th-31st incident where a drilling rig was lost, recaptured, and then grounded. A 60-day assessment of drilling will be done, which could affect future permitting for Arctic exploration. Lastly, Brent may receive some support from Iraq's halt of exports to the Turkish port of Ceyhan due to a fault in the pipeline. The line was shipping 425,000 b/d prior to the shutdown.

Natural Gas

Feb futures finished 10.5 cents lower yesterday at $3.113/mmbtu. Weather was the primary concern once again as private forecasters are predicting warmer temperatures beyond 10 days from now. NOAA's 8-14 day maps have moderated some of the below-normal temperatures that had been forecast over the last few days. The market appears likely to continue lower until there's significant and lingering cold weather in the forecast.

Bloomberg had a good article yesterday on politics and energy, suggesting that Energy Secretary Chu may leave his post soon. It suggested that Mr. Chu's replacement as well as second term Obama administration initiatives may be guided by the EPA's study on the effects of fracking which is due in 2014. The concern could then be that any new regulations on fracking could be mishandled and then slow development. Of course, a replacement for Lisa Jackson at the EPA is a more immediate concern, after she announced her resignation last month. The outgoing governor of Washington Christine Gregoire is one potential candidate.

The impact on the natural gas market could be mixed. It may be negative over the next year until the EPA's fracking study is published, as the status quo may dominate. It could then be bullish for prices if fracking regulations are mishandled. Another question may be whether the same level of aggressiveness that the green agenda promoted by Pres Obama and Sec'y Chu had four years ago ends up returning. Without another 2009 style stimulus packed with windmills and given the new level of fiscal austerity in Washington, the only way that the green agenda will receive much gov't backing is if fossil fuel prices rise considerably. The growth in fracking may prevent that from happening....1530 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

Read the full story and get access to the Real Money Pro trading floor.

There’s no substitute for a trading floor to get great ideas, so Jim Cramer created a better one at Real Money and blogs there exclusively. We then added legendary hedge fund manager, Doug Kass, with his exclusive Daily Diary and best investing ideas. Staffed with more than 4 dozen investing pros, money managers, journalists and analysts, Real Money Pro gives you a flood of opinions, analysis and actionable trading advice found nowhere else, and allows you to interact directly with each expert.

Already a Subscriber? Please login.

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.