The Energy Space

Energy Price Outlook

Oil prices could trade in a mixed direction this week, with a small pullback toward $91.50 possible in WTI. Pressure may be offered by a developing bearish divergence on the stochastics oscillator in both WTI and Brent, as well as by weakness in oil demand, and Tuesday's monthly EIA report which showed 2014 supply growth outpacing demand by 0.35 mb/d. The market has performed well in the last few weeks on improvements in economic data. Housing and the Philadelphia Fed surveys are reported on Thursday and may provide the next potential for bullish enthusiasm. Other support will come from weakness in the dollar and increased appetite for risk. We'd look for a rebound in WTI after a test of $91.50 as well as a narrowing in the Brent-WTI spread. We favor holding our June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00.

WTI finished 26 cents lower on Friday while Brent ended down $1.25. The markets traded in negative territory for most of the session as pressure came from Chinese inflation data, which was 0.2% above expectations at 2.5%. Inflation bottomed at 1.7% in October, which now suggests that the Chinese gov't may have less reason to add stimulus going forward. Pressure also came from a lack of upside follow-through in the U.S. stocks market following Thursday's push to new five-year highs in the S&P 500. There was an update on the Seaway pipeline whereby Genscape said that it detected increased power consumption at pump stations along the line beginning late on Thursday. That added pressure to an already weak Brent market and narrowed its spread with WTI.

Most other news was positive not only on Friday but during the week as well, and could keep energy prices buoyed in the near-term. A sense of excitement began to build about the global economy, as U.S. data showed the lowest level of continuing jobless claims in 4 1/2 years. The ECB left rates unchanged on Thursday in a decision that was unanimous. That compared to the previous meeting where several members wanted to cut rates. The press conference that followed mentioned that stabilization and confidence are returning to financial markets, and that positive contagion may soon take place in Europe. Japan unveiled a huge $117B stimulus plan on Friday, which was the second largest since WWII. The election of Abe several weeks ago foretold the new accommodative actions, which may also include the BOJ adopting a 2.0% inflation target at its Jan 22nd meeting. Such measures show that liquidity remains in place globally, which should help commodity prices. Investors believe in the improvement, as a debt auction by Spain was oversubscribed. Spanish 10-year yields fell below 5% for the first time since March '12. Inflows to U.S. stocks and ETFs in the first week of the year were the biggest since June 2008 at $18B and surpassed the largest increase of 2012 of $11.4B. The dollar fell to a 10-month low against the euro.

Fundamental news was generally positive too, as Syncrude Canada cut its January production forecast by 600,000 bbls to 10.0 mln from 10.6 mln previously. Additionally, Saudi Arabia cut its oil output by 5% in December to a 19-month low of 9.025 mb/d. Tuesday's monthly report by the EIA showed that 2013 demand was revised up by 110 kb/d and there were upward adjustments to price forecasts. Brent goes to $105/bbl in 2013 from $104/bbl, while WTI was lifted to $90/bbl from $88/bbl. Negatives on the fundamental side came from a large expected increase in 2014 oil production which outpaced the gain in oil demand. Pressure also came from weak total demand in the weekly Wednesday report. Overall, it appears as though sentiment is putting more weight on economic improvements than the mixed fundamental condition.

Natural Gas

Friday's trade settled 13.4 cents higher as the focus remained on the possibility that recent cold temperatures may result in an inventory change this week that is larger than the -144 bcf of the five-year average. Our first impression is that it could show something on the order of -175 bcf, but we'll adjust that on Monday when we get more complete weather data. Earthsat predicted colder weather in the Northeast and Great Lakes from Jan 21st-25th which helped boost Friday's trade. However, NOAA's latest 8-14 day map removed the area of below-normal temperatures in western portions of the country. Friday's COT report showed that managed money accounts subtracted 5,060 contracts from their net short, while non-commercials subtracted 7,468 contracts. That may help to explain the rally at the end of the week, but wasn't large enough to suggest that large funds are exiting their bearish strategies.

Despite the strength of the last two sessions, key resistance between $3.32 and $3.53 could hold the market in the near-term. We'd look for potential bearish action close to the $3.53 resistance level this week to think about a possible short position. NOAA's warmer maps on Friday afternoon are one point of potential pressure, as is Tuesday's monthly EIA report which showed a wider surplus in the supply/demand balance for 2013. Demand was revised up 0.26 bcf/day while supply was increased 0.50 bcf/day. Thus, the supply/demand balance moved to a surplus of 1.36 bcf/day from 1.12 bcf/day previously. Things get better in 2014, with demand falling 0.24 bcf/day over 2013 levels and supply falling by 1.15 bcf/day. The balance went to a surplus of 0.45 bcf/day from 2013's 1.36 bcf/day. However, the market will still have to contend with another peak storage issue at the end of the injection season sometime in November. That may cause more weight to be put on the bearish 2013 numbers than the bullish ones of 2014....624 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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