The Energy Space

Energy Price Outlook

Oil prices may hold within a sideways trading direction this week, as the short-term rally contends with a building bearish divergence on the daily stochastics oscillator. Near-term support may come from weakness in the dollar, yesterday's assurance of accommodative Fed policy from Chairman Bernanke, and from expectations of improving economic data (housing and Philadelphia Fed on Thu). There's a growing potential for pressure, however, from a bearish divergence on the stochastics oscillator, weakness in oil demand, and the prospects for supply growth to outpace that of demand. Saudi Arabia may also add pressure after the country assured oil supplies in a statement yesterday. If the growing divergence can pressure WTI, we'd look for a rebound after a test of the $91.50 level as well as a narrowing of 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.

Oil prices advanced 58c/bbl in WTI yesterday and $1.24/bbl in Brent. WTI seemed to underperform based on the refinery outage at Phillips 66's Wood River plant in Illinois as well as due to the potential for bickering in Washington over the debt ceiling. The Wood River facility is due to be restarted "within a couple of days," according to Phillips, following a power outage on Saturday. A press conference held by Pres Obama yesterday saw him reiterate his intention not to negotiate with Republicans over raising the debt ceiling. He indicated that he wants more revenue and would be okay with raising the ceiling without many spending cuts. He said that obstinate Republicans can't get everything they want, although he sounded obstinate himself. A Politico article implied that Republicans may be more willing to shut down the gov't than expected. The fight that's developing pressured the dollar, which in our view, added at least a short-term boost to energy prices. If the debt ceiling debate continues to falter, it could eventually become a negative for oil prices. But if the dollar continues to weaken, oil may benefit. The dollar also fell yesterday after Apple Computer cut in half its orders for 65 mln iPhone 5 screens.

Until any downside momentum can be achieved, energy markets may remain firm with support offered by the easy monetary policy. Friday's CFTC data showed that large funds are positioning for such a case, with non-commercials adding 16,700 contracts to their net-long and managed money accounts adding 24,691. Fed Chairman Bernanke yesterday appeared to walk back some of the hawkish suggestions in the FOMC minutes published a week ago which said that several members though accommodation could end sooner than previously communicated. Mr. Bernanke said that the recovery remains fragile and that it shouldn't be hampered by fiscal cuts that are too sharp. Earlier in the day, Fed Presidents Evans and Lockhart raised concern about the effects of QE but signaled that it would be three years until it is unwound. There were also dovish comments made in Japan and China as well, which may have supported energy prices. The prospect of easy money needing to find an investment home could be bullish for hard assets like commodities.

Natural Gas

Feb futures settled 4.6 cents higher yesterday, as the focus remained on colder temperatures. CWG predicted below-normal temps in the eastern U.S. from Jan 19th-23rd, and last week's NOAA maps showed most of the country engulfed by the color blue. 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 suggest that they were exiting short positions possibly at the end of the week, but it's not large enough to suggest that large funds are exiting their bearish strategies. Managed money has bounced 7,511 contracts in the last two weeks, but fell 110,904 in the month of Dec....1629 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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