The Energy Space

Energy Price Outlook

And so the bullish trade returns. The up-down-up-down pattern that has developed over the past week continued yesterday in WTI and cast a positive light on an otherwise neutral-appearing chart. Brent appears similar, but couldn't get much of a rally going yesterday. The market will still receive support from improved economic data in China and Europe, general weakness in the dollar, accommodative Fed policy, and recent production declines in Saudi Arabia. Those declines can also be interpreted as negative at the same time, because they add to OPEC spare capacity. Yesterday's surprise drop in oil inventories were positive but should be only temporary, as inventories tend to gain through the first five months of the year. Negatives are still in place from uncertainty over the U.S. debt ceiling and from Tuesday's report of weak 2012 German GDP. The bottom line between these ups and downs is that the market has almost gone nowhere in Brent and slightly higher in WTI in recent weeks. Expecting that trend to continue may be the best assumption going forward. We favor holding our June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00. In the event of a selloff in WTI, we would look for a rebound after a test of the $91.50 level. We would also anticipate a shrinking of the WTI futures contango.

Oil prices inversely mimicked trends in the dollar again overnight, and traded on either side of unchanged. There was some support given by OPEC's monthly report, which officially acknowledged the production cut that took place in December. That can also be a negative for prices, as it means that OPEC has additional spare capacity. OPEC left its 2013 demand estimate unchanged. Pressure was given overnight by the World Bank's cut to its 2013 global growth outlook to 2.4% from 3.0% previously. As the NY session progressed, prices finally caught wind in their sails after inventory numbers showed a surprise drawdown in oil stocks. Cushing inventories grew a sharp 1.78 mb/d due to the shutdown of the Seaway pipeline, which at 150 kb/d, would account for 1.05 MB of the increase.

Despite the up-down nature of the market recently, WTI could still trend in an upward direction while Brent stagnates. The restart of the Seaway pipeline last Friday will help to alleviate the glut in the Midwest U.S. and eventually decrease the amount of imports required. Brent's backwardation should ease while WTI's contango should narrow. The economy appears to be mending still, with industrial production reported yesterday at its highest since 2008. The Fed's Beige Book provides a view of the economy that will be discussed at the next FOMC meeting (Jan 29-30) and suggested that growth was "modest or moderate." While that's not a roaring endorsement, the data was affected by the uncertainties tied to the fiscal cliff, which could eventually be reversed. The biggest concern on the economy is whether above-normal winter temperatures are pulling forward demand from the spring and summer months.

Natural Gas

The market settled 2.0 cents lower yesterday in one of the first signs of weakness within this winter chill inspired rally. Discussions turned away from colder weather to some degree, as the cold spell that is expected to make its way across the Midwest and Eastern portions of the country may be confined to the Jan 20th-24th timeframe. A check of 10-day outlooks in Midwest cities show normal temperatures both before and after that period. The NOAA 8-14 day map revealed a shrinking probability in the below-normal area of temperatures in the Great Lakes and Northeastern states. The 6-10 day appears somewhat similar. The market also received some pressure from the report that U.S. weekly power output fell 2.6% y/y according to the Edison Electric Institute.

Today's trade will focus on whether the 2-4 day cold spell will in fact move on, as well as focusing on the Climate Prediction Center's long-term update. In its last report, it showed temps in January that were above-normal across the eastern two-thirds of the country. If that remains the case for February, next week's cold may not be enough to substantially reduce stocks of natural gas. The three-month F-M-A outlook was similar to the January outlook, but with above-normal temps across a wider section of the country. Natural gas prices are approaching key resistance from the Dec 21st high at $3.532 as well as from the 50-day MA at $3.56. The market also hasn't seen an accompanying increase in open interest or a notable liquidation in the net-short currently held by non-commercials and managed money accounts. We'd look for potential bearish action close to the $3.53 resistance level this week to think about a possible short position....961 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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