The Energy Space

Energy Price Outlook

WTI finally broke out from its tired sideways direction yesterday and posted strong gains, although Brent still appears mired in its three-month consolidation. The higher trend in WTI could continue in the near-term, with support offered by improving economic data, bullish flows in the commitment of traders data, weakness in the dollar, accommodative Fed policy, and production declines in Saudi Arabia. Potential drags to the uptrend will come from questions regarding the possible forward pull of springtime economic activity into the warm winter, delayed effects of Hurricane Sandy, and the upcoming debates over the debt ceiling, sequestration, and continuing resolution. We still like WTI over Brent and favor holding the June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00 and a stop at -$14.00. We would also anticipate a shrinking of the WTI futures contango and a narrowing of Brent's backwardation.



WTI finished $1.25 higher yesterday while Brent advanced $1.42. Prices traded gradually higher throughout the overnight hours after Spain witnessed another successful auction and after dovish comments were made by a Fed member. Spain's €4.5B auction of debt spanned in maturity from 2 years all the way to 28 years and witnessed strong demand. On Tuesday, Fitch suggested that the country may not need to have the OMT buy its bonds at all this year, as confidence has been restored to some degree. Apparently the knowledge that the OMT is available to buy Spain's debt is helping to keep rates low. Support also came from the suggestion by Fed Pres Kocherlakota that monetary policy is currently not accommodative enough. That ran counter to growing speculation that the Fed would halt its buying program before its 2015 target.

The rally didn't stop despite a weaker-than-expected Philadelphia Fed index, likely because the stock market kept advancing. There seems to be a sense in both markets that the impact from Hurricane Sandy has already been discounted, as the Philadelphia Fed would have been one sign of that impact. Perhaps Wednesday's passage of the $51B Sandy relief package helped to cushion the impact. Stocks continued to move to the highest levels in five-years as the day progressed, with support from improved housing starts and initial jobless claims outweighing the Philadelphia Fed. Although global demand for oil has weakened somewhat and production is due to outpace demand in 2014, the oil market feels like it wants to trade higher. The commitment of traders data shows this too, as non-commercials have added 48,439 contracts to their net long since bottoming four weeks ago (chart below). Managed money accounts have shown a similar condition, with their net long increasing 77,652 contracts in the same four week period....646 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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