The Energy Space

Energy Price Outlook

The market's whipsawing continued yesterday as a strong rally took place. Our bias had expected a rally late last week and into this week, but we were stopped out of a long recommendation in Brent during Friday's $2.49/bbl selloff. Going forward, the market would appear as though it can continue to rally, however, there remains the uncertainty regarding the U.S. and Chinese leadership decisions. We believe that oil may perform better in the long-run if Romney were to win, but near-term trade could benefit regardless of who wins if some uncertainty is removed. Seasonal tendencies suggest as much as we detailed in yesterday's report. Outside of the election, today's trade will get support from tightening supply/ demand balances shown in yesterday's monthly EIA report, Brent's hold at $105/bbl psychological support on Monday, and the potential that fund liquidation through end-Oct may cease and possibly reverse. Pressure will be offered by the partial closure of BP's Whiting refinery for planned maintenance, the backup of Canadian syncrude, elevated inventories, and ongoing oil production growth. On balance, we look for a slightly higher trade today unless the result of the election is still unknown.



WTI settled $3.06/bbl higher yesterday while Brent was better by $3.34/bbl. The consensus behind the sharp rally seemed to be that Pres Obama would be reelected. The rally was made despite weaker JOLTS jobs data and German factory orders, however, the reasoning was that uncertainty would be removed by the election and QE would remain in place. Intrade showed the president gaining in its electronic market. We're not sure about that logic though, as high-yield and other dividend instruments did well yesterday, even though at least some owners of them would get hit with higher dividend taxes next year and would likely liquidate holdings. Additionally, Brent is currently around $2.50 below its end-2011 price while WTI is around $12.00 below, so the reasoning that slow growth and QE is good for energies just doesn't seem plausible.

Today's trade will look to the election results for guidance as well as the weekly inventory numbers. Pressure cold potentially come if states like Ohio are too close to call and provisional ballots need to be counted. Yesterday's API data was uneventful except for potential pressure on gasoline. The API showed a build of 1.4 MB which compares to a consensus for today's EIA of a draw of 1.5 MB. While support for crude oil may continue to be offered by Monday's hold of $85 and $105 in WTI and Brent, both markets face resistance today from either the top of a falling channel pattern or their 50-day moving average. Finally, uncertainty in Europe is worth watching, and has led to a stronger dollar recently. A parliamentary vote takes place in Greece today on the austerity reforms, while the same parliament will vote on an austerity budget on Sunday. On Monday, the Eurozone Finance ministers will meet to decide whether to give €31.5B in aid to Greece.

Natural Gas

December futures settled 6.3 cents higher yesterday in what was a fairly flat futures curve. The market traded higher after prices held above the 50-day MA on both Monday and Tuesday. Focus also was on the nor'easter that's forecast to reach the Northeast on Wednesday and Thursday and bring cold temperatures. Power blackouts from Sandy are now below 1M after reaching around 8.5M at its peak.

Yesterday's EIA monthly report was mixed, as it raised its price outlook for 2012 by six cents and for 2013 by 14 cents. It reduced both its supply and demand growth outlook but supplies suffered more and caused the 2012 supply/demand surplus to fall to 0.57 bcf/day from 0.70 bcf/day previously. The 2013 surplus actually expanded slightly to 0.80 bcf/day from 0.74 bcf/day previously. On the bearish side, it said that electrical-generation consumption of gas may fall to a 27.2% share next year from 30.6% this year due to high prices.

We look for prices to advance slightly over the next day or two, but aren't too excited about the market's prospects overall. Open interest isn't showing any sign of recovery or bargain-hunting. Resistance will be offered at $3.63 and $3.73....1618 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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