The Energy Space

Energy Price Outlook

Oil prices are expected to generally trend lower over the next few weeks, with WTI potentially falling toward $80/bbl and Brent toward $100/bbl. The prospect of sub-par economic growth should remain a negative catalyst along with potential increases in carbon and alternative energy legislation, weak signs of investment in oil futures, and high levels of oil stocks and production. Support will be offered by potential progress in fiscal cliff negotiations, progress in Europe, and from the possibility that the Chinese economy recovers.

Yesterday's trade finished 65 cents higher in WTI while Brent gained 43 cents. The rally began around 11:15 am EST on little news except that Nigeria's Qua Iboe exports loading from end-Oct to December are delayed by 4-9 days. Such a story would be more positive for Brent than WTI, but that wasn't the case. A rumor surfaced later that the Russian defense minister had tweeted that an explosion took place at Iran's Bushier nuclear plant. But the tweet was considered a hoax because PM Putin's inner circle doesn't tweet and the account was set up one day before. We would attribute the rally to a bounce following Wednesday's $4.27/bbl selloff.

More weight seemed to be given yesterday to the fiscal cliff as the reason behind Wednesday's selloff, rather than the Greek austerity vote and worries over Spain's problems spilling into Germany. Issues with Greece and Spain have been around all year, however, and the Greek vote was successful later in the day. The new information on Wednesday came from the election, in our view, and could adversely impact energy prices going forward. The issue will be the likelihood of slow growth and four more years of either big government (like 2009-2010) or ineffective government (like 2011-2012). Current prospects of Keystone XL approval are low too, and may also have explained WTI's out-performance of Brent yesterday. Of course, the fiscal cliff discussions are an issue, but so to will be how much compromise is struck.

The fiscal cliff is the expiration of the payroll tax cut (social security), Bush income tax cuts, Bush dividend/capital gains, and the sequestration. The CBO said the economy will contract as much as 0.5% next year if Congress fails to stop the fiscal cliff from occurring. The president didn't deal with it earlier this year because he campaigned on hiking taxes in the expectation that he would secure both houses of congress. That didn't happen, and republicans face mid-term elections in two years while the president does not. His hand may be stronger and he's an ideologue, which may signal he'll stick to his guns. He didn't pivot after the 2010 midterms, so chances may be low now. Both Boehner and Reid signaled compromise on Wednesday but the issue is far from settled. We think that the threat of the fiscal cliff and slow economic growth will weigh on energy demand and therefore prices for the foreseeable future.

Natural Gas

December futures rose 3.0 cents yesterday after inventories showed an increase of just 21 bcf. That fell short of the consensus expectation of +27 bcf and helped the market rally about five cents afterward. The rally continued as the session progressed, but the market only ascended to the highs made during the past two sessions. Some support was seen in the session's second half from NOAA's updated outlook on temperatures, which showed that October was 0.3 degrees below normal and broke the 16 month streak of above-normal temps. NOAA also showed less likelihood of El Nino forming this winter but did not say that La Nina was likely though. El Nino typically suggests above-normal temps in the western portion of the country and below-normal temps in the southeast.

Power outages associated with the Nor-easter totaled only around 150,000 according to the DOE. 600,000 customers in the Northeast are still without power due to Sandy. The lack of power demand and near-term forecasts for above-normal temperatures suggests that the market may find pressure in the near-term. The positive side could be boosted by the dropping of the El-Nino watch, however, we would not feel comfortable being positive on gas prices at least until the long-range forecasts are updated by the CPC in a week or two....1111 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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