The Energy Space

Energy Price Outlook

After a sobering week last week, oil prices are expected to be under pressure again in this week's trade and potentially fall toward $80/bbl in WTI over the next few weeks. The dominant factors should be increased prospects for slow growth in the U.S., uncertainty over the fiscal cliff, events in Europe including Sunday's vote in Greece, and OPEC's cut in demand estimates on Friday. The bull case rests on any breakthroughs in the above issues as well as some signs of improvement in Chinese economic data. We'd look for prices to drift lower in this week's trade.

A joke began circulating on Thursday after McDonald's reported same store sales that showed the first decline since 2003. The joke was that the economy is getting so bad that its 99 cent meal deals were no longer affordable. Friday's settlement in WTI was 98 cents higher and may not be much better. Brent finished $2.15/bbl higher on Friday. It was a sobering week overall, as expectations going into Tuesday's election appeared to favor Mitt Romney as the winner. With Mr. Obama in office for another term, prices fell $4.27/bbl on Wednesday on the prospect that the economic recovery continues at a trickling pace rather than anything resembling a gusher. A second issue was the fiscal cliff, which received mixed indications on Friday. Speaker Boehner said that raising tax rates would hurt the economy and job growth but that he's open to raising revenue through other means. President Obama spoke later and said that he's open to compromise but added that rates must be raised and that he wouldn't accept any proposal that wasn't balanced. The president's words were seen as less conciliatory and both energies and stocks weakened. That could be adverse for energies, unless it is just talk before a deal is made. It's believed that talks have already begun at the staff level, and there are some hints that the summer 2010 deal between Obama-Boehner could be resurrected. It's unclear though whether the "goalpost" will be moved again.

The upside will look to any progress on a deal or any change in the tone in Washington. The president may not want to budge, as Republicans face an election in two years whereas he does not. It's a tough call. The upside could also look to improvements in Chinese economic data reported on Friday. CPI fell to 1.7% from 1.9% and may provide room for stimulus. Industrial production was +9.6% vs. +9.2% previously. Chinese auto sales fell slightly to 1.30 mln units from 1.32 mln but came in marginally above the 1.28 mln expected. The chart below compares auto sales against Chinese oil demand and shows that while auto sales have been flat for two years, they're not sinking. It could be a marginal positive for Chinese oil demand....888 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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