The Energy Space

Energy Price Outlook

A mid-morning attack by Israel of a Hamas leader yesterday sent the oil market higher, but unless the tensions escalate in the near-term, we would anticipate prices to continue moving lower. The next key support below $84.05 is offered near the $80.00/bbl level. A major source of pressure will be the adjustment in growth expectations following the election and the upcoming fiscal cliff. A continuation of slow growth and possible brinksmanship on the cliff should cause risk to be re-priced and investors to liquidate holdings with capital gains and/or dividends. Fundamental pressure will come from continued elevated levels of oil production and inventories, Tuesday's reduction in global oil demand by the IEA, and relatively steady oil rig count numbers. Support will be offered by improved Chinese oil imports released over the weekend and by reduced shipping rates in the Keystone Pipeline. Yesterday's API numbers were slightly positive relative to expectations for today's DOEs. We would trade the oil market as a negative affair in the near-term.

WTI finished 94c/bbl higher yesterday while Brent closed up $1.35/bbl. News broke about an hour after the NY pit session opened that Israel attacked a car carrying a militant leader in Gaza. The Israeli Defense Force said that Israel is ready to escalate the attack into a ground operation in Gaza if needed, and Hamas said that the strike has "opened the gates of hell." One of the bullish arguments for oil markets in the near-term will depend on whether yesterday's attack leads to a more widespread conflict or not. While that could create some support initially, we think it may be limited, as there isn't much oil produced in the area and it's unlikely that other oil producers will take sides or create an embargo.

Motiva's 255,000 b/d Convent Louisiana refinery experienced a power outage yesterday and could have potentially weighed on Brent, however, the Israeli/Hamas issue ended up boosting the spread overall. Hess's refinery in Port Reading New Jersey announced it was restarting, which may also have boosted the Brent market.

The de-risking that's taken place since the election has forced the Dow 5.1% lower and is likely to pressure energy markets. Last week, there appeared to be somber reflection by both political parties and expectations that both sides would cave on the fiscal cliff issue to reach an agreement. That hasn't been the case so far this week, however, as discussions about going over the cliff have taken place. The president met with union leaders on Tuesday and business leaders yesterday, but did not invite any bankers. He also is reported to want $1.6T in new tax revenues over 10 years, which is double the figure that Speaker Boehner agreed to in the summer 2010. At a press conference yesterday, he did not appear to extend an olive branch to republicans, saying twice that the American people knew what they were going to get when they reelected him. He discussed higher taxes yesterday but not spending cuts, and seemed to suggest that in exchange for tax increases, he would only commit to discussing entitlement reform. The Dow fell 185 points yesterday partly on the Hamas attack, but also on the potential brinksmanship in Washington. Oil should follow eventually. Investors will likely continue to book capital gains before year-end and/or sell dividend stocks to avoid higher tax rates. A reduction in the incentive to invest will signal that the economy will slow.

Natural Gas

December futures settled 2.1 cents higher yesterday due to cooler weather forecasts. Cooler weather though is still confined mostly to the southeastern part of the country, as NOAA maps show above-normal temps engulfing all areas outside of the southeast. Technicals may have played a role once again, as traders who didn't buy Tuesday's advance back above the 50-day MA attempted to do so yesterday. Now that the market is closer to the top end of the range rather than the bottom, however, the impetus to buy should diminish unless today's inventory number shows a sharper-than-expected decline. Consensus inventory forecasts have been revised down in the last few days, going from -8 bcf on Monday to -13 bcf on Tuesday, and to -24 bcf as of yesterday afternoon. The EOXLive estimate is -19 bcf. It's difficult to anticipate much more strength occurring in the market given the currently above-normal temperature forecasts. Rallies near $3.90 in NGZ2 may become an attractive selling point....1219 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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