The Energy Space

Energy Price Outlook

Oil prices have held within a roughly $2.50/bbl trading range in the past seven days since the initial post-election $4.27/bbl washout on Nov 7th. While the Israel/Gaza conflict has been supportive for the market, it has only been a factor in the last two days of last week. Given the inability to fall on negative news and now the bullish developments in the Middle East, it's tough to determine whether the next move in crude will be up or down. We still lean toward the downside in our bias, but it's very tentative. Pressure will be offered by high levels of oil inventories, an 18 1/2 year high in U.S. oil production, weakness in economic data, and weakness in the stock market. The bullish case rests on the inability to fall, as well as on the potential for escalation of the conflict in the Middle East.

The new front-month January WTI futures settled $1.05/bbl higher on Friday, with the expiration of the December contract helping out the front months. The oil market didn't seem to be concerned about the Middle East on Thursday as WTI fell 87 cents, but it certainty was on Friday. Crude traded slightly lower overnight as a cease fire took hold in the Middle East. A rally began at around 7:45 am EST when news of a long-range rocket headed for Tel Aviv broke and thus broke the cease fire. The rocket landed in the sea, but shortly thereafter, Israel announced that it had begun drafting 16,000 troops and could call up as many as 30,000. Iraq's representative to the Arab League said that oil should be used as a weapon, but the comments were dialed back shortly thereafter, possibly due to pressure from countries more friendly to the U.S. It's difficult to assess the potential impact of this on the oil market. The countries affected don't produce much oil, and Saudi Arabia could help by making up for any shortfalls. Additionally, the parties involved may be fearful of a repeat of the Israeli operation in Gaza in December 2008 where 1,100 Palestinians and 12 Israelis were killed.

Worries about the fiscal cliff added pressure to the market through the first half of the day, before a short press conference took place around 11:40 am EST. Congressional Leaders said at the briefing that talks were "constructive" and "productive." Harry Reid said he's not in favor of waiting until the end of the year. Economic advisor Gene Sperling suggested at a separate briefing that any fiscal deal would require "well over $1T in revenues." The statement may have been a softening of the approach Pres Obama took earlier in the week where he demanded $1.6T in new taxes. Sentiment following the 11:40 press briefing completely changed from what was witnessed earlier in the week. By the same token though, the Dow went from 71 points lower at its bottom to 46 points higher at the close. Prices are still 657 points below their pre-election close and signal that the market may still be re-pricing a higher tax and/or slower growth environment. That could weigh on energy markets as well.

Natural Gas

December futures ended 8.7 cents higher on Friday, with forecasts for below-normal temps in the eastern half of the U.S. over the next 11-15 days offering support. The forecast was made by Earthsat and was supported by NOAA's latest maps which shown the area of below-normal temps in the Southeast expanding compared to Thursday's map. Some support was also given by the CPC's long-range forecast which showed that temps in Dec-Jan-Feb may be below-normal in the northern plains and above normal in the south and southwest portions of the country. The outlook was colder than forecast previously, and caused heating demand expectations to be increased.

We discussed selling rallies in Friday's report near $3.90. This week's trade may seen an inventory build based on warmer temperatures that dominated, and push prices lower. However, the shift on Friday toward a colder dynamic could argue for the positive case at least by week's end if not sooner. We'd trade gas as a neutral affair during this week....1154 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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