The Energy Space

Energy Price Outlook

The selloff in oil prices yesterday almost fully unwound the rally made on Monday as the buildup of fear subsided. The market may now be in a similar position as it was on Friday, which basically showed concern about Middle East tensions growing, some hope about a deal to avert the fiscal cliff, growing levels of oil stocks, and increasing oil production. These may all argue in favor of lower prices in the near-term, as the supply/demand balance is still angled toward surplus. Oil inventories will be released today at their normal time, while natural gas will be out today at 11:00am EST. The upside for oil markets rests in the chances for better demand as potentially indicated through an improving U.S. housing market and recovering Chinese economy. API data was positive yesterday afternoon. Technicals are mixed in WTI, with support coming from a bullish channel and the basing pattern at $84.05 while pressure will come from yesterday's hold at the 50-day MA and potential liquidation shown through falling open interest. Prices may fall toward $80/bbl over the next few weeks.

January WTI ended $2.53/bbl lower yesterday while Brent finished down $1.87/bbl. The selloffs unwound rallies of $2.61/bbl and $2.75/bbl respectively in Monday's trade. In the scope of the two days, it's a struggle to see what's changed in our view. Monday rallied on increased tensions between Israel and Hamas in Gaza, which is tough to argue with. Yesterday's trade fell on word of a truce. It's an area that doesn't produce much oil, and there's been no threat to supplies so far. Monday's rally was also helped by a 207 point gain in the Dow which was fueled by hopes for a settlement of the fiscal cliff. While those hopes are founded after Friday's joint statement by Congressional leaders, there were many fresh developments since Friday's 46 point gain in the Dow. The president is traveling in Asia and congress is on recess until November 26th. The Hill newspaper suggested yesterday that there is a disconnect between what's happening in Washington and the market's perception of what's happening. It suggested that the two sides are still far apart on the Bush tax rates and entitlement changes. The other issue we see as a potential negative is the speech by Fed Chairman Bernanke yesterday, where he said that the Fed would be able to do little in the event that the economy goes off the fiscal cliff.

Outside of developments in Washington, the oil market will still be focused on the growing divergence between current oil stocks and their five-year average. Last week's stocks level was 44.33 MB above the five-year average which was the highest since the w/e Oct 29th, 2010. At the same time, oil production is at the highest level since the w/e Apr 29th, 1994. Oil demand recovered last week due to the passing of issues associated with Hurricane Sandy, but that recovery may only last another week. The last monthly report from the EIA showed that global supply/demand balance expectations have tightened, but it was the result of less production rather than more demand.

Natural Gas

The gas market rallied sharply on Friday by advancing 8.7 cents. It lost 7.1 cents on Monday, but gained more than that back again in yesterday's 11.3 cent rally. The focus since Friday and even prior to Friday has been on a cooling pattern shown not only in the short-run forecasts but the longer-term ones as well. In its Oct 18th forecast, the Climate Prediction Center noted that the winter months of Dec-Jan-Feb would be above-normal in the western half of the country. Its Jan-Feb-Mar forecast showed warmth in the western and northern portions of the country as well. That forecast offered some degree of pressure on prices in the weeks that followed, as the market fell from $3.904 on Oct 18th to $3.608 on Nov 8th. The Nov 8th date is key, as it was then that NOAA dropped its watch for El Nino for the next four months, which helped create a short-tern low close one day later. The bullish tone that started on Nov 8th increased further after NOAA updated its long-range forecast on Thursday to show cooler temperatures in the northern and southeastern portions of the country with above-normal temps in a shrinking portion of the southwest. The October forecasts are shown below on the left, while Thursday's updated forecasts are shown on the right....1441 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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