The Energy Space

Energy Price Outlook

Oil prices are likely to hold within their relatively sideways direction in the near-term, as support from a weaker dollar is countered by uncertainty over the fiscal cliff. WTI had a nice bounce early in the session yesterday but fell back to close near the day's low. Today's trade will continue its focus on negative factors such as the lack of progress in fiscal cliff negotiations, recent signs of weakening economic data, and the potential that oil inventories remain elevated compared to their five-year average. The upside will focus mainly on the inability of WTI to break below the two-month consolidation bottom at $84.05, the potential of the Chinese economy to recover, and on the debt deal struck with Greece last week.

WTI settled 18c/bbl higher yesterday while Brent finished 31 cents lower. The market gained support early in the session due to the marginal recovery in the two Chinese PMI figures over the weekend. Support was also applied by weakness in the dollar caused by follow-through from last week's debt deal with Greece. Oil prices fell around mid-morning in the wake of the ISM manufacturing PMI number, which fell to 49.5 from 51.7, with weakness caused by preparations for the fiscal cliff. The employment component fell to 48.4 from 52.1 which suggests that Friday's employment report could show a contraction in manufacturing jobs. WTI peaked at $90.33 before turning lower yesterday and held at the previous high made on Nov 19th at $89.80 on a closing basis.

The effects of the fiscal cliff are still evident in the oil market as well as other risk assets. It's likely that in true Washington style, the White House and Congress will delay a decision in order to show their constituents that they're fighting for them. It's frustrating for the markets because the negative effect that the uncertainty is offering could have all been avoided if there was action taken earlier in the year. Artificial pressure is thus forced onto the market, which in the current instance is being countered by weakness in the dollar.

European finance ministers eased the terms on emergency aid for Greece last week by cutting the rates on bailout loans, suspending interest payments for a decade, and giving Greece more time to engineer a bond buyback. The action has been positive for the euro and thus negative for the dollar, which is mainly an inverse gauge of the euro due to its composition. The two-way tug of war may continue in the near-term, as support from dollar weakness will be countered by the adverse consequences on the economy from the fiscal cliff.

Natural Gas

January gas futures settled 3.0 cents higher yesterday, as the focus turned to cold weather once again. CWG said that normal temperatures could be seen in the Northeast and Midwest from Dec 13th-17th. The focus on colder temperatures ran counter to events last week which began discounting the 60 and 70 degree temperatures being seen in the Midwest currently.

A secondary focus was likely given to technical factors, which sees key support between $3.52 and $3.57. The 200-day MA offers support in NGF3 at $3.52, the 50-day MA on the continuation chart is at $3.54, and the bottom of a bullish flag continuation pattern currently sits at $3.57. These three levels are backed up by a developing bullish divergence on the daily stochastics (chart below), and by a favorable seasonal pattern that began with yesterday's close. Between Dec 3rd and Dec 20th, the market has gained 5.3% on average, although only 11 of the last 20 years saw rallies. In years where the injection season ended before Nov 9th as it did this year, the average increase is 11.0%. Prices advanced in 3 of those 4 years.

Prices are expected to bounce in the next few days, with technicals leading the way. Key resistance levels will be at $3.60 from the Nov 12th low and at $3.78 from the low on Nov 16th and we believe that prices may reach the latter level within a week or two. The biggest worry we have is the weather, which is still signaled by NOAA's 6-10 day and 8-14 day forecasts as being above-normal in most of the country except for the northern tier. The degree day numbers from last week suggest a draw of 65 bcf in our view, which would be more than the 51 bcf withdrawal shown by the 5-year average. However, given the high temps in the Midwest currently, along with last week's surprising build of 4 bcf, we don't necessarily believe that Thursday's number will be very bullish....1249 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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