The Energy Space

*Inventory report schedule during the holidays:

API report will be released at 4:30 pm EST Thursday Dec. 27 and Jan. 3

EIA petroleum report will be released at 11 a.m. EST Friday Dec. 28 and Jan. 4

EIA natural gas report will be released at 10:30 a.m. EST Friday Dec. 28 and Jan. 4

Energy Price Outlook

Oil prices rallied slightly yesterday in WTI, but fell in Brent. Wednesday's breakout above the 50-day averages in both markets thus witnessed little upside follow-through. The market may find difficulty advancing further due to the unresolved fiscal cliff, uncertainty in the global economy, and a potential that recent strength has been partly fueled by expectations of additional QE in Japan which was granted yesterday. Oil inventories remain elevated and the divergence with the 50-day MA is nearing record levels (we analyze the negative effects of this in the Analysis section on pages 4 & 5). The bullish case is being built on expectations of fiscal cliff resolution and sporadic signs of economic growth tied to recovery from Hurricane Sandy in the northeast (i.e. improved Philadelphia Fed vs. higher jobless claims). Given the triple failure near the $90/bbl level in WTI in the last two months, we would anticipate the sideways consolidation continuing in the near-term.

WTI settled 15 cents higher while Brent fell 16 cents. Despite making a new three-week high, markets were fairly range-bound through the majority of the session, as WTI had trouble with the $90/bbl level once again. Brent's trouble spot is the $110-$112/bbl range. There was support offered early by the report that North Sea BFOE loadings would fall 7% in Jan to 1.83 mb/d from 1.97 mb/d in Dec. Prices were boosted further by improvement in the Philadelphia Fed index and the existing home sales report, which both indicated that the economy may be improving. The support was fairly limited, however, as the jump in unemployment claims and Wednesday's drop in new home sales may imply that the recovery may be focused more in the Northeastern U.S. where rebuilding is taking place after hurricane Sandy. Dueling speeches by Senator Reid and Speaker Boehner cast a negative light on fiscal cliff discussions, and pressured the market in the second half of the session. The House vote on "Plan B" is scheduled for Thursday evening and is unlikely to be approved by the Senate.

It's tough to join on the bullish bandwagon in oil prices. It seems that every time there was a chance for recovery in the last two months, the rally lost momentum and prices eventually fell. One of the key negatives in the market recently has been the growth in oil production and rising inventory levels. We discuss both on pages 4 & 5 below, and can see that there's an inverse correlation between inventories and oil prices. The near-record level of inventories above their five-year average implies that prices should fall once again. Granted, distillate stocks are much lower than they were in 2009 when the current record was set. However, refinery margins are too low at the moment to encourage refiners to convert oil stocks into distillate products.

Natural Gas

January futures settled 14.2 cents higher yesterday, and the front end of the futures curve performed better than the back end. The rally began overnight after NOAA's weather forecasts on Wednesday afternoon showed growth in the area of below-normal temperatures across the country. Wednesday's 9.8 cent selloff had largely cited above-normal temperatures as the reason, so perhaps NOAA's forecasts caught some traders off guard. About 6.0 cents of yesterday's rally was made in the few minutes after the inventory report showed a drop of 82 bcf. The drop compared to consensus expectations of around 72-75 bcf and also caught the market leaning the wrong way. NOAA released its long-range forecast maps, but the changes appear to be somewhat minimal as shown below....1338 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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