The Energy Space

*On December 27th, EOXLive published a 2013 outlook for crude oil and natural gas. If you have not received it or would like a copy, please email tpawlicki@eoxlive.com.

Energy Price Outlook

WTI is showing difficulty in trading above the $94.00/bbl price level, while Brent is doing the same near $113.00/bbl. The oil markets may continue to remain range-bound in the near-term, as influencing factors are somewhat mixed. The upside will focus on improving economic data, buying by managed money accounts, and fresh refinery issues with Motiva. The downside will look to a potential rebound in today's DOE data, potentially weaker demand in light of higher prices, and from yesterday's EIA report. We analyze the report on pages 3 & 4 below. We would maintain our June WTI-Brent trade entered on Friday morning at -$14.25 with a target at -$8.00.

Brent settled 54c/bbl higher yesterday while WTI finished 4c/bbl lower. Both markets moved higher early in the session based on improved European economic confidence and slight gains in European equity markets. Eurozone confidence rose to 97.0 from 85.7 previously, and is adding to a developing narrative that Europe may be slightly past the worst of its debt crisis and economic difficulties. The easing of Basel III terms on Monday was another favorable event. Both WTI and Brent then weakened through midday due to a falling U.S. stock market, but Brent held higher on the day due to the more favorable international economic outlook. Motiva's Port Arthur refinery announced yet another shutdown of its new crude unit after a replacement clamp failed. The prospect of shortages of refined products in the Gulf Coast region and especially in distillates caused those markets to trade firmly throughout the session.

The EIA's Short-term Outlook was a bit of a concern in our view, despite a nice gain in 2014 demand projections. The monthly report showed an increase in 2014 global demand of 1.35 mb/d and compared to 2013's growth of 0.94 mb/d and 2012's 0.88 mb/d. One of our takeaways was that the slow growth in demand witnessed between 2010-2012 may be nearing an end. By the same token, however, the EIA forecasted supply to grow by 1.70 mb/d, with two-thirds of that coming from growth in U.S. shale production. The report admitted that U.S. shale output had outpaced its expectations made a year earlier, which in our mind, may suggest that shale possibilities aren't fully known, and could surprise once again this year. Additionally, the oil market's supply/demand balance goes from a deficit of 100 kb/d in 2013 to a surplus of 250 kb/d in 2014. The long-term prospect of growing supplies could help put a cap on prices even in the near-term.

Natural Gas

February natural gas settled 4.8 cents lower and led the futures price curve on the downside. The market reacted to a warming in temperatures from what was previously expected to be below-normal temps across the western two-thirds of the country. NOAA's maps were generally unchanged yesterday afternoon, however, Commodity Weather Group said that the area of below-normal temps between Jan 18th-22nd may be confined to just the northern tier of the country rather than the majority of the central U.S. At the same time, NOAA said that 2012 was the warmest year on record in the lower-48 states. The average was 55.3 degrees, which was 3.2 degrees higher than the 20th century average.

The EIA's monthly report yesterday was somewhat mixed for prices, as there was something in it for both sides. The negative side may focus on the upward revision to the 2013 supply/demand surplus to 1.36 bcf/day from 1.12 bcf/day previously, while the bullish aspect came in the potential shrinking of the surplus to 0.45 bcf/day in 2014 from 2013's 1.36 bcf/day. The EIA also raised its 2013 price forecast slightly to $3.74 from $3.68.

In the end, the market should be most susceptible to weather developments, and they're still slightly on the warm side. Large funds continue to position themselves on the short side, according to the COT data, and Monday's rally reversed after holding at resistance near $3.32. We would maintain a negative bias until there's any significant and lingering cold weather in the forecast.

Global Economic & Dollar News

» PBOC Economist said that China's economic growth is likely to exceed 8.0% in 2013.

As is usually the case, the EIA's release of its monthly Short-term Outlook yesterday created little reaction by markets, but it was still a report worth paying attention to. There was something for both the bullish and bearish sides of the market, however, we would lean toward the bearish side overall due to the 2014 supply/demand balance.

On the bullish side, the report raised its forecast for demand in 2013 by 110 kb/d to 90.11 mb/d, which pushed the supply/demand balance to a deficit of 100 kb/d from a deficit of 50 kb/d previously (chart 1). Demand has trended higher since the July '12 report, which in turn, has offered support for oil prices (chart 2). More importantly, the initial forecast for 2014 demand showed growth of 1.35 mb/d compared to 2013's growth of 0.94 mb/d and 2012's 0.88 mb/d. The 2014 growth rate provided more evidence that the demand weakness of the 2010-2012 period may be nearing an end. The report also made slight upward adjustments to its price forecasts, with Brent going to $105/bbl in 2013 from $104/bbl, and WTI lifted to $90/bbl from $88/bbl.

On the bearish side, oil supplies will rise in the 2014 forecast at a rate greater than the increase in demand. The 1.35 mb/d gain in total demand was countered by a 1.7 mb/d increase in supply, with 1.3 mb/d of that coming from non-OPEC sources. U.S. shale interests accounted for the majority of that increase. The supply/demand balance in 2014 thus goes to a surplus of 250 kb/d from 2013's deficit of 100 kb/d. The EIA admitted that supply growth in the U.S. and Russia in 2012 outpaced its year-ago expectations, which may thus present a negative potential in our opinion.

On the natural gas market, the EIA was mixed too, with a looser 2013 supply/demand balance countered by an upward revision to its price forecast. The level of 2013 demand was revised up 0.26 bcf/day while supply was increased 0.50 bcf/day. Thus, the supply/demand balance moved to a surplus of 1.36 bcf/day from 1.12 bcf/day previously. Things get better in 2014, however, with demand falling 0.24 bcf/day over 2013 levels and supply falling by 1.15 bcf/day. The balance thus went to a surplus of 0.45 bcf/day from 2013's 1.36 bcf/day. The price forecast was raised to $3.74 in 2013 from $3.68 previously, while an initial 2014 forecast was set at $3.90.

Temperatures may be closer-to-normal in 2013 and 2014, and will lead to increases in natural gas used for heating. Declines in gas used for power generation are anticipated due to summer temperatures that are expected to be closer to normal. Expectations for gas used in electric power consumption are down from 2012 levels, however, consumption of gas may remain high in the Southeast due to structural shifts in that region.

EIA Inventory Preview

Crude oil stocks may reverse the downward trend that usually takes place at year-end and begin building again. Our expectation is for a build of 2.0 MB this week. The five-year average shows an increase of around 41.6 MB between the last week of the year and the peak in inventories in early-May, as refiners add to stocks in anticipation of the summer demand season. In the current week, the five-year gains 0.6 MB. Support for inventories may be offered by a rebound in imports, which typically recover strongly in the first couple weeks of the year. Demand may add as well, as consumer demand may have been rationed due to late-Dec price gains as well as worries over the fiscal cliff. Some spillover effects of the cliff may have included weakness in equity prices, which may thus have offered a reverse wealth effect. On the flipside, pressure on inventories may come from utilization levels that ended 2012 more than 5.0% above the five-year average.

Gasoline inventories typically build sharply into early-Feb before supplies begin being shipped for increases in demand tied to late-spring and the summer driving season. We would anticipate a build of 3.0 MB in gasoline and 3.0 MB in distillates. The level of distillate stocks recovered late in 2012 due both to higher refinery production as well as weakness in demand.

Natural gas inventories may fall 170 bcf this week, as heating degree days increased to around 238 from 212-220 previously. Temperatures were generally below-normal across the majority of the country from west to east, with the exception of the northern Great Plains and parts of the desert Southwest. The 238 degree day reading is higher than anything seen last season, where the peak was made at 218-220. Inventories fell 192 bcf that week in what was the largest draw of the season. Given increased production levels being seen this year, however, we wouldn't anticipate any draw that large.

*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures

Grains Commentary

Published Tuesday morning, 1/8/12

The overnight markets have once again given a little for everyone as the markets have traded on both sides but seem to gaining some strength through the early AM hours so far.

The bean and meal spreads showed significant strength yesterday which seems to be pointing towards the recent flat price strength as well, it's a bit bizarre since the cash markets don't seem to be showing any significant strength over the same period and if anything it seems that more business is shifting to SA and away from the US. The one factor that could be driving this is the fact that Chinese crush margins over the past few weeks have had a consistent rise and will drive additional import demand. The US margins are decent but meal premiums have been sluggish recently and could start to hear some discussion that US crush could start to slow in the 2nd quarter.

The USDA will release its stocks figures along with final production on Friday and this report over the past 6 years has been anything but dull producing limit moves in corn 5 of the last 6 years. The question that will finally be answered is how many acres were abandoned? Old school think that harvested acres should be 83-84 million but with this the yield would shot up into the upper 120's leaving production in the range of 10.7-10.9. The CO figure for corn should increase marginally as exports remain poor and ethanol has had no increase, the CO figure could be closer to 700 than 600.

The bean report is just as critical with most thinking that the yield will push near 40 bushels an acre, the question is what do they do with demand? It's no doubt that we are well ahead of pace for this time of year, but we also see SA premiums more attractive for March forward. The bean CO will most likely increase marginally based on the yield. The wheat seedings are expected to see an increase of 500-1.2 million acres along with a CO also showing a slight increase due to exports not matching up with the USDA projections so far.

The OI in corn increased by 4523, wheat increased by 6920, beans fell by 3141, meal was up 4741 and oil increased by 2700.

The outside markets are mixed but one market to monitor is the Matif rapeseed is up over 8 Euros this AM. The other market to start to watch is the Brazilian Real as this is starting to increase, this has a direct correlation with bean prices as Brazilian farmers get paid in US $'s and like it when the Real is weak.

The option markets are starting to position for Friday as history has shown us that this report is not a dull one and the option premiums are showing us that. The interesting structure in beans is how the SH puts are now at a premium to the calls, look to do some types of 1x2 put spreads capturing the downside positive skew, or also look to buy calls sell put and hedge accordingly. The February premium is escalated vs. the deferred and could create some good opportunities to sell the nearby vs. deferred for those who believe Friday won't be as extreme as the past few years. The bean oil has big shorts and for those who believe that oil could have a rally coming look at doing some BOH 1x2 call spreads, such as the 51-54 for a debit of 30 points.