Energy Market Analysis – Monday Morning Jan 12, 2015

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Quote of the Day

“Most of us can read the writing on the wall; we just assume it’s addressed to someone else.” – Ivern Ball

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After falling for the last seven weeks in a row the oil complex is starting yet another week on the defensive. Oil prices are trading at an over 5 ½ year low with no sign of any bottoming yet on the horizon. Market participants are now looking at WTI trading as low as $40/bbl … an area some are suggesting would be needed to clear the global surplus. In fact Goldman Sachs cut their WTI outlook for the six month period to $39/bbl and their twelve month forecast to $65/bbl with Brent at $43/bbl and $70/bbl for the same timeframes.

Goldman like many other analyst do not expect Saudi Arabia or other key OPEC members to cut production anytime soon even though Venezuela is in the midst of shuttle diplomacy calling on OPEC producers to work together to spur a recovery. So far it seems only Iran has joined Venezuela in commenting on OPEC doing something to solve the collapsing oil problem. Neither Venezuela nor Iran are in a position to do anything alone within OPEC rather the key to cutting production will have to be led by Saudi Arabia and other Arab Gulf producers which does not look like that is going to happen anytime soon based on all of their comments over the last several weeks.

The lower price environment is starting to hit US operations as drilling rigs decreased again last week by 61 rigs according to the latest Baker Hughes report. Over the last five weeks drilling rigs have declined by 154. Also thirty five horizontal rigs normally used to drill in places like North Dakota’s Bakken area and in the Permian were idled last week for the largest single week drop over the last six years according to Baker Hughes.

Bottom line no sign that OPEC is going to change their market share strategy anytime soon and as such prices are likely to continue to decline over the coming weeks until the price hits a level that starts to result in non-OPEC production starting to decline. So far even with the reduction in drilling rig over the last five weeks US crude oil production is still robust and within a few barrels of the highest level since the EIA has been reporting data (1983)

On a weekly basis oil prices were modestly lower for the seventh weekly decline in a row as the market continues to adjust to the ongoing market share war initiated by OPEC. The evolving geopolitical events around the world continue to be a non-event insofar as an oil interruption issue is concerned and have only impacted the short term price direction from time to time as we continue to see in places like Libya. Crude oil prices decreased last week as the market continued to react to the view that the surplus of crude oil will continue to build well into 2015 or as long as OPEC continue to chase market share rather than to defend the price level.

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Both the WTI and Brent contracts decreased with the spot Feb Brent contract decreasing more than WTI on the week. The spot February Brent/WTI spread narrowed on the week after narrowing during the previous week. With the US refinery maintenance season over total crude oil inventories decreased last week. Refiner demand for crude oil is increasing but with the market in a wide enough contango inventory building may continue going forward.

RBOB depreciated more than WTI while HO appreciated versus WTI. The HO-WTI crack spread widened on the week while the RBOB crack narrowed along with the widely followed 3-2-1 crack spread. The externals were as secondary price driver for the oil complex.

The February WTI contract decreased by 10.79 percent or $6.06/bbl last week as total combined crude oil and refined products increased strongly during the report period. The February Brent contract declined more than the Feb WTI contract.

The Feb Brent/WTI spread narrowed after narrowing during the previous week. The spot Feb Brent/WTI spread narrowed by 51.39 percent or $1.85/bbl. Crude oil stocks increased at Cushing but declined in PADD 3. As of this morning the spread is in a new lower technical trading range with $2.40/bbl on the resistance side and $1.10/bbl on the support end as it remains in its long term narrowing trend that has been in play since mid-January of 2014.

Market participants have been moving back and forth between the international supply issues and the destocking of crude oil inventories in the Cushing & PADD 3 areas.  Both of these factors impacted the direction of the spread again last week with the international supply issues more dominant on the Brent crude oil situation resulting in the spread narrowing last week.

On the distillate fuel front the Nymex HO contract decreased by 5.25 percent or $0.0944/gal on the week as distillate fuel inventories increased more than the market expectations with warmer than normal temperatures moving over major portions of the US during the report period. Gasoline prices decreased after a strong build in inventories. The spot Nymex gasoline price decreased by 7.53 percent or $0.1078/gal this past week.

The Feb Nat Gas futures contract decreased even after a larger than expected net withdrawal from inventory that was below last year and the five year average. The Feb contract decreased by 2.39 percent or $0.072/mmbtu. The market ended the week in a light short covering mode that has already reversed into selling in this morning’s trading. In fact as of this writing Nat Gas futures are lower by around 3.1 percent compared to Friday’s settle.

The spot Nat Gas futures price is still trading below the psychological $3/mmbtu level even with a larger than expected draw from inventory this week and with a cold blast engulfing major parts of the US. Even with the cold blast in place this week the inventory withdrawal that will be reported in next week’s EIA inventory report will be only slightly above the five year average but below last year based on my current model run. The remainder of January is projected to show smaller than normal withdrawals as another bout of moderating temperatures roll into major portions of the US.

The latest NOAA six to ten day and eight to fourteen day forecasts are both less supportive for heating related Nat Gas demand than those issued earlier in the week. The forecasts are projecting larger portions of the US returning to normal and even above normal temperature levels. The six to ten day forecast is projecting about 50 percent of the country expecting above normal temperatures with the majority of the rest of the country projected to experience normal temperatures with only a few small pockets of very cold temperatures for the January 14th to 19th timeframe.

The eight to fourteen day forecast is simply bearish for Nat Gas above normal temperatures are projected over about the entire US for the period January 16th to 22nd. Heating related demand for Nat Gas is going to be below normal for the forecast period and inventory withdrawals will be below normal and below last year over the same timeframe.

On the financial front equity markets were lower in active trading around the world as the broader EMI Global Equity Index decreased by 1.13 percent. The EMI Global Equity Index has declined on the week even after a few strong up days last week. The year to date loss is at 1.13 percent. There are now only three of the ten bourses in the Index in positive territory. China remains on top of the leader board with Japan still holding the bottom spot. Global equities have been a positive price driver for the oil complex over the last several trading sessions.

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The Yen and the Euro were lower while the US Dollar Index was higher on the week. Last week the US dollar was a negative directional price driver for oil and most commodity markets.

I am maintaining my oil view and bias at cautiously bearish as the market remains bearish but in oversold territory. The intense selling started again last week and continued throughout the week even as the market continues to search for bottom. I continue to fly the caution flag as the market remains susceptible to additional short covering rallies at any time.

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I am maintaining my oil view and bias at cautiously bearish as the market remains bearish but in oversold territory. The intense selling started again last week and continued throughout the week even as the market continues to search for bottom. I continue to fly the caution flag as the market remains susceptible to additional short covering rallies at any time.

I am maintaining my Nat Gas view at neutral with my bias at cautiously bearish as the short term weather is still projecting warmer than normal temperatures returning after a short bout of cold temperatures this week. Nat Gas demand will likely be below normal for the month of January based on current temperature projections.

Markets are mostly lower heading into the US trading session as shown in the following table.

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PRESS RELEASE: AS FUEL PRICES APPROACH LOW POINT, COMPANIES URGED TO LOCK IN LOWER PRICES NOW

Energy Management Institute Advises Companies to Develop an Energy Risk Management Program Now to Ensure Extraordinary Cost Savings.

***EMI can educate and prepare you for the oil market’s inevitable swing to the upside with our two-day Introduction to Petroleum Hedging course on February 11-12 in Atlanta, GA. Our blog readers are eligible to receive $200 off of the regular registration fee. Just use promo code BLOG200 when registering. You can get course details and register here.***

NEW YORK, NY (January 9, 2015): Energy Management Institute (EMI.org) is advising its clients to prepare now in order to take advantage of a quick turnaround in gasoline and diesel prices once crude bottoms out. Since 2004, each time the crude market reaches its low point the diesel market rebounds and recovers 80% of its lost value in just over 4 months. This fact holds true for gasoline and jet fuel prices as well. Once the market turns, unprepared companies have little time to develop a strategy to lock into lower prices.

“Time and again we see companies fail to prepare to take advantage of extraordinary cost savings,” said J. Scott Susich Senior Partner at EMI. He went on to say, “Companies become fixated on trying to time the market and catch the bottom only to see their opportunity squandered away.”

EMI’s advice is based on recently completed analysis of ten years of energy prices focused primarily on crude and its relationship to diesel. Since 2004 the market has experienced seven rapid declines in crude price of 20% or more. In six out of seven of those declines the market recovered at least 80% of its value. The one exception being the meteoric drop in energy prices associated with the global financial crisis of late 2008. Currently the market is on the downside leg of the eighth such drop this decade. The analysis showed that once a bottom is reached the market turns upward and recovers very quickly. The six decline and recovery periods are highlighted below:

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When we examine the effect on retail diesel prices during these periods, we see a high degree of correlation and the same rapid recovery of 80% of the lost value. The table below details these movements:

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(Prices are EIA on-highway retail diesel)

“Locking in to low prices requires the development of an energy risk management program with buy-in from the very top of the organization. Getting the proper authorizations can be a months-long process for many companies emphasizing the need to begin before the bottom of the market is reached,” said Susich.

Many companies waiver from implementing such a plan believing the world is in for a long period of low energy prices.“We absolutely believe current low prices will not be the norm and oil prices will recover to higher levels as geopolitical risk is not going away. Lower oil prices will ultimately result in an increase in demand and, frankly, we do not think many of the OPEC countries will be able to sustain lower prices for an extended period of time before eventually going back to their historical policy of defending prices by cutting production.”

About EMI
New York-based EMI (www.emi.org) provides specialized education, data services, and advisory services to major oil companies, utilities, Fortune 500 end-users and top transportation fleets throughout the world. As a division of Advanced Energy Commerce, Inc., EMI provides critical business information services and thought leadership in the energy segments of Oil, Gas, Alternative Fuel, and Electric Power.

EMI provides a tremendous amount of expertise in developing, implementing, and executing risk management programs. EMI helps businesses, both large and small, successfully manage their exposure to price risk in the face of never-ending market volatility. For more information on EMI’s Advisory Services, visit www.emi.org.