The economy continues to take center stage in setting the direction of most of the risk asset markets around the world. The global economy is slowing by just about any measure one wants to apply... macroeconomic data, corporate earnings, revenues and forward guidance as well as rising government debt and slowing of demand growth for most major commodity markets. Last night Apple joined the ranks of many other corporations in missing their earnings forecast and lowering their guidance for the next quarter... the holiday season. The consumer is not opening their pocketbooks very wide at the moment as uncertainty reigns over many issues... high unemployment, fiscal cliff, evolving geopolitics of the middle east, US presidential election to name just a few.
Today the US Commerce Department will release the latest snapshot of third quarter GDP (expectation of 1.8% versus 1.3% for the second quarter). In addition the Consumer Sentiment Index will also be released with an expectations for the Index to come at 83 for October. The US economy is only slowly growing and at a pace that is much too slow to expect to see the huge unemployment situation to be resolved anytime soon.
In Europe the euro zone leading economic index(LEI) declined by 0.4% to 104.9 in September. The index declined for the fourth month out of the last six months. Other data released out of Europe mostly pointed to a further slowing of that regional economy with Spain's unemployment level hitting a record high at 25.02% for the third quarter versus 24.6% for the second quarter. All of the above simply translates to less oil consumption going forward and thus supply likely outstripping demand for the foreseeable future (barring any unforeseen geopolitical event).
Global equities are back on the defensive since Europe opened as shown in the EMI Global Equity Index table below. The Index is now lower by 1.6% for the week resulting in the year to date gain narrowing to 6.1%. Only Germany and Hong Kong are still showing double digit gains for the year (versus six countries about a week or so ago). China remains at the bottom of the leader board showing a year to date loss of 6.1%. Global equities have turned back to being a negative price driver for the oil complex as well as the broader commodity complex.
The main event that is likely to dominate the media airwaves over the next week or so is not the US Presidential election rather it is Hurricane Sandy. Hurricane Sandy is now on a path heading for the most populated part of the US east coast packing a lot of rain and wind that will impact millions of people. This storm has many of the characteristics of the so called perfect storm from 1991 in that the northward movement of Sandy will likely hook up with a wintry storm moving across the country and frigid air streaming down from Canada. Following is the latest projected path of Sandy as of 5 am this morning.
There are likely to be mass power outages (thus Nat Gas consumption will decline) and with power outages expected there is likely to be a run on gasoline as many fill up ahead of the storm. The storm will impact transportation in the region as flooding will be an outcome of the storm. There is also a possibility of refinery outages as refiners take preventive action as well as also being subject to the impact of power outages and flooding. The forecasters are already saying that this storm could cause about $1 billion dollars worth of damage. There will also likely be an possible interruption in the main trading markets in the US if power is out and workers are unable to get to the office. This is a very dynamic and dangerous storm and one that will be on the radar for the foreseeable future.
I am maintaining my overall view for the oil complex at cautiously bearish now that the spot WTI contract has breached its range support that has been in play since mid September. The new resistance level is the old range support level of $87/bbl. The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics have continued to remain an issue for market participants.
I am keeping my Nat Gas price view at neutral as the fundamentals and technicals are once again keeping suggesting that the market may have topped out for the short term. I anticipate that the market will remain in a trading range until it becomes clearer as to how the heating season will evolve.
Today's Nat Gas injection report came in just about at the consensus forecast and within the range of expectations. The market was under a bit of selling pressure before the report was released and prices remain in negative territory since the injection report hit the media airwaves. There is not a lot of upside support at the moment even as the latest NOAA temperature forecast is calling for below normal temperatures for the eastern half of the US for both the six to ten day and eight to fourteen day forecasts. Although the 8 to 14 day projection shows a bit of moderation in the temperatures compared to the shorter term forecast.
It is that time of the year when the Nat Gas market is likely to be almost entirely driven by the day to day temperature forecasts as the winter heating season slowly evolves. The beginning of the heating season has been mixed with some colder temperatures early in October followed by a week or so of above normal temperatures with some colder weather now on the horizon. That all said the injection this week has increased over the earlier October injection reports and unless the temperatures get decidedly colder we could we could see the next few injections working their way closer to a more normal injection level.
From a technical perspective the expiring (expires October 29) November futures contract is now below the inverted head and shoulders breakout level and quickly approaching its next support level of around the $3.32-$3.33/mmbtu area. In addition the November/December contango is still widening suggesting that when the December contract becomes the spot month on October 30th it could be exposed to a bit of selling pressure unless the weather turns more bullish.
Markets are mostly lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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