After a day of good macroeconomic data out of the US the political circus in Washington DC ended the day by cancelling a vote on Plan B with both the Senate and the House of Representatives now in recess until after the Christmas Holiday. The market is now left trying to figure out if this means a deal to avert the fiscal cliff will not get done or one will be completed but not unit the very last minute. The one thing Santa Claus is not bringing for Christmas in the US is clarity as the cloud of uncertainty got even larger after last evening's performance of the Grinch who may be stealing the US economic recovery. Oil and most all risk asset markets immediately sold off on the news last night and have been in negative territory throughout the evening trading session... although the equity markets are off of the extreme lows hit shortly after the news broke.
As I have been discussing for over a month the market will remain susceptible to the 30 second news snippets for direction and the latest news was certainly bearish for all risk asset markets... or at least that is the current market interpretation. With the holiday period upon us and with little in the way of macroeconomic data the rest of the year will be dominated by whether or not the US politicians will be able to put a deal together before the fiscal cliff trigger data of January 1, 2013.
There are six trading sessions left in 2012 (counting today) and 10 days until the trigger date. Liquidity will be low, volatility will be high and risk asset markets will remain susceptible to sudden price reversals on any news snippet that emerges on the fiscal cliff negotiations. I am still of the view that a deal of some sorts will be done and the worst of the fiscal cliff will be avoided. It may not be the best deal in town nor one that will ultimately be good for US economic growth... but that is next year's storyline. However, I expect both sides will come to their senses and agree to something to avoid being blamed for sending the US economy into a downward spiral.
Global equity markets are starting to reflect the reality of last night's no vote in the US as shown in the EMI Global Equity Index table below. The Index has lost a small amount overnight but it does not reflect what will likely be a sell-off in the US (at least on the open). The Index is still up by 1.6% for the week and 11.3% for 2012. Those levels are bound to narrow after the US trading session by I expect the Index will end the week with gains.
Thursday's EIA report was bullish from the perspective that the report showed net withdrawal that was greater than most of the consensus forecasts. However, this week's withdrawal was smaller than both last year's draw as well as compared to the net withdrawal for the five year average for the same week. The 82 BCF withdrawal (below normal for this time of the year) was greater than the expectations and the market consensus calling for a withdrawal of around 78 BCF. The draw of 82 BCF was greater than my model forecast (-65 BCF withdrawal) this week. The inventory surplus widened modestly versus last year and versus the more normal five year average. The current inventory surplus came in at 344 BCF above the five year average or about 10.2% above.
This week's 82 BCF withdrawal compares to last year's draw of 100 BCF and the withdrawal for the five year average of 144 BCF for the same week.
Working gas in storage was 3,724 Bcf as of Friday, December 14, 2012, according to EIA estimates. This represents a net decline of 82 Bcf from the previous week. Stocks were 66 Bcf higher than last year at this time and 345 Bcf above the 5-year average of 3,379 Bcf. In the East Region, stocks were 80 Bcf above the 5-year average following net withdrawals of 49 Bcf. Stocks in the Producing Region were 183 Bcf above the 5-year average of 1,078 Bcf after a net withdrawal of 24 Bcf. Stocks in the West Region were 81 Bcf above the 5-year average after a net drawdown of 9 Bcf. At 3,724 Bcf, total working gas is above the 5-year historical range.
I am maintaining my view at neutral and my bias at cautiously bullish as the current fundamentals are still biased to the bearish but the forward view of 2013 fundamentals are starting to look more supportive. In addition the technicals are indicating that the selling momentum has eased as the market is has now moved into a higher level trading range over the last two days.
There is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil. But as discussed above the market seems to be paying less attention to the nearby fundamentals. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. This is still an event driven market for oil at the moment.
I am maintaining my Nat Gas view at neutral and bias at cautiously bearish side as the fundamentals and technicals are now suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to remain in the new lower trading range... as the latest temperature forecast is once again less supportive. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the heart of the winter heating season and currently those forecasts are back to switching to a more neutral to bearish scenario.
Markets are mostly lower heading into the US trading session as shown in the following table.
Note: Today will be the last publication of the Energy Market Analysis for 2012. Publishing will resume on Wednesday January 2, 2013.
I do want to take this opportunity to thank all of you for reading the newsletter . I hope you enjoyed reading the daily report as much as I have enjoyed writing it. 2012 was yet another tumultuous year but one that was laden with many opportunities in the energy world. 2013 is likely to be even more interesting. I look forward to conversing with you all in 2013.
I also wish all of you a very happy holiday season and an extremely healthy and happy 2013.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.