In China over the weekend the new leadership team ready to take the reins in 2013 seems to be signaling a different view toward the rate of economic growth compared to the previous administration. The new group of leaders said they are looking for higher quality and efficiency of growth in 2013 suggesting that they may be willing to accept a slower pace of growth in exchange for higher quality and more sustainable growth. Since 2006 the objective has been a fast paced growth strategy. They are also looking to maintain a so called prudent monetary policy and a proactive fiscal stance. It looks to me that the government is moving to a new level of sophistication for managing the world's fastest growing economy and main oil demand growth engine of the world.
Over the last month or so China is starting to show the early signs of economic stabilization and may be setting up for another leg of growth in 2013. If so it would mean that the latest projection for oil demand growth for China from the IEA may in fact have a decent chance of being met.
In the US the Republicans seem to being moving closer to the President's side putting tax hikes for millionaires on the table. It is certainly not the deal the President is looking for but it certainly shows that movement may now be starting to take place as the deadline for the fiscal cliff is less than two weeks away with the Christmas holiday break in between. A deal will be done possibly even as early as this week.
The oil complex ended the week higher... mostly on the IEA forecast for an oil consumption growth spurt from China in 2013 in spite of a bearish weekly oil inventory report. Heating oil led the way higher on the week after experiencing a large price decline during the previous week. WTI increased by 0.90% or $0.77/bbl as Brent gained about 1.99% or $2.13/bbl. Crude oil stocks in PADD 2 and Cushing were strongly higher for the fourth week out of five even as refineries were returning from maintenance in the region. The Jan Brent/WTI spread widened by $1.36/bbl as the normalization process is only slowly proceeding. The Jan spread is still currently trading near the highest level in months as the surplus in the US mid-west is once again growing.
On the distillate fuel front the Nymex Jan HO contract increased by 2.24% or $0.0654/gal on the week as distillate fuel inventories increased strongly even the temperatures were warmer than normal over parts of the US. Gasoline prices increased on the week. The Jan Nymex gasoline price increased by 2.11% or $0.0550/gal this past week even as inventories surged for the third week in a row.
Nat Gas futures were once again hit with the realization that warmer than normal weather is here with the possibility of it continuing for another few weeks. The January Nat Gas futures contract decreased by 6.67% or $0.237/mmbtu on the week and is now below the support level of $3.50/mmbtu as the market continues to be focusing on a bout of warm weather.
The selling in the Nat Gas market continued for the seventh session in a row on Friday with the spot Nymex futures contract declining by $0.388/mmbtu or 19.5% over the aforementioned timeframe. Based on the latest NOAA forecast for the next several weeks it is looking more and more like prices may go even lower before staging any significant recovery to the upside. Both the six to ten day and eight to fourteen day temperature forecasts are projecting a wide area of the US expecting above normal temperatures through December 27th. As such I would expect that the inventory reports covering those time frames will likely result in very small net withdrawal or even additional injections. As we saw this week above normal temperatures at this time of the year will result in injections as supply remains very robust even at the current low prices.
From a technical perspective the spot Jan futures contract's next support level is not until $3.20/mmbtu which is also the same level on the spot continuation chart which if breached the price will be heading into a gap area that was made back in late September which could result in the market moving down to about $3.06/mmbtu or the level that the October contract expired at. From a technical viewpoint the only supportive point is the RSI which is approaching an oversold level and could result in a round of short covering before resuming its move to lower levels.
In the latest EIA weekly Nat Gas report on November 30, the U.S. Energy Information Administration (EIA) released marketed natural gas production estimates for September 2012. These data indicate a 9 percent increase in average daily production between August and September 2012. Although part of this increase is attributable to a recovery from Hurricane Isaac-related declines in August and September, the increase reverses several months of declines that took place earlier in 2012. At 69.4 billion cubic feet per day (Bcf/d), marketed production in September was slightly higher than January 2012 and the highest since February 1973 despite the significant decline in the natural gas rig count this year. According to Baker Hughes, the natural gas rig count was 435 at the end of September, compared with 811 at the start of 2012.
On the financial front equity markets around the world were mostly higher for the week (except the US) as market participants continued to look at signs that suggest that the global economy may be starting to stabilize as well as a solution to the US fiscal cliff may be possible while the EU finally agreed to the next batch of financial aid for Greece. The increase in equities were mostly a result of the view that the combination of all of the money printing by central banks around the globe (with a new round by the US) coupled by some of the uncertainty of the fiscal cliff slowly starting to diminish and with Greece now moving into the background could have a positive impact on the global equity markets. Global equity values increased as shown in the EMI Global Equity Index table below and remains in positive territory for the year.
The EMI Index increased by 1.6% on the week with the Index now showing a year to date gain of 9.7%. Over the last week the Index increased in value in most all of the bourses with just one bourse still in negative territory for the year... China. The Index is trading at levels not seen since the middle of September and above the sell-off levels shortly after the US Presidential election. China remains the only bourse still in negative territory for the year. However, with the strong rally in Chinese equities last week it now seems that this bourse has a chance of moving into positive territory for the year over the next several weeks. In fact in Monday trading the rally in Chinese stocks continued where it left off on Friday.
The German bourse remains the best performing market in the Index showing a year to date gain of 28.8% with Hong Kong now also showing a gain above the 20% level for the year. In spite of all of the negativity surrounding the global economy in 2012 both Germany and Hong Kong are clearly in the midst of a bull market and could possibly be a leading indicator for what might come in 2013... especially if the US fiscal cliff is solved and the global macroeconomic data continues to show stability.
The euro was higher on the week while the US dollar was lower driven by the US Fed announcement of a new round of quantitative easing. Last week the global equity markets were a marginally bullish price driver for oil and most commodity markets.
I am maintaining my view and bias at neutral 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 now in a short term and narrow trading range.
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 price direction at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is still positioned to test the lower end of the trading range... especially after this week's bearish inventory snapshot. 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 early stages of the winter heating season and currently those forecasts are all still mostly bearish.
Markets are mixed heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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