Equities Remain Directional Indicator For Energy Prices

Markets are trending sideways to lower today after another sell-off Wednesday as a slightly weaker dollar and flat equity futures give the market some pause for now.  The DOE report yesterday was neutral to bullish by the numbers, but weak product demand continues to shake the nerves of some traders with inventories remaining at better than 10-year highs.  The euro’s higher turn Wednesday may be the beginning of the end for the euro-run with the dollar index rising over 1000 points in evening trading yesterday, but the brief drop below the 200-day moving average in the S&P 500 Wednesday also indicates this is not just a currency story anymore.  Equities remain the directional indicator for energies near-term, and the trend there remains lower right now.

Energy & Equities Look Bearish

Energy and equities markets continue to run into selling, as fears connected to the euro-zone remain.  That said, the EU isn’t the only reason to be turning bearish as yesterday’s PPI data and a double-digit fall in housing permits indicate growth here in the U.S. may be slowing as well as stimulus efforts begin to sunset.  Adding to that today was the Mortgage Bankers Association reading on mortgage applications which fell an astonishing 27.1% for the week, its lowest reading since May 1997 (13 yrs) and further confirmation that any housing stability has been government-driven and artificial.  Furthermore, this comes as mortgage rates for an average 30-year sit at 4.83%….just a few basis points from March 2009’s record low of 4.61% (the point is housing hasn’t been driven by rates but free tax money). 

Looking at the 2010 economic powerhouse, Asia and more specifically China, the Shanghai Index is down more than 20% from its peak and already signs of slowing are being seen in China’s high-end property market.  Demand for commodities also appears to be waning from the massive YoYo increases seen in the last 6 months, and so no matter where you look we are seeing signs of slowing.  The U.S. still looks to be performing well near-term, but the now sharply higher dollar isn’t going to do anyone here any favors moving forward.  The equities market (and similarly the energy complex) has been pricing in a robust and near-perfect V-shaped recovery all along, and now we are seeing that this view may be a little too optimistic. 

Looking at gasoline demand alone, the EIA still indicates that consumption is more than 360,000 bpd below 2007 levels….undoubtedly part of the reason why inventories remain above the high-end of the 10-year range.  The energy complex remains decidedly bearish as the macros continue to influence the complex negatively.  Further weakness in equities will likely lead to still lower energy futures near-term.

Market Up on $1 Trillion Greece Bailout

Markets are trending sharply higher this morning as the EU with the IMF put forth a nearly $1 Trillion bailout package to stem the rising crisis in Greece and the rest of the euro-zone.  This has helped assuage near-term fiscal concerns which are helping the euro vs. the dollar, but at the end of the day this is not a solution but more kicking of the can down the road (did they solve Greece’s problem, no).  Is anyone noticing our can is getting pretty flat with all this kicking, and now isn’t rolling as well these days?  Energies are reacting as they should given the Dow is up nearly 400 points, but with gains of only $1.50 to $2/bbl in crude to levels just above $76……we wouldn’t say the complex is quite as bullish as the outside markets would otherwise indicate.

Markets Trending Lower on EU/Greece Crisis

Markets are trending lower again, now selling off relentlessly for three consecutive days.  The currency markets remain at the forefront of the movement with the dollar index rising another 500+ basis points to over 84.50 while the euro goes for new lows below $1.28.  Equities are opening mostly flat and despite a small bump down in initial jobless claims and good retail sales figures (with the exception of Target) for April, the market remains in a cautious mode right now as everyone positions themselves for tomorrow’s highly anticipated April unemployment report.

Greece is still the word of the day as their parliament begins to debate the austerity measures prescribed as part of this bailout.  Riots yesterday turned deadly, and while the EU has come to its rescue when they (on some level) didn’t have to….it’s quite the slap in the face to see civil workers and other protesters in Greece challenging any of the cost cuts necessary like pay freezes and the like.   The EU should be insulted Greece’s public protest.  Binding countries to a single currency without a central political or financial apparatus, not to mention the book-cooking that was going on, always ends in disaster when times of crisis unfold as countries lose the ability to manipulate their money supply.  The end-game could be the removal of Greece as a member of the EU with an implication they could enter a few years down the road after they have “healed” themselves.  If Greek’s think they have it bad now……wait until that’s thrown on the table.  Contagion is the real fear right now. 

Focusing on energy more crude traded below $80 and the 100-day moving average (MA), quite a feat and a decidedly bearish position near-term.  The question of whether this correction was a blip or a developing trend is not quite answered yet, but with this correction in the Dow still being less than 5%….we might still have more to go in May.

Oil Slick: Long Term Implications…Bullish?

At least 3 rigs in the Gulf of Mexico have been shut-in as a safety precaution as the oil slick invades their waters.  As much as 1/5th of the Gulf’s platforms could be within the slick-field in another 2 days and also might be forced to shut-down in response.  The growing concern about the slick today, above and beyond stopping it, is how traffic might be impaired through these shipping lanes.  More than 25% of all the refining in the country takes place in this Delta region, and any shutdown of the channels would force inventory out of the SPR. 

In short, while disruptions are not likely in the near-term…….long-term implications could be bullish, especially where it changes the offshore drilling debate.  Do you believe that the current catastrophe will impair future off-shore drilling…should it be the case, and if so, how will prices react?

Equity Futures Pushing Energy Prices Higher

Today the market is off to the races after Exxon’s earnings for Q1 rose 38%, helped along by the recovery in oil prices.  This as well as sharply higher equity futures are pushing  energy values higher, looking to test $85 in oil today.   The dollar index is weaker as the prospect of an EU bailout for Greece got a boost from fast-track approval from Germany, the major player in the region.  This is politically very difficult for them, and it will be interesting to see if they write the check and under what conditions.  

Initial jobless claims also fell 11,000 to drift below the 450,000 level, its lowest reading in 4-weeks.  The trend is definitely better, but it will be the April unemployment report at the end of next week that will really drive the market’s economic sentiment. 

Today sentiment is decidedly positive, and with equities higher, the dollar lower, and the macros (while bearish) giving some a reason to be bullish product demand moving forward…..the markets are trending notably higher and trying to get back toward the highs for the year that they’ve consistently failed to take out.  

Oil volatility over the last 50 days is the lowest since July 2007.  Does that mean we’ve found equilibrium?  Doubtful, but what isn’t is the impact of $3 retail fuel on business and consumers moving forward.  Overall the market is still range-bound and continuing to take its cues from equities.

Energy Prices Trending With Equities

Near-term demand for fuel remains suppressed, but more broadly there is still a belief the economy is in the midst of a steep recovery…..sentiment furthered by the surge in new home sales in March (up 27%).  Clearly this was tax credit driven, but for many the idea that individuals are ready to engage the economy (and most importantly the credit markets) has them bullish the current economic cycle.  Corporate earnings continue to beat most estimates despite still being below the peaks seen a few years ago, and interest rates overall remain in check and off their highest levels of the last couple months. 

Overall energies continue to trend with equities as sentiment shifts from optimism to caution and then back to optimism.  We expect the market to remain range-bound near-term as it struggles with its own fundamental weakness and the reluctant climb by equities during this Q1 earning’s season.  Tomorrow’s stocks report will be key to oil’s near-term direction, and already the market is looking for another round of builds in the products of 2 mb and 1.5 mb gasoline/ distillate respectively (oil expected to decline slightly) to further cushion already burgeoning inventories.  For now the market continues to be in a holding pattern more or less with $80/bbl representing the low-end and $85/bbl indicating the high-end of the trading range.

Q1 Earnings “Red-Hot”: Energy prices continue to rebound

Equities remain the key to energies ultimate direction, but increasing fundamental pressures continue to bias the complex lower or at least keep any advance in check. Overall we expect the complex to congest further, likely waiting until next week to make another push higher. 

 

Peak Oil

What is it…and why we should care?

Peak oil is the point in time when the maximum rate of global supply extraction is reached, after which the rate of production enters terminal decline. This concept is derived from the Hubbert curve, and has been shown to be applicable to the sum of a nation’s domestic production rate, and is similarly applied to the global rate of petroleum production. Peak oil is often confused with oil depletion; peak oil is the point of maximum production while depletion refers to a period of falling reserves and supply.

M. King Hubbert (a geo-physosist from Royal Dutch Shell in the 1950’s) created and first used the models behind peak oil in 1956 to accurately predict that United States oil production would peak between 1965 and 1970. He was “right-on” and his work is now referred to as Hubbert peak theory, and its variants have described with reasonable accuracy the peak and decline of production. According to the Hubbert model, the production rate of a limited resource will follow a bell-shaped curve based on the limits of exploitability and market pressures. In general, the Hubbert curve suggests that production stops rising and then declines. Supply shortfalls will cause increased energy prices, unless demand is mitigated, often by higher prices, conservation and/or alternatives.

Optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis, without requiring major changes in the lifestyle of heavily oil-consuming nations. Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred, oil production is on the cusp of the peak, or that it will occur shortly.

Whether the optimistic or pessimistic view is taken, one thing is clear; because the future is un-known, and the possibility exits that crude oil production has peaked…and this means there is a price risk in the future. This price risk can be prudently hedge against.

This long term view (regarding “peak oil”) further cements the importance of knowing your energy budget objectives and analyzing how much risk you can “stomach” should an event like “peak oil” go against your desires. One cannot control whether “peak oil” becomes a reality, but one can control the price exposure should production peak, casusing a shortage in supply and thus higher energy prices.

The Bull Bear Sample Report

The Bull Bear Report

March 29, 2010

Maverick Energy

Market View Summary:

Crude Oil:
The crude market remains bearish signaling that flat to lower markets are possible near-term. Closes below $79.41 would confirm that a short-term top has been posted. If the rally renews, the upside target is $85.43.

Bear (Short-Term) & Neutral (Long-Term)

 


Hedge Funds & Technical Factors:
Technicals remain mixed, but the bias is still to the downside as momentum slowly grows.

Slight Bear (Short-Term) & Neutral (Long-Term)

 


 


Inventory (DOE weekly report)


Distillates (Diesel) & Gasoline:
Crude saw a build of 7.3 mb, gasoline a draw of 2.7 mb, and diesel a draw of 2.4 mb. Refinery utilization was at 82.1% (last week 81.5%)

Neutral (Short-term) & Neutral (Long-term)

 


Natural Gas Storage:
This week’s injection was 11 BCF. The prior year number was an injection of 3 BCF. The current inventory balance is 1.626 TCF which is 149 BCF above the 5 year average and 28 BCF below the prior year.

Bear (Short-Term) & Neutral (Long-Term)

 


 


Weather Outlook

The 6 to 10 day forecast calls for warmer than normal for the Midwest and East, while cooler than normal for West.

Neutral (Short-Term), Neutral (Long-Term)

 


Economy (Macro-economics)

Q4 GDP was revised to a final +5.6% from the last reading of +5.9%, a fairly large adjustment for a final reading and a lower one at that. Within the data consumer and business spending was seen being lower than previously reported while overall the largest contribution continued to come from inventory building. That inventory building is not likely to provide a boost moving forward, as with any GDP reduction…energy demand is also being trimmed ever so lightly.

Slight Bear (Short-Term), Slight Bear (Long-Term)

 


Geo-Political/International

Geopolitical risk is a continual risk for energy prices, especially with respect to Iran. If/when geopolitical issues hit the forefront we can expect oil moves above $100. Due to the ongoing risk of geopolitical tension, crude is expected to average $85 for most of the year.

Bull (Short-term), Bull (Long-term)

 


Natural Gas

As we sit today we remain at a loss to find something to be bullish about for natural gas in the short-term. We are in one of those rare times when no hedge is the best hedge (short-term). This will eventually change, but for now we expect the monthly premium seen in the outward months to drift lower for the prompt month.

  Crude Oil Technical Storage Rigs Weather Economy
Short Term Bear Bear Bear Bear Neutral Bear
Long Neutral Neutral Neutral Neutral Neutral Bear

 

Gasoline & Diesel

The dollar and equities continue to drive energies, but overall the complex remains reluctant to follow which could indicate a swift sell-off if the macros were to turn more bearish.

 

  Crude Oil Technical Storage Weather Geo Political
Short Term Bear Bear Neutral Neutral Bull
Long Neutral Neutral Neutral Neutral Bull

  Icon Legend  
Bear Bull Neutral
Bear Bull Neutral
 
Contacts:
John Righeimer
815-498-3855
Righeimer@maverickec.com

Russ Paluch
630-470-9176
Paluch@maverickec.com


Maverick is an energy procurement consulting firm devoted to providing strategy, planning, budgeting, and tracking services to a broad range of providers and end-users. We provide quality procurement strategies that produce bottom line results. We assist in the procurement of supply and prepare hedging strategies to manage energy price volatility.
Quote of the week:

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