Energy prices sank on Friday on the back of a one-two punch of poor macroeconomic data from both Japan and the US. Japanese industrial output fell by an unprecedented 10% in January vs. the previous month, sending the Asian session off to a weak start, and only hours later, the US government reported that its economy shrank by 6.2% in the fourth quarter. This latest drop encompassed a substantial downward revision to the initial estimate of -3.8%, and had a chilling impact on the commodity and equity markets for the balance of the day.
Not helping the energy bulls either on Friday, was the release of EIA long-term demand numbers showing U.S. 2008 oil demand revised downward by 4% from an earlier estimate to a final number of 19.199 million barrels per day. This brings consumption for the year to its lowest level since 1998. (See our chart and table in our attachment). Moreover, the EIA said it does not expect any substantial improvement in energy offtake for 2009.
There is no change in our outlook for the crude oil markets over the short-term. We suspect that prices will continue to remain in a $32-$50 trading range for the next several weeks, with the downside being supported by the likelihood that OPEC will again sanction another cut at its upcoming meeting on the 15th. On the flip side, the steady stream of poor macroeconomic numbers will almost certainly trip up any budding rallies, keeping prices south of the $50 mark.
Technically, our charts. (see pp 4-5). show more of the same, namely, a sideways drift in both crude contracts. However, one market that perhaps is getting slightly ahead of itself is RBOB, where our charts show that prices may be on the verge of breaking out now that April takes over as the spot month. The action over the next day or two will be critical, but we would venture to guess that this apparent breakout on the charts will prove to be false, and prices will instead turn back inside the trading range, thus setting up an appealing short play. (We outline our thoughts in this regard on page 4 of our attachment).
Finally, latest CFTC shows there is not much conviction on the behalf of noncommercial traders, with net length in crude oil receding this past week in line with falling open interest. (See our story and charts on page 3).
In Other News from Reuters...
* Noncommercial net long positions on NYMEX crude in the week ending Feb 24th fell to 28,749 lots from 45,016 the week before. WTI open interest was down by 51,084 lots to 1,179,171 lots. Net length in RBOB decreased to 41,902 lots from 43,203 lots the week before, while open interest fell by 3,426 lots to 188,086 lots. Net longs in heating oil dropped to 4,852 lots from 7,909, while open interest was up by 225 lots to 259,123 lots. Net shorts in nat gas grew to 148,904 lots from 140,524, while open interest was down by 43,646 lots to 688,701 lots. (See charts page 3).
* President Obama said that U.S. combat operations in Iraq would end on Aug. 31, 2010, although roughly 35,000-50,000 troops will remain beyond that date to bolster security. All U.S. forces will exit Iraq by the end of 2011.
* The CFTC announced Thursday that it was investigating the United States Oil Fund (USO) concerning a large NYMEX trade made on Feb. 6. USO’s chief investment officer said Friday that it was unaware of the investigation, but that the fund ‘will fully cooperate.’ The fund now holds about 20% of the front month crude contracts on NYMEX.
* The number of rigs drilling for natural gas in the United States fell below 1,000 last week for the first time since May 2004, this according to the oil services firm Baker Hughes. The current level of 970 is considerably lower than the peak of about 1,600 reached last September.
* Exxon Mobil said Friday that it has completed the restart of a gasoline-producing fluidic catalytic cracking unit at its Torrance, California refinery. The unit had been shut since late December. Valero also said it had restarted its 245,000 barrel-per-day total-throughput refinery in Texas City, Texas, on Sunday after a month of planned work.
* A strike by more than 1,000 workers was temporarily averted at Sunoco’s two refineries in Pennsylvania on Sunday as the union and the company extended talks for a new contract.
* Mexico shut down its Coatzacoalcos and Cayo Arcas oil exporting ports in the Gulf of Mexico due to bad weather on Sunday; its Dos Bocas port also remained closed.
Quote of the Week: “Derivatives contracts... often go unsettled for years, or even decades, with counterparties building up huge claims against each other….Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged ...Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with”. Excerpts from Warren Buffet’s latest 2008 letter to shareholders...
European North Sea crude oil quotes as reported by Reuters: A Forties cargo for loading March 15-20 was bid at April BFOE minus $0.55, but there were no offers. An Oseberg for loading March/April cross-month offered at dated plus $1.35, while a Statfjord cargo for loading March 30 offered at dated plus $1.25.
European North Sea crude oil quotes as reported by Reuters: A Forties cargo for loading March 15-20 was bid at April BFOE minus $0.55, but there were no offers. An Oseberg for loading March/April cross-month offered at dated plus $1.35, while a Statfjord cargo for loading March 30 offered at dated plus $1.25.
U.S. gasoline/distillate quotes as reported by Reuters: In Gulf Coast trading, prompt M3 traded at 7.9c under the April screen, up from 8.3c late Thursday. On distillates, newly prompt ULSD traded at 2.3c under April. Low sulfur diesel traded at 3.0c under, while heating oil traded at 5.3c under the screen. In New York harbor, heating oil was at even to expiring March. ULSD was offered at 4.5c over March, and low sulfur diesel fell a quarter cent at 0.8c over. Jet fuel was offered at 4.0c over April. On gasolines, conventional regular held at 0.5c over sharply lower March futures.
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