Oil and most commodity markets are starting the shortened US trading week higher after the Bank of Japan came out with an aggressive monetary program after over 20 years of going nowhere. They shifted their program to an open ended asset purchase program... much like the US Central Bank but delaying the start of the program until next year. They did vote for a 2% inflation target to be achieved at the earliest possible time. If they do achieve this rate of inflation it will be the first time since the early 1990's. The market is somewhat disappointed over the BOJ kicking the open ended purchase program down the road to 2014. Although commodities were firmer over the BOJ plan equities were lower.
In the US the House Republicans have decided to vote to expand the US debt ceiling to the middle of May. The vote will come on Wednesday. This is a bit of a strategy change for the Republicans who have been insisting that any increase in the debt ceiling had to come with reduced spending. The objective is to allow more time for negotiations and to push the Senate to possibly put forth a budget. I view this situation much as the fiscal cliff nonsense that lasted for months and did not culminate until the very end of 2012. The markets will once again be held hostage to the 30 second news snippets coming from all sides until a lasting deal is finally reached. I expect a deal will eventually be reached.
The oil complex ended the week modestly higher... with RBOB gasoline the largest gainer in the complex even as gasoline inventories have now built by about 35 million barrels since mid November. WTI increased by 2.14% or $2 /bbl as Brent gained about 1.13% or $1.25/bbl. Crude oil stocks in PADD 2 and Cushing were strongly higher as Seaway was shut down from maintenance. The Mar Brent/WTI spread narrowed by only $0.10/bbl as the expanded Seaway pipeline starting pumping at a rate of 400,000 bpd. The Mar spread is still currently trading near the middle of the trading range that has been in play for the last several months.
On the distillate fuel front the Nymex Feb HO contract increased by 1.46% or $0.0440/gal on the week as distillate fuel inventories decreased modestly as temperatures were more normal over parts of the US. Gasoline prices increased on the week. The Feb Nymex gasoline price increased by 2.3% or $0.0629/gal this past week even as inventories increased once again.
The weather pattern may be changing once again. The latest NOAA six to ten day and eight to fourteen day forecasts as both decidedly less supportive for higher levels of Nat Gas heating related consumption than those from just a week ago. Neither forecast period is projecting below normal temperatures with the six to ten day forecast expecting above normal temperatures across most of the eastern half of the US. However, the eight to fourteen day forecast is a tad less bearish. The February Nat Gas futures contract increased by 7.18% or $0.239/mmbtu on the week and is now back into the $3.50 to $3.75/mmbtu trading range as the market continues to be focusing on the nearby round of cold weather currently in place.
The current weather is winter like along major portions of the East coast but that pattern is about to change. The latest NOAA six to ten day and eight to fourteen day forecasts are both projecting a moderating temperature profile. In fact I would call the forecasts biased to the bearish side as Nat Gas heating demand during the period of January 23rd to the 31st is likely to be below normal and thus result in an underperformance of the weekly inventory withdrawals over the aforementioned timeframe.
From a technical perspective the spot Nat Gas futures contract is hovering around the lower end of the new $3.50 to $3.75/mmbtu range support level suggesting that there is may not be a lot of upside conviction at the moment. The cold nearby weather is being offset by a bearish forecast period. At the moment market participants are skeptical that the current uptrend that has been in play for about a week is sustainable against the backdrop of a warming period during the last week or so of January.
According to a recent report by the National Oceanic and Atmospheric Administration (NOAA), 2012 was the warmest year in the contiguous United States since recordkeeping began in 1895. The average temperature was 55.3 degrees, 3.2 degrees greater than the 20th century average and 1.0 degree greater than the previous record in 1998. The warm year was the result of the combination of a mild winter and a hot summer, and warmer than normal temperatures in every state, not just in isolated regions of the country.
The temperatures in 2012 affected natural gas consumption. Even with lower average natural gas prices, residential and commercial consumption in 2012 was lower than any of the previous 5 years with lower demand for heating.
On the financial front equity markets around the world were higher for the week with the China still in positive territory for 2013. Market participants continue to look at signs that suggest that the global economy may be starting to stabilize. Global equities are mostly higher for the year to date primarily as a result of the view that the combination of all of the money printing by central banks around the globe (Japan now back in the foreground) coupled by some of the uncertainty of the fiscal cliff slowly starting to move into the background. Global equity values increased as shown in the EMI Global Equity Index table below and remain in positive territory for the year.
The EMI Index increased by 1.0% on the week with the Index showing a year to date gain of 2.7%. Over the last week the Index increased in value in most all of the bourses with just one bourse including China. The Japanese bourse remains the best performing market in the Index showing a year to date gain of 5% with London a close second with a gain of 4.4% for 2013.
The euro was lower on the week while the US dollar was higher driven mostly by the ECB keeping rates steady. Last week the global equity markets were a modestly supportive price driver for oil and most commodity markets.
I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a move to the upside now that the spot WTI contract has breached its upper resistance level.
I am maintaining my Nat Gas view at neutral with an eye toward the downside if we get further bearish weather forecasts. 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 bearish at the moment.
Markets are mostly higher 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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