The first Energy Market Situation of 2014 arrives with a newly optimistic economic outlook.
The job situation should stabilize with unemployment between 6.9 and 7.2 per cent.
The Federal Reserve recognizes the change and is unwinding its bond buying program.
Domestic supply and demand is mixed:
- Crude oil stocks fell seven million barrels during the week ending December 27th.
- They remain at the top of the five year range of stocks.
- Demand is strong, but is being overmatched by supply.
Natural gas prices are reacting bullishly to weather, but the same phenomenon of supply exceeding demand remains a concern.
Sincerely,
Alan Levine
Chairman, Powerhouse
DOE Statistics for the Week Ending December 27, 2013
The Matrix
The year 2014 opens on an optimistic note. In particular, the labor market improved in 2013, with 203,000 jobs added to US payrolls in November. (December data will be released on January 10th.) Layoffs were declining too and while these employment data include the effect of the government shutdown, the overall pattern has been positive.
Economists expect the unemployment level to stabilize between 6.9 and 7.2 per cent. Job growth should be experienced in higher-paying sectors including manufacturing and health care.
The Federal Reserve has announced the start of unwinding its bond-buying program in response to improving employment. The central bank is expected to reduce the size of its purchase program by $10 billion monthly.
The Climate Prediction Center of NOAA offers a chilling near-term weather forecast:
The chances for below-normal temperatures are elevated in the Northeastern US due to cold conditions forecast early in the period. Temperatures are expected to rapidly moderate during the 6-10 day period throughout the East from very cold conditions near the start of the period to above normal temperatures near the end.
US Supply/Demand Balances
Weekly petroleum data for the week ending December 27, 2013 was released on Friday, January 2, 2014. Results were mixed.
Crude oil inputs to refining averaged over 16.2 million barrels per day during the report week, 14 thousand barrels per day higher than the previous week.
Refineries operated at 92.4% of capacity last week. Gasoline production decreased to 9.1 million barrels daily. Distillate fuel output rose to 5.2 million barrels per day.
Crude oil stocks fell 7.0 million barrels during the week. Declines were seen everywhere but in the Rockies (PADD 4). Gulf Coast stocks fell 3.8 million barrels, possibly reflecting year-end tax selling rather than refinery requirements.
Geopolitical issues remain a concern for crude oil prices which have been relatively calm for the past three years despite major upheavals in Middle East and North Africa. The availability of oil from shale has created this situation. Most analysts see this as bearish.
The possibility of new production from Iran, Iraq and Libya support this view. If these oil provinces reach their objectives, an additional two to three million barrels could reach world markets.
Product demand in the US is growing, but is being overmatched by supply. Domestic production continues to top eight million barrels daily. EIA projects output of 8.5 million barrels daily in 2014. And demand in emerging markets has recently been running into headwinds.
Distillate fuel oil added 5.0 million barrels to stocks. They remain well below the lower limit of the five year range.
Four week demand for all products grew year-on-year 3.3 per cent, moving to 19.9 million barrels daily for the report week. Gasoline demand grew 3.5 per cent over last year for the four week period. Distillate demand was up 1.3 per cent for the comparable period.
Natural Gas
Natural gas prices have reacted bullishly to the expectations for cold weather that have shaped the start of this year. Early next week the East Coast could experience some of the coldest weather in years, supporting natural gas demand. Meteorologists are looking for near to record cold.
The withdrawal reported on Friday was less than expected:
Working gas in storage was 2,974 Bcf as of Friday, December 27, 2013, according to EIA estimates. This represents a net decline of 97 Bcf from the previous week. Stocks were 562 Bcf less than last year at this time and 289 Bcf below the 5-year average of 3,263 Bcf. In the East Region, stocks were 226 Bcf below the 5-year average following net withdrawals of 67 Bcf.
February futures prices are hugging the 20-day moving average, now around $4.31. This is higher than the price for March, supporting our short term bullish outlook.
Cash market prices in the Northeast are likely to be constrained because of transportation bottlenecks in the Marcellus. This is similar to the situation in the Rockies several years ago when new pipelining was constructed to facilitate the movement of natural gas to markets.
Some new pipelining was built carrying natural gas into New York City in November, 2013, but this is only a beginning. Marcellus production is growing rapidly and it will take time for additional transportation pipes to be built, relieving the backlog now in the Marcellus region.
On a broader scale, natural gas production grew two per cent last year. Demand is hard to pin down, especially demand from the power sector. And manufacturing needs are growing only slowly. On balance, one must be concerned that there may be more supply than markets can absorb.
Futures trading involves significant risk and is not suitable for everyone. Transactions in securities futures, commodity and index futures and options on future markets carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged”. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit. Past performance may not be indicative of future results. This is not an offer to invest in any investment program.Vol. PH 03 NO. 01
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