Oil rebounds as traditional fundamentals reassert themselves

Oil rebounds (NYMEX:CLZ13) after being oversold and helped with a little fire in Lemont and on word that Europe might not need as much U.S. product gas after a labor dispute at the Grangemouth refinery. Even as the dollar hits a two-year low against the euro (FOREX:EURUSD), oil continues to march to its own drummer as traditional supply and demand fundamentals try to reassert themselves into the crude market.

RBOB led the petroleum complex back as the Chicago cash market rallied on a fire in the Lamont Citgo refinery. On top of that, a Bloomberg report that Euro-region gasoline supplies fell by 13% offset the good feelings of a settled labor dispute. That came as gas prices hit a three-year low! Can't we enjoy it for more than just a minute?

For oil we are selling rallies. The market is oversold and could rebound, but we are targeting $88 barring any major geo-political or weather developments. 

The USA shale gas capital of the universe is exciting the world with the bright prospects of huge exports in the coming years and lower carbon emissions, which hit a 13 year low. Yet the battle with coal will continue. Cathy Cash of the National Rural Electricity Co-op says electricity demand this winter will highlight the back-and-forth battle between natural gas and coal as the cheapest fuel for power generation, Federal Energy Regulatory Commission staff said in a seasonal market outlook. As natural gas prices rose, use of gas for electricity generation fell 13% nationwide from last year, according to FERC's recently released winter 2013-2014 Energy Market Assessment. The Midwest saw gas used for power plummet 36% in 2012 from 2011 levels, as generators that had switched to gas returned to coal last year.

"As natural gas prices recovered from 2012 lows, coal became more economic in certain regions," the FERC staff outlook said. "Power burn this coming winter is likely to be lower than last winter if coal and natural gas prices remain at current relative levels." Still, electricity prices this winter are expected to follow the natural gas market, which is seen as "generally positive." That's because conditions heading into the year's cold season are prime for moderate natural gas prices based on the growing production and adequate inventories, the assessment said. "For the coming winter, futures prices for natural gas and power are generally comparable to last year's low prices," the outlook said. The futures market allows consumers to lock into a price for winter generation to guard against price volatility.

"Current spot and futures market natural gas prices remain relatively low in most regions of the country and natural gas storage levels are in line with the five-year average," the assessment said. "Electricity prices are expected to track the natural gas market prices."

While mid-Atlantic natural gas prices are lower this winter compared to last because of growing Marcellus Shale gas production, New England maintains the highest prices heading into winter with gas futures up more than $5.00 per million Btu over last year's prices.

Weather forecasts, a key driver for electricity prices, show a "normal" winter for the eastern half of the United States, and chances of a strong El Niño to impact the market "are waning," the assessment said. The National Weather Service predicts a "warmer-than-normal" winter in the West, where the demand for gas largely does not influence prices this time of year.  

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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