Oil faces supply reality to start New Year

Reality Check

The New Year is bringing clarity to the oil market (NYMEX:CLG14) and maybe to the stock and gold market (COMEX:GCG14) as well. The first trading session of the New Year seemed like someone flipped a switch and changed the market’s mood. Stocks instead of rallying broke for the first negative start to a New Year since 2008, the year when the market finally realized that we were already in a major economic crisis and saw a major deflationary downward spiral.

Oil prices got hit hard as weak data out of China and the reality of abundant supply stated to weigh on market sentiment. Oil also fell as the dollar rallied and as reports that the Libyan protesters at Al-sharara oil field decided to suspend protest for two weeks raising hopes that Libyan supply would soon be back on the market. Traders also exited oil because of the possibility that we could see oil inventories start to rise dramatically in the coming weeks. As the Fog lifts from the Gulf Coast and year-end tax considerations take a back seat, the market will be heavily supplied.

Reuters reports that U.S. natural gas inventories fell by 126 billion cubic feet last week, according to a Reuter's poll of industry traders and analysts on Thursday ahead of a weekly government report on Friday.  The U.S. Energy Information Administration will release gas storage data for the week ended Dec. 27 on Friday at 10:30 a.m. EST (1530 GMT). The report will be delayed one day because of the New Year's holiday.

The Reuters poll had 20 participants, with withdrawal estimates ranging from 103 bcf to 162 bcf. The median draw in the poll was 125 bcf. Stocks fell by a date-adjusted 126 bcf during the same week in 2012. The five-year average draw for that week is 121 bcf. Utilities typically stockpile natural gas from April through October, and then withdraw stored supplies from November through March to help meet peak winter heating demand.

The U.S. National Oceanic and Atmospheric Administration said there were 180 heating degree days last week. That was 5 colder than the previous week, 19 colder than normal and 14 colder than the same week last year. Heating degree days, or the number of degrees Fahrenheit that a day's average temperature remains below 65 degrees Fahrenheit (18 Celsius), are used to estimate demand to heat homes and businesses. They are often weighted to reflect state and regional population differences.

For the week that ended Dec. 20, overall stockpiles fell 177 bcf to 3.071 trillion cubic feet, much higher than the five-year average draw for that week of 125 bcf. The expected 126 bcf draw would leave total stocks at 2.945 trillion cubic feet, 17% lower than the same week last year and 10% below the five year norm.

In the last four reports, total stocks have fallen 705 bcf, or 176 bcf per week, vs. a 214 bcf draw during the same one-month period last year and a 375 bcf five-year average decline for that period. Early withdrawal estimates for next week's storage report range from 140 bcf to 184 bcf, vs. a 201 bcf drop in the week ended Jan. 4, 2013, and an estimated five-year average decline for that week of 131 bcf. That report will come out on Jan. 9. NOAA said it expected 212 heating degree days this week, seven above the same year-ago week and five below normal.

While 2013 was the first time in five years that gas in storage did not kick off the heating season at a record high, stockpiles peaked at 3.834 tcf in early November, just 2% below last year's all-time high of 3.929 tcf and 1.5% above average. But chilly winter weather so far has triggered stock draws that are more than double the norm for this period and prompted analysts to scale back end-winter storage estimates. If drawdowns for the rest of the heating season match the five-year average, storage will end winter below 1.5 tcf, the lowest since 2008.

DTN reports that  the U.S. Pipeline and Hazardous Materials Safety Administration today issued a safety alert to notify the general public, emergency responders, shippers and carriers that recent derailments and resulting fires indicate the type of crude oil transported from the Bakken region in North Dakota may be more flammable than traditional heavy crude oil. Stay tuned could be an issue moving forward!  

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.


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

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