Oil balancing risk and demand ahead of cold-snap

Market Meltdown

Oil (NYMEX:CLG14) traders have to balance demand risks associated with a stock market sell-off vs. the possibility that the Fed may back off tapering after a terrible jobs report. While many other are joining my call for a test of the $88 handle, an oversold market and an uncertain stock market may give the bears some pause.

Lower oil prices already are becoming a big problem for countries that try to use oil as a political piggy-bank. Venezuela is already feeling the pain of underinvestment and weakening demand for their product. In another blow to the country, the Wall Street Journal reports that Vietnam Oil & Gas Group, or Petrovietnam, has suspended production of crude oil at a block in Venezuela, citing a tough economic conditions. "Basically, we are just slowing things down, and we haven't decided to withdraw from the project yet," said Pham Ngoc Khue, head of the investment and development division of PVEP, the Petrovietnam unit that jointly operates the Junin-2 block in Venezuela's Orinoco belt with Petróleos de Venezuela SA. "The investment environment there is not suitable for us right now — and even for several other foreign investors," Mr. Khue said Tuesday.

PVEP previously said the project started producing oil in October 2012, with an initial target of 200,000 barrels of crude a day by 2016. The block is Petrovietnam's only operation in Venezuela.  A Petrovietnam official said on condition of anonymity that skyrocketing inflation in Venezuela makes the cost of doing business there too high. Consumer prices in the South American country rose 56% in 2013, the fastest rate in the region. The official said Petrovietnam will continue to seek to increase its output from overseas fields, especially in Russia. "Meanwhile, we will wait and see how the Venezuelan economy fares," he added.

Polar Vortex 2 coming to a thermometer near you! Just when you thought it was safe to put your heaviest coat away, the temperatures look like they are taking a turn for the worse. Not only will we see a possible record withdrawal from supply forecasts that were calling for a continuing warm-up, it looks now like we are back in a deep freeze. Perhaps not as wide spread as the last deep freeze but big parts of the Mid-west will look like Siberia.

The Wall Street Journal reports that “Natural-gas futures (NYMEX:NGG14) climbed the most in 16 months as traders bet that a projected return of frigid temperatures in late January would stoke demand of the heating fuel. Natural gas for February delivery gained 22.1 cents, or 5.5%, to $4.2740 a million British thermal units on the New York Mercantile Exchange. Prices posted their largest one-day percentage gain since Sept. 11, 2012 and their biggest one-day dollar-gain since June 14, 2012. The rally helped natural gas futures erase all of their losses from a one-month low last Thursday and underscores the sharp volatility of a commodity prone to wild swings on changing weather forecasts. In the latest such outlook, MDA Weather Services, a Gaithersburg, Md., weather forecaster, projected a "colder outlook" for the eastern half of the country in its 11-to-15 day forecast, adding that it expects an "only modest recovery potential from these cold shots." The forecast left market participants fearful of tightening supplies as storage levels are well below typical levels for this time of year.

"More and more people are thinking that the current warm-up is just an intermission," said Phil Flynn, an analyst at Price Futures Group. Mr. Flynn said that many traders, who bet on natural gas price declines, likely bought back futures at a lower price, ahead of a Thursday government storage report that's likely to show another record storage withdrawal.

With frigid temperatures early last week, analysts expect data from the U.S. Energy Information Administration to show that natural gas supplies declined by a record 300 billion cubic feet in the week ended Jan. 10. If those estimates are correct, the storage withdrawal would break the previous record 285-bcf decline for the week ended Dec. 13 and could leave natural gas inventories at their lowest level in six years at the end of March.

During the so-called heating season, a period that runs from November through March, natural gas stockpiles fall as utilities pull supplies from storage tanks to meet high usage as customers burn the fuel in furnaces to heat their homes. Then from April through October, warmer weather allows for the rebuilding of gas inventories as supplies are injected into underground caverns. While domestic natural gas output has boomed because of hydraulic fracturing and horizontal drilling techniques, some market participants are still monitoring end-of-season storage levels for signs of a supply drain. Todd Gross, chief investment officer of Qeri LLC, a New York investment firm that specializes in energy, said, "if we get down to 900 billion cubic feet, the chance people will freak out probably increases."

Natural gas stockpiles currently stand at 2.817 trillion cubic feet, the lowest level for this time of year since 2008, EIA data show.

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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