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Ignore The Hype: Oil Is Still In A Bear Market

Sentiment in the oil market…

Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Highly Bearish Outlook For U.S. Natural Gas

Highly Bearish Outlook For U.S. Natural Gas

Goodness, gracious! ‘Great Balls of Fire‘ was recorded some 58 years ago today, and is an apt way to describe the 8-14 day outlook from NOAA, which shows above-normal conditions across the entire U.S. through October 21st. This is überly, überly bearish for natural gas, as it points to more neutral conditions in the coming weeks – kicking the can of heating demand down the road.

On Tuesday we discussed how the record storage level of 3,929 Bcf (from Novvy 2012) could be tested in the coming month or so, given the expectation for lesser shoulder-season demand combined with ongoing strong supply. Weather outlooks continue to second that emotion, hence natural gas finds itself swinging below the monkeybar of mid-two dollardom, and reaching three-year lows.

It is Thursday, which means…drum-roll…the weekly natural gas storage report. Consensus is for an injection of 96 Bcf, which lands in between last year’s 106 Bcf and the five-year average of 92 Bcf. Storage currently sits at 3538 Bcf, nearly 15 percent above last year’s level, and 4.5 percent above the five-year average.

Despite the low-price environment, natural gas production is expected to continue rising:

(Click to enlarge)

All the while, natural gas continues to steal share of the generation mix from coal. In July, natural gas accounted for 35 percent of the mix, compared to coal’s 34.9 percent; this is only the second month this has ever happened (the other time was April of this year). Compared to July of the previous year, gas-fired generation rose in every region of the U.S., while coal-fired generation fell: Related: Lithium Market Set To Explode – All Eyes Are On Nevada

(Click to enlarge)

Onto global markets and overnight action, and Chinese markets re-opened after a five-day national holiday, with its stock market playing catch-up and rallying 3 percent. Japan continues to show weakness, with machinery orders coming in extremely poor at -5.7 percent for August (+3.2 percent was expected). On a year-over-year basis, they are now down -3.7 percent.

Onto Europe, and Germany’s trade balance shrank as imports were ugly, exports were terrible. Exports dropped -5.2 percent versus consensus of -1.2 percent, their steepest decline since January 2009 (hark, belly of the great recession). Weakness on both sides of the trade equation points to lower domestic demand for imports, weak global demand for its exports. Not a good combo: Related: Has Oil Finally Bottomed?

(Click to enlarge)

German exports, percent MoM (source: investing.com)

Across the pond to the U.S., and weekly jobless claims showed a decent print this morning, coming in at 263k, down 13k on last week. The 4-week moving average for claims is down to 267k, just a whisker away from a new multi-decade low. The U.S. dollar is showing slippage today, and is likely to be pushed and prodded around by a speech from Federal Reserve FOMC member James Bullard. The crude complex is finding a footing once more amid the weaker dollar, and is also keeping an eye on geopolitical events as Russia escalates military activities in Syria.

  Related: Oil Fundamentals Improve But Inventories Will Keep Prices Low

Onto crude-specific news, and volatility reigns in the oil market, as illustrated by this graphic from the Wall Street Journal. We are seeing much larger price swings this year compared to last; we have seen 19 intraday moves of over 5 percent so far this year, compared to just one in 2014.

A few tidbits to put on the radar today: there is news out of Israel that it has made a massive discovery of oil in the Golan Heights, close to the country’s border with Syria – although there is much uncertainty surrounding potential volumes.

Meanwhile, Mexico’s deputy energy minister has said that the nation is hoping to halt depleting production levels, targeting a rebound to 2.5 million barrels per day by 2018 – a level it was at last in 2012. Aging fields and a lack of investment mean Mexican oil output has dropped to 2.25 mn bpd currently, from a peak of nearly 3.4 mn bpd in 2004.

Finally, the bad news from Brazil just won’t stop, with the National Petroleum Agency only managing to sell 37 of 266 exploration blocks in its latest auction. This was the worst level of participation in a decade, with even Petrobras deciding to pass up the auction for the first time ever, underscoring the impact that crippling debt is having on the company’s activities.

By Matt Smith

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