The Energy Price Outlook for 2013

Published on January 1, 2013 by in Energy

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The Outlook for Energy for 2013

It was the year of the printing presses. Country after country rushed to debase their currencies. European indebtedness brought about a myriad of patches to stem the decline of their economy and preserve the euro. The Fed embarked on a crusade to buoy the economy by keeping long term interest rates at historic lows for an extended period of time.
This had the effect of boosting risk assets early in the year, but the glow of overworked printing presses started to fade as the dysfunction in Washington became more pronounced. In fact, the economy is being held hostage by the intransigence of the parties to work out a deal.
There are huge sums of money on the sidelines waiting to game the markets. Dysfunction in Washington will rear its head again on the debt ceiling negotiations. This will keep the money at bay until there is certainty in public policy. We mention this only as a backdrop to the undercurrents of the energy markets.
We feel the deliberations in Washington have created a condition for chaos in the financial markets. Variables are changed through the negotiation process. The effect on the output is not linear, nor is it continuous. The system now jumps to a quantum state.
If one takes the chaotic process to be similar to that of a manifold of stretching and folding, one gets the sense of the changing geometry. This can be much the same as a baker taking and stretching dough to make a pie. The baker takes the original lump of dough, spreads it thin and folds it over to double the surface area of the dough. Let’s say there is a cut out in the dough of some design. After three applications of the process, the shape of the design is corrupted to be unrecognizable. This is important because the two sides start out close to one another, and then through the process explained above the sides get further apart. This is true for people, insect populations, molecules and any naturally occurring phenomena. The financial markets are such an organism. The paradigm discovered it was on the third application of the equation that the system was greatly altered. If the output is lower than the initial state, it is said to be chaotic or that it jumped out of the system that it originated in. This is similar to Einstein’s view on light. One has a much different perspective within the system. For his example, he noted that if one were traveling on a light beam at the speed of light, the system is “dark” behind the traveler.
As we examine the talks in Washington, there was a point that sides were closer to an agreement. Then the first trial balloon popped. A second was floated that also burst. Finally Mr. Boehner withdrew. That was the third iteration of the function. Now the output of the system moved below the starting point. This will make getting back to a zero point more difficult if not impossible. There will be an attempt to remediate the situation by a Band-Aid approach, but it is unlikely to bare fruit. Perception will tip to a more negative outlook on the economy. How can the economy operate efficiently when the elected leaders are in such disarray? It cannot nor will it. Yes there is a huge amount of money on the sidelines waiting to be invested. But this too will change the dynamic of the system. One sees the two points of attraction are recession or rampant inflation if the velocity of money picks up. That is similar to increasing the population of an insect colony. It is unsustainable. The “weight” of the system forces a collapsed state.
Although the weather will be turning severely cold in January, we think that the initial reaction to the Washington news will be negative for the upcoming weeks. However, it will reach a point of demand due to the cold and reverse higher. This is likely to be more reflective in the distillate than the crude. Moreover, it will also positively affect Nat Gas prices.
The financial markets no longer follow a Newtonian model of the universe – that every action has an equal and opposite reaction. The financial markets are following a quantum process. The perceived reality “jumps” from one view or energy level to an opposite view and quantum state. This will only increase in the upcoming year. One can see the effects on one’s P&L at the month’s end through heightened volatility. The recent extended ranges in the financial markets are likely to continue throughout 2013.

Background
There was concern through 2012 that China would experience a hard landing of its economy. But an orderly transition of power has been seen there. The new Premiere, XI, has promised to keep the economy as his number one priority. He wants to bring down the wealth disparity. The World Bank has issued a report looking for China’s GDP to average 7.8 to 8.1 percent. They also noted that increase demand for fossil fuels will come from the Asian theater.

On a bright note, domestic oil industry production in the U.S. has climbed 15 percent since 2008. However, this has caused a bottleneck at Cushing. This is likely to mitigate when the Seaway pipeline expands capacity to 450 mb/d.

Although the IEA has increased their outlook for demand in 2013, it is likely to be met by increased production in the U.S. and China. They will also be the two sources of increased demand as the forecasters feel the economies will turn around and start to recover.
We do not share the same view; we strongly feel that the antics in Washington have disturbed the mathematical fabric that weaves through nature. The mathematical discipline is called Complexification or Chaos Theory.
WTI


We look for WTI to have a probable yearly range of 70.00 to 65.00 on the low side and an upside restraint at 105.00 to 110.00. It is likely that it will average 87.00 to 90.00 for the year, which is down   slightly from the average of 90.60 for 2012. We feel the increase in North American production is going to keep pressure on WTI until such time as the Seaway pipeline capacity increase has been accomplished. Once that occurs, the arb between WTI and Brent should begin to favor the WTI. Nevertheless, we look for this grade of crude to average 87.00 to 90.00 for the upcoming year.
The chart above is a linear regression analysis of the monthly crude prices. What one can discern from this view is that the front month contract is below the mean of the regression. It is likely that the upper channel line will meet the market with a formidable resistance that will be difficult to pierce unless there is a geopolitical event that upsets supply. However if inflation begins to show on a global basis, it is likely that both grades of oil will rise.

 

 

 

 

 

BRENT
Below is a linear regression of the monthly Brent chart. The difference between the two grades is that Brent impulsed higher from the 2009 low. It means that it had a distinct five-wave move to the upside. Although on the monthly chart the high appears to be truncated, on the weekly chart its pattern is clearer. In 2012 this market averaged 108.50 per barrel. This is a more bullish looking chart than that of WTI, but with the Seaway pipeline increasing throughput WTI may take that designation relative to the Brent.
As one can see from the plot, there remains strong resistance at the upper end of the channel. It is unlikely that Brent will surpass that level for an extended period if at all. It will take a geopolitical event to engender a romp of that magnitude. Based on this assessment, it is likely that Brent will average 105 to 110 for 2013. However, if a drop to the 82.00 to 79.00 area is seen, a bullish rebound will take place.

 

 

 

 

 

 

 

 

 

 

Gasoline:
The efficiencies of autos have steadily improved over the last four years. The U.S. fleet is aging and stands at an average of ten years. These cars will need to be replaced at some point which in turn will lead to greater efficiencies. Moreover, since the Great Recession has befallen the U.S. the numbers of miles driven by the populace has been in a steady decline.
This paints a demographic shift in the paradigm for refineries.

The four charts below are the rbob quarterly cracks. These are the calendar quarter representations. As the first quarter opens for 2013 we are struck by the fact that the first quarter cracks have likely seen their high.

1st Quarter Rbob

This is depicted by the structured five wave move that shows a pattern completion. It is likely that the economy remains soft for the early part of 2013. This of course depends on the dysfunction in Washington. Nevertheless, it is likely that the first quarter of
2013 will recognize an easing of the cracks. With a breakdown of the represented trend line, the first quarter rbob crack is likely to retreat to the 20.00 to 19.50 zone as a first objective of the corrective pattern. The model reverts to its bullish ways with a break above 28.50.


 

 

 

 

 

2nd Quarter Rbob

Below is the second quarter calendar rbob crack. Although this shows a completed structure at the labeled 3, it is likely not to have completed the wave to the upside. Our view here is that the second quarter cracks will retrace. That will probably test the red line on the chart. That is the pivot to a deeper correction. It will take a daily settle of the quarter semester crack. With removal of the labeled 3 the cracks are likely to press above 30.00 to see a marginal push above to a possible 33.00 to 34.00 zone. In keeping with our lower U.S. demand theory, this will be a good place to lay in hedges.
One can immediately notice that the patterns are similar. The difference is the labeling of the 3 on this chart corresponds to the labeled 5 on the previous graph. This is an important distinction. It suggests that there will be more upside to come for the Q2 crack following an ample correction. This is likely to mean the quarterly crack will slip to the horizontal red line as the initial support. Although this model allows for the crack to fall below that level, it cannot remove the labeled 1 on the chart below without damage to the bullish intermediate term outlook.

3rd Quarter Rbob

There is likely to be a similar outcome. A retracement will test the red horizontal line. The upside pivot to this model is 22.50. A retreat to 18.00 to 17.50 will produce the base for the next leg to the upside and a peak to this formation. If this model is correct, a rise to the 27.00 to 28. 00 zone is seen.

4th Quarter Rbob

This is a pattern that looks complete to the upside. But with the expiration so far into the future, it is an educated guess as to the final outcome. Nevertheless, it is likely that this quarterly crack responds to the retracements of the previous two quarters to put in a base from which to launch a test of the high.

Distillate

The IEA has issued a report that the map of the global oil trade will be redrawn in the upcoming five years. It expects the oil market to become less tight over the year as new production increases overcome minor upticks in demand. The demand from the non-OECD countries is expected to lead the demand quotient higher and is likely to take over that from the OECD countries in 2014.
The increased supply will come from North America according to the report. Moreover Iraq stands out to be a factor for increased production as new fields are opening up. The growth of products will be focused on diesel. According to the global organization, the demand for middle distillates will dominate product demand increases. This will exacerbate the weakness in gasoline as refineries increase runs for 2oil. This will relegate gasoline as a byproduct of the refinery process.

1st Quarter Distillate Cracks

As one can see from this picture a completed upside thrust has been manifest. The cracks are on their way to correct the large move higher. For those looking to hedge that strip the ship has already sailed in most probability. There will be a minor upside pivot to this model at 37.50. Breaking above that level will lead to a test of the 41.50 area. We look for the crack to test 33.00. The weakness in the first quarter cracks is a result of a mild December. This is the seasonality of 2oil in large part. The hope for an early winter has the speculators buying the market only to find the hype did not live up to reality.

 

2nd Quarter Distillate Cracks

This plot too shows a completed upside pattern. But unlike the first quarter seasonal tendencies, the second quarter starts a recovery process at least as flat price is concerned. Therefore, if this outlook is correct, Q2 should slip to the horizontal blue line. That will put the support at 33.25 to 33.00. The downside extension pivot is 32.50. The minor upside pivot of 37.50 when removed will signal a test of 41.00 to 41.50.

3rd Quarter Distillate Cracks

This is a fully developed pattern and an increasingly more robust bearish looking picture. This model sees Q3 easing to the 31.50 to 31.00 zone; for the spread to return to a modicum of strength will require the settle above 34.75. There will be a bottom found by the retreating process and that will provide the base for a reversal to the upside. However, that could be as low as 28.00 to 27.50.

4th Quarter Distillate Cracks

Similar to the third quarter outlook, this crack array has a fully developed bearish trend underway. In fact the levels are nearly identical for the third quarter. Minimally a retrenchment to the horizontal blue line is in the cards. This being the support before it surged to 36.50. However, based on the pattern at hand a drop to 30.00 to 29.50 will not be a surprise. It will also represent a probable buying opportunity.

NATGAS

This is a market that is struggling to find a balance between constantly increasing supplies and demand. Thus far the winter of 2012-2013 has been a disappointment to the bulls. We suspect that will not be the case going forward, but will it be too little too late.
Although the recent weather patterns do suggests further weakness early in the year, on the monthly chart below there has been a major wave completion at the 1.90 level. This is likely to stand at the decade low. However, there will be much sideways churning and burning before the market is to hit the mean line of the regression analysis.


We suspect that there will be a move to begin the export process (getting the infrastructure in place). Refitting heavy duty trucks or a move by the EPA to limit Fracking will spur a substantive rebound in the years to come.
To be clear, more work will need to be done before the bulls can rest assured a trend to the upside is developing. Until that time, it is right to sell any pop to the 4.25 to 4.75 area this upcoming year.

Outlook for the U.S. Dollar

The plot above shows a potentially bullish outcome for the greenback. To be sure this is a subjective view. The monthly chart above has the index completing a five wave move at the 69.00. It has tested that level and made a higher low. Note that the moving averages, which are very long term when considering this is a monthly chart, are starting to turn higher. However, there is nothing exciting about the upside until the index moves above 83.50. If this is seen with a long term indicator (monthly settle) a rise to 90.00 to 91.00 cannot be ruled out. This positive outlook is based on the monthly trend in red holding. That is at the 73.50 level.
The great imponderable: what will be the response of the markets to the fiscal cliff, which at the time of this writing seemed to be moving in the right direction, but there are still sticking points to be ironed out. This exacerbates the ramifications of the chaotic thesis stated earlier in the paper.

The Outlook for Equities

Below is a long term monthly view on the S&P. It shows that at the 1468 area a wave 3 of a larger degree wave III has been completed. This view suggests that higher prices are ahead. Although one cannot rule out a test of 1350 in the early part of 2013, it is likely that the money that has been horded will start to find its way into the market. We will need to carefully watch the velocity of money to determine if inflationary pressures are building. This puts us in the bull camp following a retracement. The outlook for the high of the year is 1570 to 1600. The key downside pivot to this model is 1340.

CONCLUSION:

We see the oil market as likely to be close to balanced for 2013. OPEC spare capacity will increase giving more breathing room for the emerging markets. Moreover, the output from North America has been increasing steadily and will mitigate much of the increased demand from Asian sources.
One imponderable is what will civil strife in the Middle East and North America mean to oil prices. It is likely that they will spike, but unlikely that will be sustained.
The economy will continue to muddle along. The structural deficiencies in employment will need to be addressed to help get the economy back on a more solid footing. Inflation will only begin to be a concern once the velocity of money begins to turn higher. Notwithstanding the Ben Bernanke experiment on liquidity, it is the velocity of money and not the money supply that more greatly affects the outlook for inflation. Once that box has been opened, upward acceleration in commodity prices will be realized.

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