Short Term Outlook - Crude oil & Natural Gas

Crude oil

Crude oil futures rallied more than 8% for the month September 2010 settled at $79.97. The upper side move in oil prices was mainly contributed by positive investment sentiment backed by convincing economic data from US, EU and China and strong world equity indices. The record supplies in the oil market pressured oil prices to trade down but failed to sustain as investors grabbed the every down side as an investment opportunity considering the best place to park their funds after Gold hit all time high and crossed $1300.

The month September witnessed a bull run for all commodities where silver outperformed to base metals and crude oil. Gold prices traded steadied and corrected after crossing the psychological level of $1300, almost 4% up for the month providing investors an opportunity to book profit and invest in relatively cheap commodity in Energy & Metals Complex. Crude oil prices for the year 2010 so far have traded lower compare to base metals and world equity indices. With increased industrial activities and positive economic outlook the long term trend for oil prices seems bullish with tremendous funds flows.

The industrial activities have reported sustainable growth for 2010 backed by timely executed stimulus packages and financial aid. The manufacturing activities in US increased by 2.55% for 2010 and 7.44% on YoY basis while manufacturing activities in Euro Zone rose by 3.88% for the year. The industrial production in US rose by 4.46% and 13.9% in China while Japan reported 15.4% growth with decline in manufacturing activities. The industrial demand for crude oil will peak by 2011 with sustainable economic growth backed by huge demand from emerging markets.

In 2010, global consumption is projected to grow by 1.05 mb/d, up by 0.1 mb\d from the previous forecast. All the expected growth in oil demand this year is projected to come from the non-OECD region led by Asia. The demand from China is expected to grow by 5.60% while oil demand from India is expected rise by 2.30%. The International Energy Agency and OPEC sees the global oil demand for 2010 at 85.95 mb/d while demand for 2011 is expected to rise by 1.5% to 87.9 mb/d.

The moderate US driving season has put huge pressure on crude oil and product inventories. Petroleum supplies are at the highest level in records since 20 years. Overall petroleum stockpiles including Crude oil and its climbed 8.92 mb to 1.14 billion, the highest level since at least 1990. The OECD industry stocks are at 61 days of forward cover levels above the 60 days of forward cover which reflects very bearish picture for crude oil market. However, the overhang in stocks, the high level of spare refining capacity and the floating storage is expected to remain unchanged for short term and will offset by increased oil demand.

Rising oil supplies will mostly offset higher demand over the next five years. The average daily global oil consumption is expected to grow by 1.2 mb each year between 2009 and 2015. The supply-demand picture would be virtually unchanged next year compared with this year, although spare capacity would begin to shrink by 2015. (IEA: Medium Term Oil & Gas Report).

The hurricane season so far has not affected the oil prices much compare to avg intense hurricane season. The hurricane season 2010 has generated 6 hurricanes and 8 tropical storms out of total 14 cyclone formations till date in Gulf of Mexico leaving oil and natural gas producing regions unaffected. The September season is expected highly intensive in GoM according to historical figures and now it is in ending phase.

However the prevailing economic uncertainty in world market and current situation in oil market is complicating the short term trend of crude oil prices. We expect oil prices to trade up in first half of October 2010 and later will continue to trade in well known average range of $70 -$80 with important resistance at $86 and with crucial support at $72.

Natural Gas

Natural gas futures edged up for the month September 2010 settled at $3.87 almost 3% higher than August 2010. Natural gas prices traded in range for the month on moderate weather and firm demand in spot market. The first half of September 2010 remained very active for natural gas players as the rush for the winter storage boosted prices above $4.00 which was also supported by bullish weekly inventory data. Price fell on second half on neutral hurricane season and profit booking form higher side which was finally slapped by bearish inventory data on last trading session of the month.

Total Working gas in storage was 3414 Bcf as of Friday, September 24, 2010, according to EIA report. Stocks were 166 Bcf less than last year at this time and 202 Bcf, 6.30% above the 5-year average of 3212 Bcf. In the East Region, stocks were 22 Bcf above the 5-year average while stocks in the producing region were 119 Bcf above the 5-year average of 931 Bcf while stocks in the West Region were 61 Bcf. The increased drilling activities on shale gas discoveries have put huge pressure on spot prices resulting in higher storage levels. At 3414 Bcf, total working gas is within the 5-year historical range.

The total world natural gas consumption is expected to increase by 1.60% to 111.5 Tcf/day for 2010. Total natural gas consumption in US is expected to rise by 4% to 65 Bcf/d in 2010. Projected consumption of natural gas for power generation grows by nearly 1.3 Bcf/d to 20.2 Bcf/d in 2010. The projected use of natural gas in the industrial sector also grows significantly in 2010, gaining by 6.4%, from 16.8 Bcf/d in 2009 to 17.9 Bcf/d in 2010. The increased dependability on natural gas to reduce greenhouse gases compare to other alternatives will boost natural gas consumption resulting in increasing in prices.

EIA expects total marketed natural gas production to increase by 1.2% to 61.2 Bcf/d in 2010. Natural gas production grew steadily for the first half of the year as the total number of working natural gas rigs increased to 967 from 751 in December 2009 due to higher prices. A total of 7.9 Bcf of natural gas production was shut in because of hurricanes during June, July, and August. Based on the latest NOAA hurricane forecast, the production shut include 66.3 Bcf during the final 3 months of the hurricane season.

Natural gas spot prices fell at the majority of market locations as moderating temperatures eased cooling demand for natural gas. Whole sale natural gas prices at the bench mark Henry Hub delivery point rose 1.84% for the month at $3.86 from $3.79 of previous month. Natural gas price at Henry Hub spot market is more than 17% higher than previous year September 2009. EIA expects the annual average natural gas Henry Hub spot price for 2011 to be $4.76 per Mcf reporting decline against prior forecast.

The demand for natural gas will remain low for the short term until cold waves knock on the doors. The stockiest will buy natural gas now before real demand get rise to take price advantage. We expect natural gas prices to trade higher after correction in the first half of the month supported by increased cooling demand. The industrial outlook seems positive and demand from industries will grow with gradual economic recovery. We recommend buying on dips in natural gas with important resistance at $5.10 with support at $3.10.