CRUDE OIL by liaoqinmei

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    14 Nov 2011                                      Energy Weekly




    14 Nov 2011                                                                FOR PRIVATE CIRCULATION ONLY

                                                   CRUDE OIL
    HIGHLIGHTS

       •   NYMEX crude rose 5% last week marking its sixth weekly gain
       •   Crude rallied last week amid spread trade, drop in US crude oil stocks and upbeat US economic data
       •   Reuters/CRB commodities index fell 0.1% to 320.2 last week marking its second weekly drop
       •   US DJIA index rose 1.4% last week erasing some of the losses noted previous week
       •   The US dollar index ended the week on a flat note
       •   A IAEA report last week stated that Iran is seeking nuclear weapons
       •   Arab League on Saturday decided to suspend Syria’s membership.
       •   EIA noted a 1.37 mn bbl drop in US crude oil stocks as against forecast of 0.4 mn bbl increase
       •   Greece and Italy formed new government last week to enforce austerity measures
       •   LCH.Clearnet SA last week raised initial margin calls on Italian bonds across a range of maturities
       •   US Reuters/University of Michigan's consumer sentiment index rose to 64.2 in Nov from 60.9 in Oct
       •   ICE Brent crude Dec contract ended at premium of $15.17/bbl on NYMEX WTI crude on Friday as
           against $17.71/bbl a week ago
       •   The number of rigs drilling for oil in the U.S. rose by 21 to 1133 rigs, as per Baker Hughes report

    MARKET ANALYSIS
    NYMEX crude ended higher for four of five trading sessions last week and ended with a gain of 5% marking
    its sixth weekly rise. Crude oil breached $99/bbl level last week for the first time since late July. Extending
    the gains today, crude hit a high of $99.69/bbl, just short of the key $100/oz mark. Crude oil gained last
    week amid concerns about Iran’s nuclear progress, continuing tensions in Syria, gains in US equity
    markets, choppiness in US dollar, unexpected decline in US crude oil stocks and spread trade between WTI
    and Brent crude and crude oil and product futures.

    Crude oil started the week on a firm note amid expectations that IAEA report will note that Iran is
    conducting secret experiments whose sole purpose is the development of nuclear arms. Iran’s nuclear
    progress will further widen its differences with western nations keeping supply concerns high. Adding to it
    was continuing protests in Syria which resulted in its removal from Arab League.

    Crude oil plunged middle of the week as sharp drop in US equity markets amid concerns about Greece and
    Italy outweighed weekly inventory report which noted an unexpected decline in crude oil stocks. Crude oil
    however bounced back later in the week as equity markets bounced back amid easing concerns about
    Euro-zone and upbeat economic data. Weakness in US dollar also lent support to crude oil prices.

    Equity markets swayed last week according to developments in the Euro-zone. Market came under
    pressure after Italian bond yields soared to record high levels as political instability added to debt
    problems. Markets however recovered later in the week as Greece and Italy aggress on new government
    and Italy passed reforms in the Senate.

    WTI’s gain in last few weeks has also been supported by spread trade. The premium of ICE Brent crude
    Dec. contract over NYMEX WTI crude narrowed to $15.17/bbl on Friday, the lowest level seen since June
    24. The 3-2-1 crack spread narrowed to $18.3/bbl, the narrowest seen since Feb. The spread has
    narrowed lately amid signs that US supply overhand is easing. Also high demand winter season is expected
    to lend support to prices.

    Overall, crude oil has gained substantially in last few days amid drawdown in stocks in US storage and
    relative stability in equity markets. The recent leg has been largely due to spread trade between Brent and
    WTI and crude oil and product futures. However any substantial rally in crude oil will be kept in a check by
    continuing concerns about major economies. Focus will continue to be on situation in US and Euro-zone
    economy. Apart from it, focus will be on weather related demand as winter sets in Northern hemisphere.

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    14 Nov 2011                                       Energy Weekly
    STOCKS AND DEMAND
    EIA weekly report noted a 1.37 mn bbl decline in US crude oil stocks as against market expectations of a
    0.413 mn bbl increase. Meanwhile, stocks at Cushing, the delivery terminal for NYMEX crude futures, fell
    for the first time in five weeks to 31.1 mn bbl. EIA also noted a 6.020 mn bbl decline in distillate stocks as
    against forecast of a 1.98 mn bbl decline. Gasoline stocks fell by 2.107 mn bbl as against forecast of a
    0.294 mn bbl increase. Demand scenario was mixed last week. Crude oil demand, as measured by total
    product supplied averaged 20.037 mn bpd last week, up 7.5% from a week ago. Gasoline demand rose
    1.8% to average 8.671 mn bpd while distillate demand fell by 0.3% to average 4.362 mn bpd. Overall, US
    crude oil stocks are in the upper limit of the average range for this time of the year. Gasoline stocks are in
    the middle limit of average range for this time of year while distillate stocks are below the lower limit of the
    average range. The spread between WTI and Brent crude narrowed sharply last week amid signs of
    tightness in US markets and as expectations of restart of Libyan oil supplies weighed on Brent price.
    NYMEX WTI forward curve shifted to backwardation indicating tightness in the market. Upbeat US
    economic data and expectations of higher demand during winter also lent support to WTI price. The spread
    is unlikely to narrow substantially as stocks are still high in US while tensions prevail in the Middle-east.
    The spread may widen this week as market players cover positions ahead of expiry of Brent crude Dec.
    contract.

    CURRENCY MOVEMENT
    The US dollar index noted mixed trade and ended the week on a flat note. The US currency rose 0.3%
    against the Euro but registered a 0.2% drop against the pound. The greenback plunged 1.4% against the
    Yen but gained 1.8% against the Swiss Franc. The US dollar index fluctuated last week with focus largely
    on the Euro-zone. The greenback rose earlier in the week as political instability added to Euro-zone debt
    problems. Political instability rose as talks about new premier in Greece extended while Italian bond yields
    soared to record high levels amid political crisis and as margins were increased on its debt. Safe haven
    demand for US dollar however eased after Greece and Italy made progress over forming new government.
    Upbeat US economic data also boosted market sentiment. Yen fall sharply earlier this month after the
    central bank intervened however the effect waned and the currency appreciated last week. Swiss Franc fell
    last week as SNB indicated that they would consider more steps to keep a check on appreciation. Further
    direction in currency markets will be determined by situation in the Euro-zone.

    ECONOMIC DATA
    The US economic calendar last week was largely empty but most of the data released was better than
    expectations. US weekly jobless claims, trade balance and consumer sentiment reading was better than
    expectations. On the other hand, Euro-zone economic data was largely disappointing. Euro-zone Sentix
    investor confidence, retail sales and German industrial product was below expectations. Meanwhile German
    trade balance was better than forecast. UK economic data was also mixed. Manufacturing production was
    better than expectations while industrial production and trade balance data disappointed. Chinese
    economic data was also mixed. CPI fell less than expected while PPI fell more than forecast. Retail sales,
    industrial production and trade balance also failed to meet expectations.

    SPECULATIVE POSITIONS
    The recent rally in crude oil has been coupled with drop in short positions. As per US CFTC report for the
    week ended Nov.1, non-commercial traders for crude oil futures cut long and short positions by 3.5% and
    7.7% respectively. Short positions have declined for last three weeks and stand at the lowest level since
    June.

    OUTLOOK
    Crude oil has been on an upward momentum for past six weeks supported by drop in US crude oil stocks,
    stability in equity markets and spread trade between WTI and Brent. However upside will be limited by
    concerns about major economies especially the US and Euro-zone. The recent rally has been too sharp and
    we expect prices to correct to some extent this week. The optimism that EU debt problems are easing will
    soon fade in. Meanwhile, US economic data will be mixed indicating weakness in the economy. Weather
    related demand is yet to set in. The spread between WTI and Brent may also widen again this week as
    market players close positions ahead of expiration. Trend in equity and currency markets will be the key
    price determining factor for crude oil and focus will be on situation in Euro-zone especially Greece and
    Italy. For US economy, focus will be on economic data and weather related demand. Also in focus will be
    situation in Syria and tensions between US and Iran.
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    14 Nov 2011                                      Energy Weekly

                                                NATURAL GAS
    HIGHLIGHTS

       •   NYMEX natural gas fell 5.3% last week marking its second weekly decline
       •   Natural gas fell last week amid mild weather forecasts and bigger than average rise in US stocks
           EIA noted a 37 Bcf increase in US working gas stocks as against expectations of 33 Bcf rise
       •   The number of rigs drilling for gas in the U.S. fell by 30 last week to 877 rigs

    MARKET ANALYSIS
    NYMEX natural gas ended lower for four of five trading sessions last week and noted a drop of 5.3%
    marking its second weekly decline. Natural gas fell as low as $3.557/mmBtu, the lowest level seen since
    Oct.27.

    Natural gas trades under pressure weighed down by mild weather in US which limited demand and higher
    supply in US. Lack of any significant storm activity also put pressure on prices.

    Natural gas saw some buying interest last month after unexpected snowstorm hit US Northeast however
    cold weather was not seen sustaining. Weather forecasts indicated mild weather in most parts of US over
    next few days. Mild weather limits cooling or heating demand for the fuel.

    Also weighing on prices is higher supply in US. Stocks are well above average level for this time of the
    year. Meanwhile product remains on a higher side. A sustained price rise is unlikely unless weather related
    demand rises enough to result in a withdrawal from stocks.

    Overall, natural gas came under pressure amid lack of weather related demand and higher supply in US.
    However winter related demand will soon come in limiting downside in prices. Also the recent drop in rig
    count in US will also lend support to natural gas prices.

    STOCKS, RIG ACTIVITY AND PRODUCTION
    EIA weekly report released last week noted a 37 Bcf increase in US working gas stocks as against
    expectations of a 33 Bcf increase. Last year during the same week, working natural gas inventories rose 26
    Bcf while the 5-year average for the report week is 23 Bcf. US stocks now stand at 3831 Bcf which is 0.2%
    lower than stocks same period last year but 5.9% higher than 5-year average stocks for this time of the
    year. While stocks are high, EIA expects US natural gas production to remain higher. In its November
    outlook, EIA lowered its outlook for 2011 marketed gas production for the first time in six months but still
    expects output this year to average a record high 65.6 Bcf per day, or 3.8 Bcfpd, 6.1% above last year's
    levels. While production remains high, the sharp decline in price has affected production interest. The
    number of rigs drilling for natural gas in US fell by 57 rigs in last two weeks to 877 rigs, the lowest level
    seen since July. Rig activity is price sensitive and sustained lower price may further reduce rig counts.

    SPECULATIVE INTEREST
    The recent gain in natural gas was coupled with drop in net short position. As per US CFTC repot for the
    week ended Nov.1, non-commercial traders for natural gas futures cut long and short position by 0.4%
    and 2.4% respectively. Net short position fell by 4.1% to 162559 contracts.

    OUTLOOK

    Natural gas remains under pressure as mild weather in US has limited weather related demand. Also
    weighing on prices is higher supply in US and concerns about US economy. However we do not expect a
    sustained decline in price as winter related demand will keep a check on the downside. Natural gas is also
    likely to gain support from the drop in rig activity. Also with the end of injection season we could see some
    withdrawal from US working gas stocks. Overall, buying on dips could be the strategy for natural gas for
    this week.




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    14 Nov 2011                                       Energy Weekly

      Price Movement on NYMEX last week
               Commodity                Close               change            %           High             Low
            Crude Oil ($/bbl)          98.99                 4.73            5.0          99.4            93.23
         Natural Gas ($/mmBtu)         3.584                -0.199           -5.3        3.769            3.557
          Gasoline ($cents/gal)       260.38                 -5.96           -2.2        275.76           258.76
         Heating Oil ($cents/gal)     317.16                 10.09           3.3         319.95           305.77

      Price Movement on ICE last week
               Commodity                   Close            change           %            High             Low
         Brent Crude Oil ($/bbl)          114.16             2.19            2.0         116.48           111.26

      Price Movement on MCX last week
               Commodity                  Close             change            %          High               Low
            Crude Oil (Rs/bbl)            4942                324             7.0        4958              4620
        Natural Gas (Rs/mmBtu)            180.1              -6.5            -3.5        189.2             179.5

      U.S. CFTC Commitments of Traders (COT) Futures Only Report (01 Nov 2011)
      Non-commercial           Long            Short        Net position      Change                Change (%)
      Position (contracts)
      Crude Oil              323,638         162,026          161612            1894                       1.2
      Natural Gas            140,665         303,224         -162559            6881                      -4.1
      Gasoline               79,763           21,926          57837            -2813                      -4.6
      Heating Oil            58,114           38,299          19815             670                        3.5
      US CFTC report for the week ended Nov 8 has been delayed due to holiday in US on Nov.11

      U.S. EIA Weekly Petroleum Inventory Report (04 Nov 2011)
       (1000 barrels)      Stocks    change     %    Expectation      Demand        Change%    Imports    Change%
          Crude Oil       338090      -1370 -0.40        413           20037          7.49      8618        -3.75
           Gasoline       204167      -2107 -1.02        294           8671           1.80       750        -3.97
      Distillate Fuel Oil 135869      -6020 -4.24       -1988          4362           -0.27      102       -16.39

      U.S. Weekly Natural Gas Storage Report
      Billion Cubic Feet (BCF)  Date    Stocks     Change    change over last year    change over 5-year average
      Natural Gas              28-Oct   3,794       +78             -0.4%                      +5.6%
      Natural Gas              04-Nov 3,831         +37             -0.2%                      +5.9%

      U.S. Economic   Calendar (07 Nov to 11 Nov)
        Date            IST            Release             For         Actual        Consensus             Prior
       Nov-10          1900         Initial Claims       11-May        390K            400K               400K
       Nov-10          1900       Continuing Claims      Oct-29        3615K           3690K              3707K
       Nov-10          1900         Trade Balance         Sep         -$43.1B         -$45.8B            -$44.9B
       Nov-11          2025        Mich Sentiment         Nov           64.2            61.3               60.9

      Other Markets              Close             change              %               High                Low
         DJIA INDEX             12153.7             170.5             1.4            12187.5             11736.9
        DOLLAR INDEX             76.91                0                0.0            78.165              76.513
             EURO                1.375             -0.0044            -0.3           1.3858              1.3481




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    14 Nov 2011                                                          Energy Weekly
                                                                                       Forward Curve
    NYMEX crude oil contract spread chart (price in $/bb)                              The forward curve for NYMEX WTI continued
                                                                                       to remain in backwardation and spread
      100                                                                    100       widened lat week. The 1st month contract
                                                                                       stood at a premium of $0.1/bbl on Friday as
       99                                                                    99
                                                                                       against $0.07/bbl a week ago. The 1st month
       98                                                                    98        contract stood at a premium of $2.08/bbl from
                                                                                       12th month contract as against $0.96/bbl a
       97                                                                    97
                                                                                       week ago. Backwardation is a sign of tightness
       96                                                                    96        in the market. Declining stocks in US storage
       95                                                                    95        and expectations of higher demand during
                                                                                       winter may have pushed the curve into
       94                                                                    94
                                                                                       backwardation. However we do not expect the
              1M   2M   3M   4M   5M    6M   7M    8M   9M 10M 11M 12M
                                                                                       spread to widen enough as US stocks is still
                    Monday               Tuesday             W ednesday
                    Thursday             Friday                                        high. Also stocks will increase over next few
                                                                                       weeks as refinery maintenance will reduce
                                                                                       demand.


                                                        MCX Crude oil spread matrix (Rs/bbl)

                                                   Dec          Jan          Feb           Mar     Apr
                                  Nov              12             7           -1           -13     -40
                                  Dec               -            -5          -13           -25     -52
                                  Jan                             -           -8           -20     -47
                                  Feb                                          -           -12     -39
                                  Mar                                                       -      -27
                                  Apr                                                               -
                                                                                           Forward Curve
    NYMEX natural gas spread chart (price in $/mmBtu)
                                                                                           Natural gas forward curve shifted rightward
      4.200                                                               4.200            last week as price remained under pressure.
      4.100                                                               4.100            The spread between 1st and 2nd month
      4.000                                                               4.000            contract widened to $0.112/mmBtu from
                                                                                           $0.109/mmBtu a week ago. The spread
      3.900                                                               3.900
                                                                                           between 1st and 12th month contract widened
      3.800                                                               3.800
                                                                                           to $0.436/mmBtu from $0.412/mmBtu a week
      3.700                                                               3.700            ago. The spread widened as mild weather
      3.600                                                               3.600            limited demand while supply remains high in
      3.500                                                               3.500
                                                                                           US. While higher supply may keep pressure on
               1M 2M 3M 4M 5M 6M 7M 8M 9M 10M 11M 12M                                      prices, we do not expect a sustained decline
                   Monday               Tuesday             W ednesday                     due to winter related demand. The spread
                   Thursday             Friday                                             may narrow once winter related demand rises
                                                                                           enough to bring down stocks.




                                                  MCX Natural gas spread matrix (Rs/mmBtu)

                                                                      Dec           Jan
                                                          Nov         -7.3         -10.6
                                                          Dec           -           -3.3
                                                          Jan                         -



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    14 Nov 2011                                     Energy Weekly
    OUTLOOK

    CRUDE OIL- Crude oil has rallied sharply in last few days and we may see some correction in the near term
    as concerns persist about US and Euro-zone economies. The spread trade may also benefit Brent ahead of
    expiration of Dec. contract. Trend in equity and currency markets will be the key price determining factor for
    crude oil and focus will be on US and Euro-zone economy.

    NATURAL GAS- Natural gas trades under pressure due to mild weather in US and higher supply in US.
    However we believe that buying interest may emerge at lower levels as peak demand winter season lies
    ahead. Buying on dips could be the strategy for this week.

    TECHNICAL LEVELS
                                QUOTE            SUPPORT        SUPPORT         RESISTANCE         RESISTANCE
      NYMEX Crude Oil          USD/BBL              91             95             101.25              103.5
     NYMEX Natural gas        USD/MMBTU            3.42            3.5             3.72               3.85
       MCX Crude Oil            RS/BBL             4475           4700             5065               5200
      MCX Natural gas         RS/BMMBTU            172            176               186                192

    ECONOMIC CALENDAR
      Date          IST         Currency                                                   Forecast     Previous
     Nov-14        15:30          EUR              Industrial Production m/m               -2.10%        1.60%
     Nov-15       15-18th         GBP           Nationwide Consumer Confidence                              45
                   12:30          EUR                German Prelim GDP q/q                  0.50%        0.10%
                   15:00          GBP                         CPI y/y                      5.10%         5.20%
                   15:30          EUR           German ZEW Economic Sentiment                -51.7        -48.3
                   15:30          EUR                     Flash GDP q/q                     0.20%        0.20%
                   15:30          EUR               ZEW Economic Sentiment                  -52.7         -51.2
                   15:30          EUR                     Trade Balance                     -0.8B        -1.0B
                   19:00          USD                        PPI m/m                       -0.10%        0.80%
                   19:00          USD                    Retail Sales m/m                   0.30%        1.10%
                   19:00          USD           Empire State Manufacturing Index               -2          -8.5
     Nov-16      Tentative        JPY                   Overnight Call Rate                <0.10%       <0.10%
                   15:00          GBP                Claimant Count Change                  20.8K        17.5K
                   15:00          GBP                  Unemployment Rate                    8.20%        8.10%
                   15:30          EUR                         CPI y/y                      3.00%         3.00%
                   19:00          USD                        CPI m/m                       0.00%         0.30%
                   19:45          USD              Industrial Production m/m               0.50%         0.20%
                   20:30          USD             NAHB Housing Market Index                   17            18
     Nov-17        15:00          GBP                    Retail Sales m/m                  -0.30%        0.60%
                   19:00          USD                    Building Permits                   0.60M        0.59M
                   19:00          USD                 Unemployment Claims                    397K         390K
                   19:00          USD                     Housing Starts                    0.61M        0.66M
                   20:30          USD            Philly Fed Manufacturing Index               9.3           8.7
     Nov-18        12:30          EUR                    German PPI m/m                     0.20%        0.30%
                   20:30          USD                 CB Leading Index m/m                  0.50%        0.20%
    Source: Forex Factory

    ENERGY CALENDAR
      DATE     IST                                        DATA                                             FOR
     Nov 16   0300                   API US Weekly Petroleum Product Inventory Report                     Nov 11
     Nov 16   2100                   US DOE Weekly Petroleum Product Inventory Report                     Nov 11
     Nov 17   2100                      US DOE Weekly Natural Gas Inventory Report                        Nov 11




Energy Weekly                     Please See Disclaimer on the Last Page                                       6
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    14 Nov 2011                                                                          Energy Weekly




                    Faiyaz Hudani                                                                           Dharmesh Bhatia
                    Sr. Research Analyst- Spices, Edible Oil                                                Associate Vice-President- Technical Research
                    faiyaz.hudani@kotakcommodities.com                                                      dharmesh.bhatia@kotakcommodities.com
                    +91-22-66528837                                                                         +91-22-66528846




                    Sudha R. Acharya                                                                        Amit Sajeja
                    Research analyst- Edible Oil, Pulses                                                    Sr. Research Analyst- Technical Analyst
                    sudha.acharya@kotakcommodities.com                                                      amit.sajeja@kotakcommodities.com
                    +91-22-66528809                                                                         +91-22-66528847




                    Madhavi Mehta                                                                           Ajay Baheti
                    Research analyst- Energy, Bullion                                                       Associate Research- Technical Analyst
                    madhavi.mehta@kotakcommodities.com                                                      ajay.baheti@kotakcommodities.com
                    +91-22-66528857                                                                         +91-22-66528845




                    Priyanka Jhaveri
                    Research analyst- Base Metals
                    priyanka.jhaveri@kotakcommodities.com
                    +91-22-66528848




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