Cold Weather, Declining Dollar and Improving Economics

Jim Brown
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Crude prices rallied again on Thursday to close at $87.99 on colder than expected weather in the northern U.S., Europe and China. Also pushing prices higher was hopes for higher than expected job gains in November when the Non-Farm Payrolls are reported on Friday.

The economic data over the last week has been very supportive for oil prices. Manufacturing data has come in stronger than expected and the employment component of those reports has risen sharply.

The consensus estimate on Friday's payroll report is for a gain of 138,000 jobs. However, recent reports like the Manpower Survey and the ADP Employment suggest that could be over 150,000. I think it could be closer to 180,000 but that depends on how many jobs the government terminated. With stimulus money running out the federal, state and local governments are ending temporary programs and this is deflating government payrolls. This is the wild card for Friday. The key to the report will not be the headline number but the private jobs created number inside the report.

Crude is trading on anticipation of increased demand and the fluctuation in currencies. The short-term fundamentals are still bearish. In the U.S. fuel consumption has fallen for three consecutive weeks. Refinery output declined -1.8% to 18.5 mbpd in the week ended Nov 26th and that was the lowest in six weeks according to the Energy Dept.

OPEC oil ministers are starting to ratchet up talk ahead of the next meeting on Dec-11th. Venezuela's energy minister said on Wednesday that $100 was a fair price for oil. Since Venezuela can't produce enough oil to meet its quota they would like prices to be as high as possible.

Libya's top oil official, also a price hawk, said OPEC was unlikely to change its quotas. If it is not broken, don't fix it, appears to be their thinking. They don't want to rock the boat and send a message to the markets that prices are too high. That is what would happen if they suddenly raised the production quotas.

OPEC will try to make a big show of enforcing quotas when they meet but current compliance is roughly 55% so it is all talk and no action.

Gasoline prices shot up on Wednesday because of a refinery outage in New Brunswick, which delivers 300,000 bpd to New York Harbor. Prices shot up nearly 5% to $2.2875 and the highest front month contract price since May. This is ridiculous since the 300,000 bpd blip was temporary and refiners are only operating at 82% capacity. There is plenty of oil and plenty of refined products in the system. This was simply a matter of shorts being forced to cover by an unexpected news story.

The weather is turning into a factor slightly earlier than normal. Severe winter weather disrupted travel across Europe with roads and airports closed and Eurostar trains operating on a limited schedule. This is the earliest widespread snowfall in Britain since 1993. Temperatures are expected to drop as low as 14 degrees Celsius (7 F) in Scotland while London and southeast England could see -3 celsius.

Munich was forced to cancel 250 flights and suffer long delays. Gatwick received 10 inches of snow.

Heavy snow in northeast China closed airports and several highways with forecasts of colder weather to follow as the cold front moves deeper into China. The temperature in the province of Jilin was expected to be minus 18 celsius (-4 F) on Friday.

The unseasonably cold weather is expected to boost consumption of heating oil and natural gas and this helped push prices higher. The amount of fluctuation in crude prices compared to the actual change in consumption is always amazing. Any increased consumption won't be noticed in the market for weeks but the news helped contribute to a decent spike in prices.

Jim Brown

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