Phillip Futures Energy Weekly Outlook - US Dollar Index should key to oil price movements this week; high volatility ahead if US data does not turn out as expected.

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Fundamental and Technical Analysis
String of US economic data scheduled to be released this week; the USD strength hangs in the balance: After all the support the USD has been getting from the increased likelihood of a Dec’15 rate hike, the US Dollar Index inches towards 100. With the string of US economic data scheduled to be released, the USD strength would be heavily tested this week. Preliminary Manufacturing PMI would start the ball rolling, releasing tonight at 10.45pm (Singapore Time). This will be followed by preliminary US Q3 GDP, tomorrow at 9.30pm (Singapore Time). Last but not least, we will be expecting US Durable Goods on Wednesday, 9.30pm (Singapore Time), which will be released together with the Initial Jobless Claims. The caveat given together with an increased likelihood of a Dec’15 rate hike has constantly been based on economic data. With most key economic data coming out this week, we would remain wary as weaker than expected data should affect the USD strength.

Market Summary

Crude Oil:
Prices continue on its sideways movements as WTI and Brent tested their respective supports heavily. We believe that this is because both oil fundamentals and the USD strength maintained unchanged last week. The week ahead will be different as the USD strength is expected to be volatile. Oil prices and the USD strength have an inverse relationship and if the USD does strengthen more, oil prices should be taking a hit. However, with the US Dollar Index hovering near 100, we expect to see slightly more downside than up. This would mean that oil prices should be holding steady this week and should mean that supports of $40 and $43 for WTI and Brent Jan’16 should hold.

Crude oil spreads:
WTI-Brent spread widened again after shrinking due to the terrorist attacks on Paris the week before. This has put pressure on European oil demand which dampened Brent. Most of the premium over the Brent has returned and should maintain this way. We have recently observed that the WTI calendar spreads has been widening ever since the US crude production inched upwards. With the drop in rig counts persisting, it is very likely that this spread will be narrowing again once production continues to drop. We expect a reduction towards less than -$1 when that happens.

Natural Gas:
Prices plunged with the US inventory reaching a historical high. This is coupled with the idea of a warmer winter which dampens seasonal demand. We may see prices recovery at the start of the week; however, a reminder of the oversupply would come on Wednesday, with the release of US natural gas inventories. We expect US natural gas inventories to drop this week. This suggests that prices should refrain from dropping much further and expect support of $2.2 for Natural Gas Jan’16 to hold. (Read Report)

Source : Phillip Futures Pte Ltd