Oil hit 20 month lows in morning trading (NYMEX Crude $57.39 -$1.61) as demand fears persist throughout the world. On Tuesday, the World Bank revised its 2009 growth forecast to 4.5%, down from 6.4%. It also stated that these projections could be on the optimistic side as some developing countries could see negative growth.

Last week’s heating demand was fairly light as warmer temperatures dominated the pattern for much of the country for most of the week. The pattern is shifting this week as the cold front that we discussed last week moved into the lower 48 Sunday into Monday; this front combined with some fairly strong wind activity is bringing a cooler pattern to the central and eastern states. The outlook remains cool for many demand centers into next week, so expect higher HDD values for many of the larger population regions, particularly from the Midwest through the east coast. The WTI HDD outlook for November is anticipating a pattern that is generally colder than last year for most of the remainder of November, with a return to somewhat milder temperatures during the last week of the month. In spite of falling crude prices and the EIA’s downward revision of 2009 demand estimates, snow cover per this date is higher than last year, supporting the cooler early start to the heating season that we had forecast in the long range outlook.

November HDD northeast contracts (BOS, LGA, PHL) will likely trade higher into the end of Nov.  Look for these contracts to stay here or become a little more ‘undervalued’ within the next few days - as warm weather is here for the next couple days. However towards the middle of November you will see these values correct - or the market valuation to trade higher for HDD Nov contracts - as cold weather blast materialize later in the month.

Weather Trends has released a new white paper, titled ‘Anticipating the Climate Black Swan’ applying the idea popularized by Nassim Taleb’s excellent book (The Black Swan, 2007).  Go here for the press release and to download the paper.

This table shows the Weather Trends International US HDD outlook for the next 4 weeks at the CME city locations (HDD value and change from last year).  Despite some warmth this week, we do expect another shot of cool air leading to higher heating demand requirements in mid November.

Even though last week ended up on the week and investors were slightly consoled by another cut in rates by the US (and around the world), we clock another terrible month of returns in the market worldwide this month. Most major indices around the world experienced large moves to the downside (commodities and specifically Crude experienced the worst month since trading on the NYMEX in 1983).

• Dow Jones Industrial Index: -14.1% (biggest drop since October 1987)
• S&P 500 Index: -16.9% 
• Reuters/Jeffries CRB Index: -22.3% (worst monthly decline since the Index started in 1956)
• Crude Futures: -32.6% 
• Gold futures: -18.5% 
• MSCI Word Index: -19.1% 
• MSCI Emerging Markets Index: -27.1%
• US Dollar Index: +7.8% 

The Economic reports released last week didn’t bring encouraging news either. The real GDP fell by 0.3% in the third quarter, consumer spending, down 3.1% (translate higher gas prices and less jobs). Consumer Confidence was down (38) as well.

With the US Presidential Election looming tomorrow the market could get a bounce - Or Not. 

What to expect in the week ahead:

Monday:

• ISM - Manufacturing
• Construction Spending

Tuesday

• US Presidential Election
• Factory Orders

As we discussed last week, the current pattern is quite a change from last week’s weather influenced energy demand. The east is in the midst of a cold week this week, and will see the heat switch staying ‘on’ for the next 6-8 days. HDDs for most eastern cities will be above both normal and last year for this stage in October. The outlook extending into next week will remain cold, and this will be supported by the shift to a negative trending NAO and AO. Despite the cold weather and an anticipation of OPEC production cuts, crude has softened further, with expectations of weakening demand weighing heavy among traders’ views. The strength of the US dollar (recent month rise of over 8%) is a contributing factor towards decreased overseas demand. The weekly pattern in natural gas, however, has diverged from oil and the last 5 days show an increasing slope; the current and extended cool pattern is providing support for NG futures, and traders should look for retracements as entry points for both NG and Heating Oil (NovJan). 

Heavy rains will continue to impede harvest in the western corn belt, as a moisture laden low pressure system moves through the central US.  Soybean harvest will be affected as well, but the timing of the event will have more of an impact to corn.  The US corn belt has seen a series of poor weather events cause problems for harvest operations.  This cooler and wetter fall was part of the outlook that shaped the Weather Trends outlook for reduced yields all summer.  Harvest is well behind last year’s pace - the most recent USDA crop progress update (20 Oct) reported that 29% of the US corn crop had been harvested, versus 58% for the same time last year.  At this writing, corn, soy, and wheat futures are all trading down.

Corn and soybean futures finished Monday’s session higher (near session highs for both). Traders were focused on a smaller rally, which lead to the covering of short positions, particularly on beans. In overnight activity, both corn and beans started strong, then weakened to lower levels. Crude is down, while the USD strengthened.   A wetter pattern is developing in parts of the western US grains belt, triggering delays over areas that have not yet been harvested. This poor harvest weather will contribute to further reductions in yield potential for the corn crop, a factor not yet accounted for in USDA yield estimates.   Given the short term outlook, we expect price support for corn and beans this week into next.

WTI yield estimates this week have not changed from the previous letter: corn at 140.9 -142 bu/acre, and soybeans still at 38.5-40 bu/acre (18 major growing states).

Dryness in NSW has lead to estimates of the Australian wheat crop to be reduced (Australian Crop Forecasters). ACF is putting wheat at 20 mmt, down from 21mmt. According to ProFarmer, most private estimates are ranging between 20 and 23.6 mmt; AUS gov’t estimate at 22.5 mmt.  Despite reductions in crude futures, palm oil futures have strengthened, signaling that the perceived demand from the biofuel sector will remain strong. Tight global stocks should keep this market constructive into next year.