One interesting week!. The oil complex (led by WTI) continues to make new highs on a daily basis. The market is being driven mostly by emotions and anticipation of a major supply disruption. The remains de-coupled from the current fundamentals as inventories continue to build. We saw above normal and above expectation builds in both crude oil and gasoline. Crude oil has built for the 7th week in a row while gasoline has built for the 10th week in a row.
As shown in the following table The year on year gap for crude oil has narrowed significantly over the last month or so while the surplus versus the 5 year average has widened significantly. Gasoline stocks are well above last year’s record high for this time of the year and significantly above the 5 year average. He report was bearish as the fundamental situation continues to indicate that prices are overvalued.
| Oil Inventory | | 2/29/08 | | |
| Mil of Bbls | | | | |
| | Current | Change from | Change from | Change from |
| | Inv. | Last Week | Last Year | 5 Year |
| | | | | |
| Crude Oil | 308.5 | 3.2 | (20.5) | 8.0 |
| Gasoline | 232.6 | 2.3 | 12.4 | 16.4 |
| Distillate | 120.0 | (2.6) | (4.6) | 3.8 |
| Refinery % | 84.7% | 1.2% | -1.3% | -1.3% |
Irrespective of the fundamentals the market has put in a stellar week. Crude oil absolutely was the leader of the pack as everything else has lagged. The biggest laggard was gasoline which actually declined over $5/gal on the week. AS discussed above although we have seen over a 5% increase crude oil prices oil inventories built greater than expected.
To demonstrate how over-valued crude oil is one need only look at the crack spread numbers for the week. While crude oil prices increased over 5% refinery margins (as measured by the 3-2-1 crack spread) declined by almost 20% on the week. Actually the gasoline crack declined almost $4/bbl or about 28%. This pattern will not continue for an extended period of time.
Looking at the weekly performance numbers it is obvious that the rally is very emotional and based on any logic. As refinery margins continue to decline refiners will throttle back runs throwing up more surplus crude heading into inventory. The complex is simple over-valued with crude oil not only de-coupled from its fundamentals but it is also de-coupled from refined products.
| | | | | | | |
| | | Trading For the Week | | | | |
| | | | | | | |
| | Current | Change | Change | 22-Feb | Weekly | Range % of |
| | Price | From Thurs | For Week | Settle | Range | Fri Close |
| | 6:32 AM | | | | | |
| Apr WTI | $102.05 | ($0.54) | $3.24 | $98.81 | $5.30 | 5.36% |
| Mar HO | $2.8300 | ($0.0156) | $0.0670 | $2.7630 | $0.1186 | 4.29% |
| Mar RBOB | $2.4860 | ($0.0097) | ($0.0477) | $2.5337 | $0.1049 | 4.14% |
| Apr NG | $9.398 | ($0.045) | $0.205 | $9.193 | $0.517 | 5.62% |
| | | | | | | |
| Apr 08 Cracks | | | | | | |
| RBOB Crack | $9.779 | $0.16 | ($3.81) | $13.590 | $4.79 | 35.25% |
| HO Crack | $16.159 | $0.19 | ($0.22) | $16.375 | $1.27 | 7.76% |
| 321 Crack | $11.885 | $0.169 | ($2.62) | $14.509 | $3.628 | 25.01% |
| | | | | | | |
So why is the market trading as it is? The oil complex continues to be driven by the current state of the economy and resulting impact it is having on the currency market. The US Fed Chairman pained another negative picture of the Us economy in his testimony to Congress this week indicating that the Fed’s strategy of cutting interest rates to jump start the remains their first line of defense. A lower interest environment translates to a further weakening of the US Dollar versus most every other major world currency. A weak dollar normally translate into a very supportive (bullish) driver for crude oil prices (among other commodities). The weak dollar/bullish crude oil relationship exists for three main reasons:
· Investors buy crude oil (and Gold) as a hedge to inflation during times of US dollar weakness. This is happening in a big way right now.
· OPEC continues to lose purchasing parity during times of dollar weakness and as such will endeavor to support a higher price environment.
· A weak dollar translates to cheaper oil prices in non-US dollar denominated countries and as such minimal reasons to cut back demand in those countries.
Where do go from here? Difficult to say at this point since the market is being driven by a very bullish market sentiment and strong emotions. This current rally can continue in the short term but as each day goes on and each new high is made the market remains strongly susceptible to a major price correction, especially on the crude oil side. We expect next week will perform much like this week.
Currently prices are drifting lower in quiet overnight trading.
| Current Expected Trading Range | | | ||
| | 2/29/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 6:32 AM | Yesterday | | |
| Apr WTI | $102.06 | ($0.53) | $102.50 | $85.25 |
| Mar HO | $2.8300 | ($0.0156) | $2.8500 | $2.4000 |
| Mar RBOB | $2.4860 | ($0.0097) | $2.6500 | $2.2000 |
| Apr NG | $9.398 | ($0.045) | $9.500 | $8.250 |
| | | | | |
Dominick A. Chirichella
Energy Management Institute
tel 646.202.1433
fax 801.383.7510
dchirichella@emimail.org
www.energyinstitution.org
www.advancedenergycommerce.com
