The market is once again ignoring the fundamentals, discounting bearish news and embracing anything bullish, even remote issues. Yesterday the market was hit with two bearish reports…first the IEA monthly oil report that projected a reduction in oil demand growth and another bearish EIA oil inventory report.
This was the 5th week in a row that crude oil has built and with the refining sector now moving into the beginning stages of the spring maintenance period we would expect to see further builds in crude oil. On the gasoline side stocks continue their meteoric builds with the level now a little over 4 million barrels higher than last year and over 11 million barrels higher than the 5 year average for the same week. In fact gasoline inventories have not been this high for this time of the year since 1994. Finally on the distillate front the year on year deficit has been reduced again as the stocks remain over 5 million barrels above the 5 year average.
Simply put we view the oil fundamentals as bearish/well supplied.
| Oil Inventory | | 2/14/08 | | |
| Mil of Bbls | | | | |
| | Current | Change from | Change from | Change from |
| | Inv. | Last Week | Last Year | 5 Year |
| | | | | |
| Crude Oil | 301.1 | 1.1 | (22.8) | 4.1 |
| Gasoline | 229.2 | 1.7 | 4.1 | 11.4 |
| Distillate | 127.0 | (0.2) | (6.4) | 5.1 |
| Refinery % | 85.1% | 0.8% | -1.5% | -1.5% |
The market is choosing to discount the fundamentals at the current time and instead looking to the financial markets and the possibility of Chavez extending its embargo of oil sales to Exxon to the entire US (remote at best). The equities markets have been in the midst of a recovery rally based on a few pieces of supportive economic data (i.e., yesterday’s retail sales numbers).
On the Venezuelan front Chavez has retaliated against Exxon’s lawsuits against Venezuela by cutting off oil sales to Exxon. In November, 07, Exxon Mobil imported about 90,000 barrels per day of oil from Venezuela, plus 77,000 barrels per day into their 50-50 joint venture with PdVSA at the Chalmette refinery in Louisiana, which will not be impacted. The volume impacted is relatively insignificant to Exxon and the world. I believe the likelihood of Chavez cutting supplies to the entire US is low. About 55% of Venezuela’s crude oil production is exported to the US with Citgo (100% owned by Venezuela) as the major recipient of these imports. If this amount of oil were to be shut in by Venezuela (about 1,220 mbpd) it would certainly impact oil prices. However, it would cost Venezuela over $70 million dollars per day. With the Venezuelan economy weak at best this would likely be the demise of Chavez. Needless to say we do not believe this will happen.
When we look at the market in its entirety we note that prices have been trading in a range of about $100/bbl to a low of about $85/bbl (basis Spot Nymex WTI) since late November, 2007. We believe the market will remain in that trading range with prices now about in the middle of the trading range. We see nothing in the near term that will support prices moving outside of the trading range (in either direction). On the upside it will take a major direction change in the current oil fundamentals and/or a significant supply disruption (i.e. Venezuela). On the downside it would require OPEC to completely ignore a major slide in prices and not cutting production (unlikely).
So we continue to project a market that will be highly volatile while trading in a wide range. As we have also been indicating the market remains susceptible to sudden changes in direction as we have seen of late.
Currently prices are steady across the board.
| Current Expected Trading Range | | | ||
| | 2/14/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:44 AM | Yesterday | | |
| Mar WTI | $93.98 | $0.71 | $94.62 | $85.25 |
| Mar HO | $2.6315 | $0.0159 | $2.6600 | $2.4000 |
| Mar RBOB | $2.4089 | $0.0190 | $2.4900 | $2.2000 |
| Mar NG | $8.540 | $0.152 | $8.690 | $7.500 |
| | | | | |
Dominick A. Chirichella
Energy Management Institute
tel 646.202.1433
fax 801.383.7510
dchirichella@emimail.org
www.energyinstitution.org
www.advancedenergycommerce.com
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