The market continues to focus solely on financials, especially the ongoing weakness of the US dollar. WTI crude is absolutely hitched to the side of the dollar. The dollar continues to fall against all of the major world currencies on concerns over a weakening US economy. The combination of an emotionally charged market sentiment, a weakening dollar and complete disregard for the fundamentals over the last 21 trading days WTI crude oil has increased by a little over $23/bbl or almost 27% as shown in the following table.
This table shows the current 21 day surge in oil (Feb 6 when WTI bottomed out and turned to the upside) along with the appreciation of three major currencies (depreciation of US dollar). A few interesting observations:
· Over the last 21 trading days the three currencies shown in the table have appreciated in a range of 4.2 to almost 6. 7%. The Euro is leading the pack with the dollar weakening the most versus the Euro.
· The Euro is looking more and more like the world’s reserve currency instead of the US dollar.
· In contrast the oil complex has appreciated in value about 4 times (basis percentage change) as much as the currency markets.
· WTI is leading the way in the oil complex with both HO & RBOB lagging.
· RBOB gasoline is the weakest commodity in the group as inventories of gasoline (see table below) are at record highs for this time of the year.
· In the crude led oil rally refinery margins are continuing to deteriorate as product prices lag.
| | | | | |
| Short Term Oil vs. Currencies | % | |||
| | 6-Feb | Current | Difference | Change |
| WTI | $87.14 | $110.38 | $23.24 | 26.7% |
| RBOB | $2.2399 | $2.7205 | $0.4806 | 21.5% |
| HO | $2.4188 | $3.0339 | $0.6151 | 25.4% |
| | | | | |
| Euro | 1.4612 | 1.5591 | 0.0979 | 6.7% |
| Yen | 0.9409 | 0.9960 | 0.0551 | 5.9% |
| BP | 1.9554 | 2.0372 | 0.0818 | 4.2% |
| | | | | |
Although the market is not concerned about the fundamentals the fact remains that oil is well supplied. As shown in the following table yesterday’s report showed significantly larger builds than expected for both crude oil and gasoline and a smaller than expected decline for distillate. Under normal circumstances this report would have sent the market reeling to the downside. Instead prices hit new highs as the US dollar got pounded during Wednesday’s trading.
As shown in the table inventories today are almost 20 million barrels above last year for gasoline as the year on year deficit for both crude oil and gasoline narrows. Putting the three (WTI, gasoline & distillate) categories together inventories are just 900,000 barrels below the same week last year. On the other hand the surplus versus the 5 year average continues to grow. Again putting the three categories together the surplus versus the same week for the 5 year average is 33 million barrels.
All I can say about the current fundamentals is one word …bearish.
| Oil Inventory | | 3/13/08 | | |
| Mil of Bbls | | | | |
| | Current | Change from | Change from | Change from |
| | Inv. | Last Week | Last Year | 5 Year |
| | | | | |
| Crude Oil | 311.6 | 6.2 | (13.7) | 9.2 |
| Gasoline | 236.0 | 1.7 | 19.5 | 22.4 |
| Distillate | 116.4 | (1.2) | (6.8) | 1.4 |
| Refinery % | 84.7% | -1.2% | -1.1% | -1.1% |
So what happens from here? Hard to predict other than one has to follow the flow. The flow is oil is moving in sync with currencies and not with fundamentals or anything else for that matter. So watch the financials and watch closely as the market (both oil & currencies) are overdue for a major downside correction.
Dominick A. Chirichella
Energy Management Institute
tel 646-202-1433
tel 845.368.3904
fax 801.383.7510
www.advancedenergycommerce.com
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