Has the bubble burst for now? We think so. Energy & commodity prices are likely to see lower prices in the short term rather than surging to new historical highs. That does not mean that the long term uptrend is anywhere being over. It just means that the current over valued state of the energy complex is in a downside correction. A correction that could push prices all the way down to between $90 to $100/bbl basis WTI. How deep the correction turns out to be will be very dependent on:
· How strong the short covering rally of the US dollar turns out to be. This is the second week in a row that the dollar has gained versus most major currencies. If the trend has turned and the dollar continues to firm energy prices will decline strongly.
· How the US economy performs over the next two months. The next Fed meeting is in two months. If economic numbers come in as they have over the last week or so (0.6% GDP) it may be enough for the Fed to truly change their bias from reducing rates to neutral or even raising rates slightly toward the end of the year. If this scenario evolves it will be very supportive for the dollar and bearish for energy prices.
· Which if any of the ongoing Geopolitical hotspots flare up. If all remains quiet the risk premium in oil will contract and be supportive of the downside correction. If not prices will struggle to contract.
· The current fundamentals of oil and NG are well supplied with inventories of most everything either way above normal (gasoline) or comfortably within the normal long term operating range. With retail gasoline prices at historically high levels the EIA and many others are projecting a decline in gasoline consumption during the upcoming driving season. If the fundamentals remain comfortable (most likely case) and gasoline demand declines or even remains the same the fundamentals will be very supportive of a downside correction.
· Much of the increase in energy prices this year have been supported by the large inflow of investment dollars as investors sought a hedge against a weak dollar (inflation) and higher returns than were available in just about any other market around the world. If the dollar firms (as discussed above) this flow will not only come to an abrupt halt but investors will quickly begin to ext the market putting further pressure on the downside correction.
· All of the above said the market sentiment is still slightly bullish but changing. As more and more of the above factors work their way into the media and the mindset of the traders and investors the sentiment is likely to change and embrace the downside market correction.
On the week we saw prices declining strongly across the board as shown in the following table. In a nutshell there were no winners from a bullish perspective in the energy side with the dollar being the clear cut winner as it continued to slowly regain some of its footing. The leader of the downside pack was gasoline which should be no surprise since it is the most oversupplied with just weeks left to the start of the summer driving season. Once again the refining sector did not fare to well and is likely the reason we saw refinery runs decline slightly this week.
| | | Trading For the Week | | | ||
| | | | | | | |
| | Current | Change | Change | % Change | Weekly | Range % of |
| | Price | From | for | For | Range | Fri Close |
| | 7:21 AM | Thurs | Week | Week | | |
| June WTI | $113.06 | $0.54 | ($5.46) | -4.61% | $9.63 | 8.13% |
| June HO | $3.1479 | $0.0302 | ($0.1434) | -4.36% | $0.2454 | 7.46% |
| June RBOB | $2.8845 | $0.0063 | ($0.1622) | -5.32% | $0.2451 | 8.04% |
| June NG | $10.574 | $0.013 | ($0.526) | -4.74% | $0.980 | 8.83% |
| June 08 Cracks | | | | | | |
| RBOB Crack | $8.089 | ($0.28) | ($1.35) | -14.32% | $1.42 | 15.02% |
| HO Crack | $19.152 | $0.73 | ($0.56) | -2.85% | $2.27 | 11.51% |
| 321 Crack | $11.740 | $0.056 | ($1.09) | -8.51% | $1.699 | 13.24% |
| | | | | | | |
| Euro/$ | 1.5433 | 0.0003 | ($0.0129) | -0.83% | $0.0261 | 1.68% |
| Yen/$ | 0.9572 | (0.0034) | ($0.0027) | -0.28% | $0.0139 | 1.45% |
As we said above we see the complex in the early stages of a downside correction with a higher probability of prices heading lower before they once again surge to new historical highs. The market will be very focused on the direction of the dollar with every economic number being released quickly being interpreted as bullish or bearish for the dollar vis-a-vis the Fed cutting or standing pat on interest rates. That exact situation exists this morning as the energy complex has firmed slightly as the market awaits this morning weekly labor number. A big job loss will be viewed as bearish for the dollar and bullish for oil.
Interesting but complex market. Expect volatility to increase further as the market continues to sort out all of the aforementioned drivers. Currently prices are firm.
| Current Expected Trading Range | | | ||
| | 5/2/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:21 AM | Yesterday | | |
| June WTI | $113.09 | $0.57 | $120.00 | $99.20 |
| June HO | $3.1479 | $0.0302 | $3.4000 | $2.7100 |
| June RBOB | $2.8845 | $0.0063 | $3.1500 | $2.5200 |
| June NG | $10.574 | $0.013 | $11.000 | $8.700 |
| | | | | |
| Euro/$ | 1.5433 | 0.0003 | 1.6000 | 1.5200 |
| Yen/$ | 0.9572 | (0.0034) | 1.0450 | 0.9900 |
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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