Last week proved true to form…several bearish reports and yet the market made new highs and ended the week with gains. The market sentiment remains decidedly bullish with most spec/investment participants unwilling to be short for any length of time. The commercial sector is along for the ride. For some an enjoyable ride…producers, for others not so much fun…consumers. As has been the case for months all of the down moves seen in the market have been short-lived and shallow corrections leaving prices in a significantly overvalued state.
Last week we saw the US Congress pass a bill to stop filling the Strategic Petroleum Reserve. THE EIA agreed to stop filling the SPR as of July. The SPR fill rate is currently about 70,000 bpd. Once this was officially circulated within the market prices in fact increased. So why has this not help push prices lower? First of all it is an insignificant amount of crude oil, about 0.3% of daily US consumption. Secondly the US market (or the world) is not short of crude oil nor does it need this volume of crude oil. For instance since the end of 2007 US commercial crude oil inventories have increased a little over 36 million barrels as a result of supply outweighing demand for crude oil. On the other hand (see table below) crude oil prices are up almost 32% since the end of 2007, the same timeframe that crude oil stocks built by 36 million barrels.
The above was on top of the Saudi’s stating they would increase production by 300,000 bpd next month. A little more bearish news that was also discounted in the marketplace. The vast majority of the move to the upside in 2008 has been mostly related to the perception(sentiment) that something catastrophic is going to happen rather than anything happening. The fundamentals are adequate, especially gasoline (gasoline stocks are 15 million barrels above same time last year) as the market begins the start of the so called summer driving season this coming weekend (Memorial Day Weekend).
On the year energy prices continue to add to their gains with HO & NG leading the way on a percentage basis while gasoline brings up the rear. Also energy remains the investment of choice when comparing the returns on energy (this year) versus, the Dow or Gold ( this would be true in a comparison to most other investments). Finally, although the US dollar is starting to show signs of bottoming out it is still weaker by over 6% year to date versus the Euro & Yen (and most other major currencies)
| | | | | |
| 2008 Performance to Date | | | ||
| | | | | |
| | 5/19/08 | 29-Dec | Change | % Change |
| | 2008 | 2007 | For YTD | YTD |
| | | | | |
| Spot WTI | $126.65 | $95.98 | $30.67 | 31.95% |
| Spot HO | $3.6989 | $2.6494 | $1.0495 | 39.61% |
| Spot RBOB | $3.2278 | $2.4908 | $0.7370 | 29.59% |
| | | | | |
| Spot NG | $11.195 | $7.483 | $3.712 | 49.61% |
| | | | | |
| Dow Industrials | 12986.8 | 13264.32 | (277.52) | -2.09% |
| Gold | 910.8 | 836.8 | $74.00 | 8.84% |
| | | | | |
| Euro/USD | 1.5558 | 1.459 | $0.10 | 6.63% |
| Yen/USD | 0.9616 | 0.9013 | $0.06 | 6.69% |
As we have said many times the market is being driven by a very bullish market sentiment and a view that the US dollar will only get weaker. The fundamentals are playing a very minor part in the equation. In fact the only time the fundamentals are being followed by market participants is when they are bullish. All bearish fundamental news is quickly being discounted (last several weeks of oil inventories for example). The spec & investment flow continues to maintain and add to long positions on any dip. The long awaited correction will only begin when the market sentiment changes. We believe the market sentiment will not change until the US dollar truly heads to higher ground and convinces the market that the downside slide in the dollar is over.. Until then stay buckled up for a continuation of the wild ride to the upside.
Our recommendations remain the same…specs should only trade from the long side (buy dips) with tight stops until proven wrong. Buy side hedgers should continue to use options spreads in the short term to protect upside price risk.
Currently oil prices are mixed.
| Current Expected Trading Range | | | ||
| | 5/19/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 6:57 AM | Yesterday | | |
| June WTI | $126.65 | $0.36 | $130.00 | $99.20 |
| June HO | $3.6989 | ($0.0039) | $4.0000 | $2.7100 |
| June RBOB | $3.2278 | $0.0043 | $3.2500 | $2.5200 |
| June NG | $11.187 | $0.093 | $12.000 | $8.700 |
| | | | | |
| Euro/$ | 1.5554 | (0.0004) | 1.6000 | 1.5200 |
| Yen/$ | 0.9622 | 0.0006 | 1.0450 | 0.9000 |
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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