Once again the market ignored a bearish inventory report and once again buying the dips was the right trade. As we have been indicating for some time the market sentiment remains decidedly bullish and participants are just not yet interested in bailing out of the long side of the market. The market continuously replays the following reasons for continuously pushing prices higher:
· Surplus capacity is on the low side
· Demand is still growing , at least outside the US
· The economy may not be as bad as originally thought
· Geopolitical risk spots are still active, Nigeria, Iran, Iraq
· The dollar has been recovering but is still at a big discount to most major currencies
The above has been the reason prices have increased from $70 to $80, $80 to $90,$90 to $100 all the way to over $122/bbl. Yet what has happened over this long period of increasing prices. Pretty much nothing other than high prices:
· Inventories are comfortable,
· there have been no major supply disruptions that required emergency oil from places like the Strategic Petroleum Reserve
· there have been no shortages of gasoline at the retail pump
· demand growth in the US has slowed and will likely show a decline in demand this year due to high prices
· none of the geopolitical hotspots that have resulted in a shut in of crude oil supply(like Nigeria) have resulted in a shortage of physical oil anywhere in the world.
Yet after increasing by almost 65% in 2007 oil prices are already up by almost 30% across the board for oil and over 50% for Nat Gas (as shown in the following table). Even the refining sector is starting to recover a bit with the widely watched 3-2-1 crack up over 14% year to date. An amazing gain in energy prices with little conventional support for the rally.
| | | | | |
| 2008 Performance to Date | | | ||
| | | | | |
| | 5/8/08 | 29-Dec | Change | % Change |
| | 2008 | 2007 | For YTD | YTD |
| | | | | |
| Spot WTI | $123.25 | $95.98 | $27.27 | 28.41% |
| Spot HO | $3.4560 | $2.6494 | $0.8066 | 30.44% |
| Spot RBOB | $3.1177 | $2.4908 | $0.6269 | 25.17% |
| Spot NG | $11.388 | $7.483 | $3.905 | 52.18% |
| | | | | |
| HO Crack | $21.90 | $15.29 | $6.61 | 43.20% |
| RBOB Crack | $7.69 | $8.63 | ($0.94) | -10.89% |
| 3-2-1 Crack | $12.50 | $10.94 | $1.56 | 14.30% |
In my view most of the gains of late are directly attributable to the large influx of speculative/investment money continuously flowing into the complex along with an increase in so called program type (algorithmic) trading that has the impact of moving the market in the short term very quickly in one direction or the other. Over the many years that oil/energy products have been traded both physically and financially major moves (both up and down) have been primarily driven (at some point in the move) by the reality of the commodity…fundamentals, supply & demand). For the last several years the market has moved strongly in anticipation with no event (other than Katrina/Rita) that caused any noticeable shortage of supply anywhere in the world.
So yes the market is now clearly in the hands of the spec/investment community with the commercial sector tagging along for the ride. A good ride for some a challenging ride for other. A ride that I am not sure anymore where it will end and when we will experience a strong downside correction to bring energy prices back down from their extremely over-valued level.
Currently prices are mixed.
| Current Expected Trading Range | | | ||
| | 5/8/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:13 AM | Yesterday | | |
| June WTI | $123.23 | ($0.30) | $125.00 | $99.20 |
| June HO | $3.4560 | $0.0087 | $3.4000 | $2.7100 |
| June RBOB | $3.1177 | ($0.0005) | $3.1500 | $2.5200 |
| June NG | $11.388 | $0.061 | $11.500 | $8.700 |
| | | | | |
| Euro/$ | 1.5319 | (0.0052) | 1.6000 | 1.5200 |
| Yen/$ | 0.9598 | 0.0041 | 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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