The market hit a new high during Monday’s trading even though there was basically nothing new in the media to drive prices. In fact, most of what was out in the market was biased to the bearish side…talk of Saudi increasing production, Iraq production increasing, dollar firming and relative quiet on the Geopolitical front. With little new expected today the market is turning its attention to tomorrow’s oil inventory report which is expected to be bearish but likely discounted by participants. The market is expecting a build of about 700,000 barrels of crude oil, a build of about 1.25 million barrels of distillate and a small build of about 100,000 barrels of gasoline. Refinery runs are expected to increase about 0.5% bringing the utilization level to a little over 87% of capacity. The report will show that stocks remain very comfortable heading into the long holiday weekend and beyond.
The market sentiment remains bullish as oil prices remain very overvalued. We have discussed the primary reasons many times in this publication. This morning I will try to quantify some of the key items in the market place. The following table summarizes the fundamental situation along with energy prices and some financial indicators year to date.
· Macro Fundamentals – Bearish
o According to the latest EIA numbers global demand is running about 1.56% lower today than it was at the end of 2007.
o OPEC production is only slightly lower. However, non-OPEC production has gained slightly and thus neutralized the very small decline in OEPC production. In addition Saudi Arabia announced it is increasing production by 300,000 bpd in June along with Iraq who expects to see production increase about 125,000 bpd in June
o The all important surplus capacity (all in OPEC) has increased by almost 300,000 bpd so far this year. This does not include the current shut in capacity in Nigeria which is available but unknown when it will return.
o On the inventory side OECD stocks have improved to 54 days supply. Even though the absolute level of OECD stocks have declined (due to normal winter draw of distillates) demand is lower (see above) thus improving the overall inventory coverage.
o In the US total commercial inventories have been on the increase during the first 5 months of 2008. The biggest gainer is crude oil which has grown by over 12% or 36 million barrels through last week’ release of EIA data. Distillate has been the big decliner. This again is the normal pattern during the heart of the winter heating season (Jan – Apr). Of late distillate inventories have now entered the building period which will last until early December.
o With all of the talk of the SPR in Congress so far this year a total of 6.6 million barrels of oil went into the SPR of about 3 VLCC size ship levels. The amount is insignificant and only 1/6 of what the industry built in commercial stocks of 26 million barrels during the same time frame.
· Energy Prices – Surging
o Year to date prices have now increased more than half of what they gained for all of last year. As presented above not based on the fundamentals. Even the refining sector is starting to show an improvement in their earnings picture with the HO crack leading the way higher.
· Other Financials – Bullish for Oil
o Oil remains the best investment in town as depicted by the return for equities (as measured by the Dow) and Gold. In fact as shown in the table the Dow is still negative on the year while Gold the so called “Inflation Hedge” is up only a fraction of what oil is up on the year. Oil have indeed become the new inflation hedge (at least in the minds of the investment & spec community).
o The main driver of the year remains the weak US dollar. The dollar has depreciated over 6% this year versus the Euro & Yen ( and most other major currencies). This is on top of about the approximate 40% depreciation over the last several years. The correlation between the dollar and oil prices is very strong and clearly the main bullish driver currently in the market. Until the dollar reverses strongly to the upside we can expect to see any major decline in oil prices to be short-lived and shallow.
·
| 2008 Performance to Date | | | | |
| | 5/20/08 | 29-Dec | Change | % Change |
| | 2008 | 2007 | For YTD | YTD |
| Macro Fundamentals | | | | |
| World Consumption,mmbpd | 85.12 | 86.47 | (1.35) | -1.56% |
| | | | | |
| OPEC Production,mmbpd | 31.78 | 32.05 | (0.27) | -0.84% |
| Non-OPEC Production,mmbpd | 49.53 | 49.15 | 0.38 | 0.77% |
| Surplus Capacity,mmbpd | 1.9 | 1.61 | 0.29 | 18.01% |
| | | | | |
| OECD, Days Supply | 54 | 52 | 2 | 3.85% |
| OECD, mmbls | 2562 | 2574 | (12.00) | -0.47% |
| | | | | |
| US Tot. mmbls | 1680.31 | 1670.95 | 9.35 | 0.56% |
| Crude ,mmbls | 325.76 | 289.58 | 36.18 | 12.49% |
| Distillate, mmbls | 107.06 | 127.18 | (20.12) | -15.82% |
| Gasoline,mmbls | 210.17 | 207.84 | 2.33 | 1.12% |
| | | | | |
| US SPR,mmbls | 701.99 | 695.38 | 6.62 | 0.95% |
| Energy Prices | | | | |
| Spot WTI,$/bbl | $127.20 | $95.98 | $31.22 | 32.53% |
| Spot HO,$,gal | $3.6930 | $2.6494 | $1.0436 | 39.39% |
| Spot RBOB,$/gal | $3.2400 | $2.4908 | $0.7492 | 30.08% |
| Spot NG.$/mmbtu | $10.960 | $7.483 | $3.477 | 46.47% |
| | | | | |
| HO Crack,$,bbl | $27.91 | $15.29 | $12.61 | 82.45% |
| RBOB Crack,$/bbl | $8.88 | $8.63 | $0.25 | 2.85% |
| 3-2-1 Crack,$/bbl | $15.30 | $10.94 | $4.37 | 39.92% |
| Other Financials | | | | |
| Dow Industrials | 13028.16 | 13264.32 | (236.16) | -1.78% |
| Euro/USD | 1.5489 | 1.459 | $0.09 | 6.16% |
| Yen/USD | 0.9595 | 0.9013 | $0.06 | 6.46% |
| Gold,$/ounce | $907.5 | $836.8 | $70.70 | 8.45% |
All of the traditionalist in the market need to forget about the normal market drivers like fundamentals and focus ones attention on the financial sector with two eyes glued to the ups and downs of the US dollar. It will be the catalyst that will cause the long overdue market correction. We just do not know precisely when it will happen. The dollar is currently in a bottoming pattern but it is still too early to declare that it has turned the corner.
In overnight trading the dollar is weakening and giving back most of yesterday’s gains. The Bank of Japan decided to leave their overnight interest rate unchanged and that has been viewed as bearish for the dollar so far this morning. The dollar will need a push to move strongly to higher ground. We still believe that push will come from the Fed who is likely more concerned about the inflationary impact of high energy prices that the recessionary problems associated with the housing slump (many are now forecasting that the housing slump has bottomed out). We do not think the Fed will lower interest rates any further and in fact if energy prices remains strong they will almost likely be forced to think about increasing interest rates toward the second half of the year. This action would be bullish for the dollar and bearish for oil. Time will provide the answer.
Currently prices are mixed with the dollar weakening. If the dollar trend continues further into today’s trading we can expect to see another new historical high for oil sometime today.
| Current Expected Trading Range | | | ||
| | 5/20/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 6:51 AM | Yesterday | | |
| June WTI | $127.20 | $0.15 | $130.00 | $99.20 |
| June HO | $3.6930 | $0.0179 | $4.0000 | $2.7100 |
| June RBOB | $3.2400 | $0.0034 | $3.2500 | $2.5200 |
| June NG | $10.960 | $0.006 | $12.000 | $8.700 |
| | | | | |
| Euro/$ | 1.5635 | 0.0146 | 1.6000 | 1.5200 |
| Yen/$ | 0.9630 | 0.0035 | 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
This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or the taking of any action in reliance on this information is strictly prohibited. If this message has come to you in error, please immediately notify the sender by telephone or return e-mail and delete the original transmission and its attachments without reading or saving in any manner. Thank you.
No comments:
Post a Comment