The surge continues. New historical highs were made already today when WTI topped $130/bbl. The reason(s) remain a strongly bullish market sentiment fueled by the anticipation of a supply problem/event in the future along with a weak dollar. The current move was fueled by comments made by Boone Pickens yesterday morning (appearing on CNBC) which he said the world is running out of oil. He is a proponent of peak oil and said the price will likely go no place but higher. He projected $150/bbl this year, in line with the Goldman Sacs forecast.
The move since yesterday morning demonstrates how jittery and how strongly bullish the market is. As we have outlined continuously in this report the current fundamentals do not support the meteoric price rise in the oil complex. The market continues to discount anything bearish and is aggressively seeking bullish justification for the current surge. As we have been forecasting this will continue. Oil remains the best investment on the street with year to date returns many multiples of other investment vehicles. Based on the way the market has been trading the view can only be interpreted that there will be a significant shortage of oil at some point in time in the future. This view coupled with the significantly overvalued level of oil prices would make one think a supply shortfall is almost certain and soon.
For now the world is not running out of oil, there is no shortage of oil and demand in the US in fact is declining due to high prices. In addition inventories are continuing to build. As described in yesterday’s report US inventories are higher today than they were at the end of the year with crude oil leading the way higher building 36 million barrels so far (through last week). Today we get another snapshot of inventories. The market is expecting an across the board build in inventories and a modest jump in refinery runs. A bearish report is expected but as we have seen for most of this year the market will discount the report within 24 hours (or less).
As we enter the long holiday weekend gasoline supplies remain more than adequate indicating that a supply problem today or anytime soon is extremely low. Both crude oil & distillate are in a normal building mode with distillate expected to build inventories until early December. With refinery runs on the rise and inventories already building the likelihood of any supply problems with crude or distillate is also very remote.
We view the report as bearish the market will discount the report and move to higher ground in the event that prices decline after the report is issued.
| Projections | | 5/21/08 | |
| | | | |
| | Current | Change from | Change from |
| | Projections | Last Year | 5 Year |
| mmbls | | vs. Proj. | vs Proj. |
| Crude Oil | 0.8 | (17.6) | 5.3 |
| Gasoline | 0.1 | 13.6 | 3.9 |
| Distillate | 1.3 | (11.9) | (3.5) |
| Ref. Runs% | 0.5% | -4.0% | -5.9% |
| Change Level | 87.1% | 91.1% | 93.0% |
Another interesting observation about the market… the forward curve for WTI has switched from a backwardation to a contango (carry market). This is shown in the following chart. The top WTI forward curve is from based on 5/20 prices, middle curve based on 4/20 prices and the lower curve is based on 3/20 prices. What does that suggest? A backwardated market is representative of higher prices in the front end of the market and lower prices in the forward period. This type of curve normally suggests that the market is undersupplied. A contango market is representative of lower prices in the front end of the market and higher prices in the forward period. This type of curve normally suggests that the market is oversupplied. With the market moving deeper into a contango (supplies/inventories building) and prices rising we have a divergence forming suggesting an inconsistent market or possibly a market that is moving closer to a correction. Again only time will tell.
Specs should cautiously continue to trade from the long side with tight stops while buy side hedgers should continue to employ options spread strategies to protect against upside price risk.
Currently oils are firm while the dollar is weaker.
| Current Expected Trading Range | | | ||
| | 5/21/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:27 AM | Yesterday | | |
| Jul WTI | $130.16 | $1.18 | $135.00 | $99.20 |
| June HO | $3.8267 | $0.0517 | $4.0000 | $2.7100 |
| June RBOB | $3.3275 | $0.0231 | $3.5000 | $2.5200 |
| June NG | $11.533 | $0.168 | $12.000 | $8.700 |
| | | | | |
| Euro/$ | 1.5736 | 0.0090 | 1.6000 | 1.5200 |
| Yen/$ | 0.9698 | 0.0037 | 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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1 comment:
Steve Peasley at http://blog.investtalk.com has an interesting take on the gas crises:
"It is interesting that a slowing economy has not pulled down the commodity prices. Over the last few years trading in commodities on the futures market has exploded. That is a sign of dramatic speculation. Gasoline prices are not going to fall any time soon until some of this speculation is taken out. No one knows how much of the cost of a barrel of oil or a tank of gas is due to traders� speculation, but it is significant. There is currently an adequate supply and the supply is actually growing as the demand for gasoline in the U.S. is falling. Drivers are changing their habits to reduce consumption; despite that prices are still increasing. The perception is world demand is going to outstrip supply sometime in the future; that is not likely to happen. Both supply and demand are elastic; as prices rise more supply will be found and demand will reduce. Currently oil producers are using about $50 per barrel as the price to justify new projects. With the price near $125 there will be pressure to find, drill and pump more oil. There is plenty of oil but the easy stuff has already been found. Now it is oil sands, oil shale and deep water deposits that are being exploited. These are very expensive projects so high oil prices are needed to justify them."
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