Noting like a few comments coming from a Central Banker to scare the weak shorts and awake the bulls. With the oil complex on the verge of breaching all of the medium term uptrend support levels the President of the European Central Bank (ECB) Central suggested that with inflation a concern the ECB could raise interest rates going forward. That was all the currency market needed to quickly reverse what was a modest upside correction in the US dollar versus the Euro and dollar selling became the order of the day. The oil complex which was moving lower at the time on weak fundamentals and a recovering dollar quickly reversed to the upside and ended the day with the single largest one day gain in the history of the market. Not bad for just a comment and once again the anticipation of an event.
We have been saying that the complex was likely to make its next major move to the downside. We also suggested that the dollar was going to play a major role in the next move. Unfortunately we were expecting the dollar recovery to continue and thus put pressure on oil. Yesterday’s comments by the ECB were unexpected and the reaction in the oil complex to those comment were absolutely unexpected. It is obvious once again that a weak dollar has a significant impact on the direction of the commodities and energy complex in particular. The downside move in oil is now just another short and shallow correction and irrespective of the fundamentals the market sentiment has moved back into being decidedly bullish mostly based on the potential for the dollar to weaken further down the road. Although the ECB is talking about potentially raising their rates so is the US Fed. In essence they should possibly negate each other if they both in fact happen and as such the current reaction in the oil complex may once again be an overreaction.
On the week the energy complex dramatically reversed itself and is now showing gains with crude and NG leading the way higher. HO & RBOB are currently following the lead of WTI. Not only did the market experience an enormous move to the upside on Thursday this week has seen a well above normal level of volatility as measured by the weekly trading range. One of the surprising outcomes of yesterday’s move is the absolute overreaction in the oil complex. Interestingly the dollar versus the Euro is only marginally weaker so far on the week (down by about ¼%) while the dollar versus the Yen is still stronger on the week by about ¾%. On the other hand WTI is now up almost 2% on the week!
| | | Trading For the Week | | | ||
| | | | | | | |
| | Current | Change | Change | % Change | Weekly | Range % of |
| | Price | From | for | For | Range | Fri Close |
| | 7:10 AM | Thurs | Week | Week | | |
| July WTI | $129.72 | $1.93 | $2.37 | 1.86% | $8.97 | 7.04% |
| July HO | $3.7444 | $0.0636 | $0.0777 | 2.12% | $0.2401 | 6.55% |
| Jul RBOB | $3.3642 | $0.0297 | $0.0160 | 0.48% | $0.2106 | 6.29% |
| July NG | $12.631 | $0.112 | $0.928 | 7.93% | $1.036 | 8.85% |
| Jul 08 Cracks | | | | | | |
| RBOB Crack | $11.576 | ($0.68) | $2.39 | 26.08% | $5.35 | 58.27% |
| HO Crack | $27.545 | $0.74 | $0.89 | 3.36% | $1.34 | 5.03% |
| 321 Crack | $16.846 | ($0.213) | $1.90 | 14.31% | $4.027 | 30.34% |
| | | | | | | |
| Euro/$ | 1.5586 | 0.0003 | $0.0040 | 0.26% | $0.0252 | 1.62% |
| Yen/$ | 0.9420 | (0.0048) | ($0.0071) | -0.75% | $0.0235 | 2.48% |
So where do we go from here and what and who will be the main drivers. We must now say that the probability of the market retesting the all time highs is once again in the cards in the short term. The only support for this premise is if the dollar continues to recede back into a strong decline. If not we would expect the market to settle down and possible move back into the downside correction that began last week. The dollar remains the main market driver going forward as the fundamentals are comfortable from a supply perspective and demand is now on the defensive.
The spec and investment community loom large over the market of late and will continue to do so. The spec and investment community likely played a large role in the outcome of yesterday’s trading and into this morning’s session so far. We likely had the first wave of buying as short covering coming from the trading sector followed by a new wave of buying from the investors entering index funds to once again add more to the inflation/weak dollar trade. A trade that is still providing the best returns year to date than just about any other alternate investment vehicle. We expect this pattern to continue into next week unless the dollar regains some strength.
Currently prices are firm for energies and about unchanged for the dollar.
| Current Expected Trading Range | | | ||
| | 6/6/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:10 AM | Yesterday | | |
| Jul WTI | $129.72 | $1.93 | $135.00 | $99.20 |
| July HO | $3.7444 | $0.0636 | $4.0000 | $2.7100 |
| July RBOB | $3.3642 | $0.0297 | $3.5000 | $2.5200 |
| July NG | $12.631 | $0.112 | $12.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5586 | 0.0003 | 1.6000 | 1.5200 |
| Yen/$ | 0.9420 | (0.0048) | 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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