Another interesting trading week comes to an end with the oil complex putting in a another erratic and volatile trading week. Volatility was once again above normal as we saw a new historical all time high in the beginning of the week, another interruption in Nigeria, a neutral to bearish oil inventory report, discussion all week about the Saudi output hike & the meeting on Sunday, discussions of punishing speculators all over the world, the beginning of a debate on new drilling in the US but the news story that provided the largest impact on the market was China decreasing their subsidies on oil.
As shown in the following table China has raised prices by 17% for gasoline, 18% for diesel and 25% for Jet fuel representing a total of 4.5 million barrels of oil consumption per day. It is difficult to say how much this will reduce demand but as a very macro estimate I took the % demand decline year on year in the US (which has seen about 100% increase in prices) and applied that to the current pre-price rise level in China (as reported in the latest IEA report). As shown this is not a big number. When totaled and compared to current global demand of 86 million barrels per day China’s three main products represents a little over 5% of total global demand. If my projected demand reduction is close that translates to 0.1% of global demand.
Although this is an interesting turn of events (since no one was expecting China to do this right now) it may turn out to be more symbolic than meaningful in the medium term. Even with the decrease in the subsidies the price of oil will still below market as some level of subsidy still exists. In fact throughout Asia China remains in the lower portion of the list as far as prices of gasoline & diesel are concerned. Further keeping prices low is the Chinese Yuan remains much stronger than the US dollar further reducing the real dollar cost of oil in China.
It is also possible that the reduction in subsidies may in fact increase consumption in China as many refineries have been running below normal utilization rates due to poor refinery margins and some product has been exported of late. This has caused spot outages in China. With increased prices comes improved refinery runs and thus an economic motivation to increase refinery runs and thus an increase in crude oil demand. With the Olympics just around the corner the last think the Chinese government wants is the international media running around China talking about outages of fuel. I believe the move by China was motivated by shoring up supply for the upcoming Olympics more than any other motivation.
Bottom line great news for the overall oil crisis as demand reduction is very important but be cautious as the world may not see a significant reduction in China’s call on worldwide oil anytime soon and as just mentioned it may in fact increase its call on crude oil.
| Potential Demand Reduction Due to Raising Prices | | ||
| | China | Inputted | US |
| | Demand | Pot. Demand | Year on Yr |
| | 000 bbl/day | Reduction | Demand |
| | Apr IEA Report | in China | Decline, % |
| Gasoline | 1368 | (51) | 3.7% |
| Diesel | 2833 | (11) | 0.4% |
| Jet Fuel | 303 | (22) | 7.1% |
| | | | |
| Total | 4504 | (83) | |
| % of World | | | |
| Demand | 5.2% | 0.1% | |
On the week oils declined modestly with gasoline leading the way lower followed by HO and crude oil. The refinery sector did not fare so well this week losing ground on all fronts and resulting in about an 8% decline in the widely watched 3-2-1 crack spread. Gasoline was also the most volatile (as measured by the percentage change in the weekly range) on the week. Nat Gas held its own on the week putting in a solid gain as patches of heat waves hit various parts of the US (West Coast) while stocks remain near the lower end of normal.
The US dollar also did not fare so well this week losing a little over 1% of its value thus providing no relief for the high oil price.
| | | Trading For the Week | | | ||
| | | | | | | |
| | Current | Change | Change | % Change | Weekly | Range % of |
| | Price | From | for | For | Range | Fri Close |
| | 7:00 AM | Thurs | Week | Week | | |
| July WTI | $133.45 | $1.52 | ($1.41) | -1.05% | $8.70 | 6.45% |
| July HO | $3.7730 | $0.0595 | ($0.0638) | -1.66% | $0.2691 | 7.01% |
| Jul RBOB | $3.3875 | $0.0349 | ($0.0751) | -2.17% | $0.2510 | 7.25% |
| July NG | $12.998 | $0.137 | $0.373 | 2.95% | $0.725 | 5.74% |
| Jul 08 Cracks | | | | | | |
| RBOB Crack | $8.825 | ($0.05) | ($0.95) | -9.76% | $2.16 | 22.09% |
| HO Crack | $25.016 | $0.98 | ($1.26) | -4.81% | $2.89 | 11.00% |
| 321 Crack | $14.168 | $0.287 | ($1.06) | -7.97% | $2.401 | 18.09% |
| | | | | | | |
| Euro/$ | 1.5541 | 0.0114 | $0.0191 | 1.24% | $0.0228 | 1.49% |
| Yen/$ | 0.9344 | 0.0038 | $0.0102 | 1.10% | $0.0144 | 1.56% |
As we have been predicting the market remains in a very wide trading range with a short-term bias to the downside. We expect that to continue through today with next week expected to bring a whole new set of conditions. Those conditions will start with the market digesting the outcome of the Saudi meeting this Sunday followed by how the dollar sets up next week along with next Wednesday’s EIA oil snapshot. On top of all of that will be the ongoing noise from politicians on speculator/investor limitations in the energy complex as well as the political debate on how to solve the crisis…drill or not drill, conserve, nationalize the US refinery industry (of all of the ridiculous proposals coming out of Congress) etc.
Stay buckled up as volatility will remain above normal as prices remain in a wide trading range with a downside bias barring any major Geopolitical event.
| Current Expected Trading Range | | | ||
| | 6/20/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:00 AM | Yesterday | | |
| Jul WTI | $133.45 | $1.52 | $140.00 | $99.20 |
| July HO | $3.7730 | $0.0595 | $4.0000 | $2.7100 |
| July RBOB | $3.3917 | $0.0391 | $3.5000 | $2.5200 |
| July NG | $12.998 | $0.137 | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5541 | 0.0114 | 1.6000 | 1.5200 |
| Yen/$ | 0.9344 | 0.0038 | 1.0450 | 0.9000 |
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