After putting in a down week the market is picking up where it left off…in negative territory. All of the factors remain the same as the market sentiment seems to be slowly switching to being more biased to the downside.
· Fundamentals – Neutral to bearish
o Supply & demand remain in a comfortable balance in the near and medium term. With the market now in the so called gasoline driving season we find gasoline inventories still over 5 million barrels above last year at this time while demand for gasoline seems to be on the defensive. Interestingly we saw not only heating oil in a building pattern but also diesel fuel has now started to build. With refinery economics now very positive which will result in a continuing increase in refinery utilization we expect refined products inventories to continue to build, especially distillate (both heating oil & diesel).
· Geopolitics – Neutral
o All of the usual suspects remain in the media with Nigeria the only location that has actually resulted in a reduction in supply. The situation in Nigeria remains precarious and further impacts to supply can come at any time. Most interestingly none of the supply disruptions from Nigeria have yet to result in shortages of oil in any consuming location. Iraq seems to be improving on the security and political fronts. Production is expected to increase by 125,000 bpd in Iraq in June. In the medium term Iraq is in negotiations with International Oil Companies to begin the process of restoring and maximizing the utilization of their robust oil sector.
· Currency – Neutral to firming
o The US dollar remains in a bottoming pattern versus most major international currencies. In fact we saw the dollar put in as solid week of gains last week with many signs suggesting that further firming is more probably than another round of selling. Technically the dollar is near critical upside break-out levels versus the Euro & the Yen. We may test these levels this week. If breached it could be indicative of further dollar firming over eh next few weeks and thus further downside pressure on the oil & commodity complex.
· Weather – Neutral
o With the Hurricane season now officially underway the first storm of the season hit Mexico & Belize causing very temporary shut-downs of some Mexican oil production. The storm has dissipated and the resulting impact on oil flow is negligible. For the moment noting else is on the horizon in the short term.
· Technical’s - In transition
o Technically the long term uptrend remains solidly in place. However, the shorter term technicals are now suggesting a transition from a very strong uptrend to a minimum of a downside correction. On a crude oil basis we are now within about $3 to $4/bbl of major upside support. If breached it could be a signal that prices will be on the defensive (possibly all the way to $100/bbl) and at least for this cycle we may have made the highs for everything energy.
All of the above is suggesting a transition from a very strong market sentiment o one that at best is now cautiously neutral with one eye toward the downside. Last week’s quick discounting of what appeared to be a bullish inventory report was a clear, early warning sign that the short –term sentiment is changing. The probability of further selling in the complex is increasing with the likelihood of prices testing major upside support levels (possibly as early as this week) is also increasing.
Volatility will remain high this week and if this week’s snapshot of inventories are even remotely bearish (crude stocks recovering and demand down) we may see another price sell-off toward the second half of the week. In addition with the dollar looking a bit firmer we expect this very important driver to impact oil prices once again this week. This time to the downside for oil.
Currently prices are on the defensive for oil and mixed for the dollar.
| Current Expected Trading Range | | | ||
| | 6/2/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:02 AM | Yesterday | | |
| Jul WTI | $125.97 | ($1.38) | $135.00 | $99.20 |
| July HO | $3.6200 | ($0.0467) | $4.0000 | $2.7100 |
| July RBOB | $3.3235 | ($0.0247) | $3.5000 | $2.5200 |
| July NG | $11.696 | ($0.007) | $12.000 | $8.700 |
| | | | | |
| Euro/$ | 1.553 | (0.0016) | 1.6000 | 1.5200 |
| Yen/$ | 0.9543 | 0.0052 | 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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