As we have been discussing all week the market is on the defensive on a stronger dollar and signs that oil demand is starting to be impacted by a combination of high prices and a mediocre economy. Yesterday’s inventory report confirmed most of the predictions showing oil demand lower across the board versus the same time last year. The trend in demand in the US is clearly toward the downside(refer to yesterday’s report). This is resulting in above normal builds in refined products. This pattern is likely occurring in other locations around the world and will begin to be reflected in the monthly oil reports issued by both the IEA and the EIA next week. Furthermore many developing countries that have been subsidizing oil prices are beginning to raise the caps on prices. Both India and Indonesia announced increases yesterday. As caps are raised demand will be impacted.
In overnight trading we have seen a bit of short covering after yesterday’s strong push to the downside. However, the market sentiment has clearly changed and is now neutral at best and quickly moving into a bearish view. Everything we have seen over the last two weeks indicate that lower prices are more probable going forward rather than another short term surge. Even with the move lower the price of oil still remains in overvalued territory and is susceptible to additional declines to the downside. In fact prices are approaching the medium term uptrend support levels and if breached we could eventually see WTI testing the $100/bbl level with both HO & RBOB trading below $3/gal on the Nymex.
For the longer term the market still remains tightly balanced and the entire risk premium that has been built into the complex will not go away completely. As such we view the market as being in the beginning of a steep downside correction but one that will not violate the long term uptrend. The so called oil shock of 07/08 is not ending and we do expect significantly higher prices emerging either late this year or during the first half of next year. For the moment we see most of the weak longs heading to the exits with less motivation for new longs coming into the market just yet. It is not clear if the investment public that have been investing in energy related index funds are ready to hit the exits. For that to happen we will more than likely need to see a very strong performance in the dollar for an extended period of time. When it occurs the economic benefits for being invested in oil will quickly become yesterday’s news. That time has not occurred yet and in the short term we still do not see a major motivation for these type of investors to pick up and leave the market. The returns for being in oil still beat most any other investment.
We expect trading in the next day or so to be erratic with bouts of short covering and renewed selling. We do expect prices to remain under pressure with lower prices on the near term horizon. For interest the performance of retail gasoline this season is poised to perform much like it does the vast majority of the time…prices peaking in late May/June and moving lower for the rest of the summer. Odds now favor that pattern.
Currently prices are higher for oils on short covering even though the dollar continues to strengthen in overnight trading.
| Current Expected Trading Range | | | ||
| | 6/5/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 6:56 AM | Yesterday | | |
| Jul WTI | $122.39 | $0.09 | $135.00 | $99.20 |
| July HO | $3.5735 | $0.0277 | $4.0000 | $2.7100 |
| July RBOB | $3.2027 | $0.0076 | $3.5000 | $2.5200 |
| July NG | $12.460 | $0.081 | $12.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5382 | (0.0051) | 1.6000 | 1.5200 |
| Yen/$ | 0.9428 | (0.0097) | 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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