Dominick A. Chirichella's Energy Market Analysis

Thursday Morning, July 31, 2008 As we have been suggesting for several days this week's EIA short term fundamental report certainly did have several surprises. Interestingly all of the surprises and the ultimate numbers did not send the same message nor were they the result of any one event. Following are the main highlights and some comments: Crude oil inventories declined only 100,000 bbl versus an expectation for a decline of 1.5 million barrels and possibly more due the passing of Hurricane Dolly and closure of the Houston Ship Channel. A big surprise but in the other direction. A bearish surprise. Gasoline inventories declined by 3.5 million barrels versus an expectation for a build of about 200,000 barrels. This was the surprise of the day and the one that ultimately led to a pretty strong short covering rally in the complex on Wednesday. The surprise seems to have little to do with the passing of Dolly or the closure of the Mississippi River and more to do with poor refinery economics as refiners seemed to have prematurely switched to a max distillate (HO/Diesel) production mode from a max gasoline production mode as production of gasoline declined while distillate production increased. This was a neutral to slightly bullish surprise. Distillate stocks increased more than expected and the year on year surplus is quickly beginning to accumulate. With refiners appearing to be on a max distillate mode of production the year on year surplus is likely to grow even further. Another bearish surprise. Refinery utilization increased slightly versus an expectation for another decline. A bearish surprise.     Oil Inventory   7/31/08     Mil of Bbls           Current Change from Change from Change from   Inv. Last Week Last Year 5 Year           Crude Oil 295.2 (0.1) (49.3) (19.9) Gasoline 213.6 (3.5) 8.9 6.2 Distillate 130.5 2.4 4.0 6.2 Refinery % 87.2% 0.1% -6.4% -6.5% Demand                   Total 20204 301 (696) (588) Gasoline 9468 126 (194) (57) Distillate 4199 122 89 293 Jet Fuel 1424 3 (184) (196) Moving on to the demand side of the equation the report showed across the board gains in demand on the week. We could call this a surprise but it is important to point out that the weekly implied demand numbers reported by the EIA are a bit volatile on a week to week basis and should be viewed more from a longer period of time trending relationship as shown in the chart below. Also in spite of the demand increase on the week gasoline demand is still about 2% below last year for the same week while total oil demand is still about 3.3% below last year's levels. I would not yet interpret this week's demand gains as the US consumer returning back to their old habits. Rather I would say it is just normal week to week data noise as the trend is still lower. Total US oil demand continues to trend lower and is likely to do so as long as prices remain well above the $100 to $110/bbl mark. Where do we go from here? The oil report served as a catalyst for the the weak shorts to once again jump out of the market on fear that they will lose the battle. I think this time they jumped prematurely as the overall inventory report is not all that bearish. In a nutshell the year on year deficit of crude oil narrowed, while the year on year and 5 year surplus of both gasoline and distillate indicate a more than adequate upcoming supply situation. In fact Colonial pipeline is allocating space for shipping distillate from the Gulf Coast to the East Coast due to more barrels nominated to ship versus available space.  This is bearish. Overall we still rate the short term fundamental situation as bearish. The US dollar is still firmer on the week even after losing some ground in yesterday's trading. Today and tomorrow the market will get some potentially market moving economic news (GDP, employment numbers) that could have an impact on the direction of the dollar. The dollar is currently trading around key resistance areas (vs. Euro) that if breached could put strong downside pressure on oil. The economic reports will be the catalyst in determining where the dollar heads for the rest of the week. The normal Geopolitical suspects (Nigeria & Iran) have been quiet most of this week and that is bearish. However on Saturday the most recent edict by the West to Iran to stop their nuclear enrichment program comes to an end. The remedy is supposed to be further sanctions. So far both sides have been very quiet indicating that this event could pass with little or no impact on the oil complex in the short term. The tropical storm front seems to be clear of any threats in the short term. There is a tropical pattern off of the West Coast of Africa that the NWS believes has a low probability of strengthening into anything significant in the near term. Weather is neutral to bearish for energy. Overall we do not believe anything significant has structurally changed with the release of the EIA report. Based on all of the above discussed market movers we still view the market as biased to the downside. The complex is still trading within our predicted trading ranges and has been since the second half of last week. We do believe we will remain within the trading ranges (shown in the following table) for the rest of this week and possibly into the first half of next week. Today is expiration day for the August Nymex RBOB, HO & Propane contracts. Also NG inventories are due out this morning. The expectations are calling for an injection of about 70 BCF. NG inventories are clearly in a pattern to reach very normal levels prior to the start of the upcoming winter heating season. Currently oil & ng are lower while the dollar is slightly weaker. Current Expected Trading Range Expected Trading Range   7/31/08 Change Low High End     From End Support Resistance   7:41 AM Yesterday     Sep WTI $126.02 ($0.75) $121.00 $128.00 Aug HO $3.5030 ($0.0173) $3.5200 $3.7000 Aug RBOB $3.1004 ($0.0347) $3.0300 $3.1700 Sep NG $9.196 ($0.052) $9.000 $10.300           Euro/$ 1.5577 0.0044 1.5550 1.5750 Yen/$ 0.9263 (0.0009) 0.9200 0.9470 Best regards, Dominick A. Chirichella Energy Management Institute    The Energy Management Institute operates a fleet of daily, weekly and biweekly energy publications covering various angles of the energy market, including over a decade of natural gas and power price indexing. In addition, EMI provides higher learning for energy professionals with comprehensive, fully accredited, energy education programs from basic to advanced level. It also provides critical business information services and thought leadership in the energy segments of Oil,  Gas, Power, Alternative Fuels, soft commodities and metals. For more info visit our website (www.energyinstitution.org), email EMI at info@energyinstituion.org or call 888-871-1207 To unsubscribe to this report please respond to this email with the word remove in the subject line. Dominick A. Chirichella Energy Management Institute 1324 Lexington Ave #322 New York, NY 10128 tel 646-202-1433 fax 801.383.7510 dchirichella@mailaec.com www.energyinstitution.org   This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or the taking of any action in reliance on this information is strictly prohibited. If this message has come to you in error, please immediately notify the sender by telephone or return e-mail and delete the original transmission and its attachments without reading or saving in any manner. Thank you.           1324 Lexington Ave #322, , New York, New York, 10128, USA t: 646-202-1433 | f: 801-383-7510 e: dchirichella@emimail.org | w: http://www.energyinstitution.org/

 

Dominick A. Chirichella's Energy Market Comments

Wednesday Morning  July 30,2008 So far this week the market has been trading in our predicted ranges as all await the first big oil event of the week…inventories. The market has been relatively absent of any major market moving news so far this week and as such this morning's EIA oil inventory report will be the first potential major market mover of the week. Prices have been trading lower all week and are now at the lower end of our predicted trading ranges.  More on this in a moment. First let's look at the projections for this morning's short term oil fundamental report. Today's predictions are a bit unstable as we could see some surprises or deviations from the projected numbers due to Hurricane Dolly which marched through the Gulf of Mexico last week. As we have discussed in this report nothing major occurred but there were production losses and refinery slowdowns that combined could impact this week's inventory numbers.  Some of that thinking may have already been factored into this week's projections. As shown in the following table the consensus is projecting a decline in crude oil stocks, a small build in gasoline (atypical for this time of the year) and a normal seasonal build in distillate stocks. Refinery runs likely declined slightly as a result of the hurricane and declining refinery economics.   Projections   7/30/08             Current Change from Change from   Projections Last Year 5 Year mmbls   vs. Proj. vs. Proj. Crude Oil (1.6) (50.8) (21.4) Gasoline 0.2 12.6 9.9 Distillate 1.9 3.6 3.9 Ref. Runs% -0.2% -6.7% -6.8% Change Level 86.9% 93.6% 93.7%                  Even with refinery runs at strongly lower levels than last year at this time as well as the 5 year average gasoline inventories are projected to show a year on year surplus of over 12 million barrels with a surplus of almost 10 million barrels when compared to the 5 year average. Distillate stocks are comfortably building and are expected to show a year on year surplus of 3.6 million barrels with the surplus versus the 5 year average projected to be approaching 4 million barrels. With refinery runs consistently operating at well below normal rates for this time of the year (and projected to continue) the refined product surplus is indicative of a waning demand pattern in the US due to the high product price environment.   Demand for oil and petroleum products dropped 4.3% in May from a year earlier to 19.7 million barrels a day, according to Energy Department data released on July 28. The decline is 889,000 barrels a day less for the first five months of the year, compared with the same period a year earlier. U.S. motorists drove less for a seventh consecutive month in May, as vehicle-miles traveled on all U.S. roads fell 3.7% during the month from a year earlier according to the Federal Highway Administration in a July 28th report. The seven-month slide is the longest downward streak since 1979.   On the other hand crude oil stocks continue to show an above average deficit versus both the year on year and the 5 year comparison. However, with product demand on the defensive we do not see this as being an issue for the marketplace at this point in time. Overall we view the expected inventory report as biased to the bearish side. Again we raise the caution flag as the actual numbers today could be skewed as a result of the passing of Hurricane Dolly last week in the Gulf of Mexico.   The myriad of normal energy price drivers continue to evolve. On one hand there are reports that Nigeria can't meet its OPEC quota and is now producing less than 1 million barrels per day due to militant attacks. On the other hand Iraq's daily oil production is at the highest level since the US invasion in March of 2003 as a result of the improved security from the so called "surge". In addition we have seen or heard little from the feisty Iranian President as we quickly approach the 2 week deadline (Saturday) given to Iran by the West over their nuclear program. Overall the sentiment in the market remains biased to the bearish side as the first significant correction in a long time continues to evolve.   As shown below after peaking on July 11th the Nymex has been in a pretty consistent downtrend. So far the downside correction is approaching 16% for WTI and evolving.  So far the full declines have not reached the consumer as the national average US retail gasoline (regular grade) price over the same time frame is only down about $0.1880/gal or about 4.5% as compared to a $0.6400/gal decline in the RBOB gasoline price on the Nymex (which is a wholesale price). If we do not get another surge  in prices from the financial side we could expect to see the National Average retail gasoline price fall back into the low to mid $3's a gallon. This raises the question as to what then happens to demand? Does the US consumer forget and go back to normal driving habits or is any of the demand restraint achieved so far structural?  Too early to tell but something we will be watching closely over the next several months.         Correction or New Trend? Decline Since Peak on 7/11/08   Change Change   From From   Peak, 7/11/08 Peak, 7/11/08   $/bbl % WTI ($23.00) -15.85% HO ($0.6836) -16.44% RBOB ($0.6248) -17.21%    Today's market will be all about the EIA inventory report to be released at 10:35 am EST. Beyond that we have a plethora of potentially market moving economic data due out on Thursday & Friday which is likely to impact the financial markets including the direction of the dollar. Of note the US dollar (versus the Euro) has strengthened by about 2.7% since bottoming out in mid-July. The relationship of the strengthening dollar versus weakening oil prices remains well in place. Over the same approximate time frame WTI has weakened by 16.2% (above table). We expect this trend/relationship to continue.   Currently energy prices are mixed with the dollar trading either side of unchanged.   Current Expected Trading Range Expected Trading Range   7/30/08 Change Low High End     From End Support Resistance   7:58 AM Yesterday     Sep WTI $122.01 ($0.18) $121.00 $128.00 Aug HO $3.4750 $0.0028 $3.5200 $3.7000 Aug RBOB $3.0062 ($0.0015) $3.0300 $3.1700 Sep NG $9.028 ($0.102) $9.000 $10.300           Euro/$ 1.5554 0.0007 1.5550 1.5750 Yen/$ 0.9295 0.0019 0.9200 0.9470   Best regards, Dominick A. Chirichella Energy Management Institute       The Energy Management Institute operates a fleet of daily, weekly and biweekly energy publications covering various angles of the energy market, including over a decade of natural gas and power price indexing. In addition, EMI provides higher learning for energy professionals with comprehensive, fully accredited, energy education programs from basic to advanced level. It also provides critical business information services and thought leadership in the energy segments of Oil,  Gas, Power, Alternative Fuels, soft commodities and metals. For more info visit our website (www.energyinstitution.org), email EMI at info@energyinstituion.org or call 888-871-1207   Dominick A. Chirichella Energy Management Institute 1324 Lexington Ave #322 New York, NY 10128 tel 646-202-1433 fax 801.383.7510 dchirichella@mailaec.com www.energyinstitution.org   To unsubscribe to this report please respond to this email with the word remove in the subject line. This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or the taking of any action in reliance on this information is strictly prohibited. If this message has come to you in error, please immediately notify the sender by telephone or return e-mail and delete the original transmission and its attachments without reading or saving in any manner. Thank you.       1324 Lexington Avenue #322 New York New York, 10128 USA t: 646-202-1433 | f: 801-383-7510 e: dchirichella@emimail.org | w: www.energyinstitution.org