Tuesday Morning, July 29, 2008
The exiting weak shorts won round one of this week's directional battle as prices ended the session higher on Monday as prices bounced off of the lows made last week. The short covering rally was driven by a new round of problems in Nigeria (which has led to Shell declaring force majeure through September) and a weak dollar. In fact the dollar has steadily been inching lower after peaking three sessions ago, although it is a bit stronger this morning. The gains remain capped on concern over the significant demand destruction to date.
The next main driver for the week will be the snapshot of tomorrow's short term fundamentals. The early expectations are calling for a modest decline in crude oil of about 1.5 million barrels, a small decline in gasoline of 100 to 200,000 barrels and a normal, seasonal build in distillate of about 1.7 million barrels. As we discussed yesterday the inventory report can possibly result in a few surprises as a result of the combination of shut in Gulf crude oil production and shipping delays (resulting from Dolly), a closure of the Houston Ship Channel and about 100 miles of the Mississippi River and finally an a cutback in refinery utilization due to crude oil shipment delays. Again no one issue was significant but combined they could result in larger than expected decline in inventories across the board. We further expect refinery utilization to dip as refinery margins continue to languish, especially on the gasoline side. Demand should remain on the defensive.
The end of the week will likely be impacted (one way or the other) by the Iranian nuclear situation as the two week period comes to an end on Saturday. So far the President of Iran has been relatively calm as the normal war of words remains in the background. In addition the end of the week may see concern over a new tropical weather pattern that is emerging off of the west coast of Africa that could develop according to the National Weather Center. It is far away from the US and still a big unknown as to its further development.
Trading still remains in the ranges shown in the table at the end of the report. We do not expect that to change unless the surprises we discussed result in an impact in tomorrow's EIA inventory report and/or any further Geopolitical problems. The market sentiment remains biased to the bearish side as the spec community's net long position is back to levels not seen since early 2007. In fact the specs are net short WTI with HO & RBOB still showing a spec net long position. As we said yesterday the product position is a bit of a surprise as supply is way more than adequate for this time of the year and the year on year surplus is likely to build further, especially for gasoline if demand restraint remains the order of the day for the American consumer.
We still expect prices to test the lower end of our trading ranges with a possibility of breaking down even further on a combination of the following possibilities:
· Strengthening of the dollar – starting to firm slightly in overnight trading after a few days of losses. Market moving economic data due out late in the week will most likely impact the direction of the dollar.
· A bearish inventory report tomorrow
· Signs that Iran is willing to negotiate seriously to end its nuclear enrichment program
· No further problems in Nigeria
· No short term threat of tropical storms to the US energy infrastructure.
Currently prices are mixed for the energies and firmer for the US dollar.
| Current Expected Trading Range | Expected Trading Range |
| | 7/29/08 | Change | Low | High End |
| | | From | End Support | Resistance |
| | 7:16 AM | Yesterday | | |
| Sep WTI | $124.72 | ($0.01) | $121.00 | $128.00 |
| Aug HO | $3.5627 | $0.0007 | $3.5200 | $3.7000 |
| Aug RBOB | $3.0800 | $0.0100 | $3.0300 | $3.1700 |
| Aug NG | $9.137 | ($0.026) | $9.200 | $10.300 |
| | | | | |
| Euro/$ | 1.5681 | (0.0033) | 1.5550 | 1.5750 |
| Yen/$ | 0.9306 | (0.0023) | 0.9200 | 0.9470 |
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