| 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 | 
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