Geopolitics and supply continue to override everything else. Iranian missile tests, Nigerian unrest and now the possibility of a 5 day strike by the Brazilian offshore oil workers is enough to bring oil to yet another new all time historical high. In fact this morning Nigerian gunman kidnapped two foreign workers. So goes the cease fire and calm that lasted about two weeks. What started out as a week that had some of the makings of a downside correction is ending as a week of more of the same concern over the possibility of a supply disruption and thus higher prices. As we mentioned early in the week the bull market is far from over and once again the early week downside correction was short and shallow.
The market sentiment remains decidedly bullish and anything bearish continues to be discounted while anything bullish is totally embraced. We are back on the march to the next predicted threshold of $150/bbl. At the rate we are moving it is possible we may see this level as early as next week. The money flow into oil and commodities ebbs and flows but over the last year or so it mostly flows into the market. Energy instruments remain the best investment (NG has the highest return year to date) and trading opportunity on the block as shown in the following EMI Investment Scoreboard Table.
| EMI Investment Scoreboard | | | ||
| 2008 Performance to Date | | | ||
| | 7/11/08 | 29-Dec | Change | % Change |
| | 2008 | 2007 | For YTD | YTD |
| | | | | |
| Spot WTI | $145.06 | $95.98 | $49.08 | 51.14% |
| Spot HO | $4.1269 | $2.6494 | $1.4775 | 55.77% |
| Spot RBOB | $3.5752 | $2.4908 | $1.0844 | 43.54% |
| Spot NG | $12.507 | $7.483 | $5.024 | 67.14% |
| | | | | |
| Corn | $681.50 | $456.50 | $225.00 | 49.29% |
| Wheat | $809.50 | $889.75 | ($80.25) | -9.02% |
| Soybeans | $1,620.00 | $1,201.50 | $418.50 | 34.83% |
| Cotton | $70.51 | $71.21 | ($0.70) | -0.98% |
| Cocoa | $2,917 | $2,035 | $882 | 43.34% |
| Live Cattle | 102.05 | 95.03 | 7.02 | 7.39% |
| | | | | |
| Copper | 373.35 | 302.30 | 71.05 | 23.50% |
| Gold | 948.50 | 843.20 | 105.30 | 12.49% |
| Silver | 18.25 | 14.77 | 3.48 | 23.53% |
| | | | | |
| DJI | 11229 | 13264 | (2035) | -15.34% |
| S&P | 1242 | 1494 | (252) | -16.86% |
| Nasdaq | 1828 | 2151 | (323) | -15.03% |
| | | | | |
| Euro/USD | $1.5745 | $1.4590 | $0.1155 | 7.92% |
| Yen/USD | $0.9383 | $0.9013 | $0.0370 | 4.11% |
Energy prices and thus returns year to date are soaring while equities are continuing to languish. Corn is right up there with oil as a noticeable portion of the corn crop is heading into the gasoline market in the form of ethanol. Also impacting the corn situation has been the devastating floods in the mid-west this year which has impacted the corn crop. In fact with the exception of Wheat and Cotton most of the commodities in our table are all showing sizeable returns year to date including the metals.
On the other hand the worse investment of the year remains the equities markets which have now entered a so called “bear market” as the dollar struggles and remains noticeably weaker than at the beginning of the year.
What does all of this mean? Until the market is strongly convinced that the possibility of supply disruptions are behind us and/or the surplus capacity cushion returns back to levels seen early in the decade the market sentiment will remain bullish and corrections will continue to be short and shallow. Yes elasticity of demand is slowly impacting the balances as the developed world changes its consumption habits. However, the vast majority of the growth in energy consumption is now coming from the developing world which due to positive monetary balances in many of those countries they are able to continue to subsidize the price of oil resulting in minimal demand restraint.
Further changing the current dynamics a bit is the dilemma facing the refining sector. Refinery margins continue to underperform led by a very poor gasoline crack spreads as a result of soaring crude oil prices. In the chart of the widely followed 3-2-1 crack spread shown at the end of the email 2008 year to date has continued to underperform versus the last two year. Some refiners are throttling back run rates both in the US and elsewhere. Refinery runs are already running about 4% below the normal 5 year average for this time of the year. With the gap versus normal expected to widen due to poor economics the comfortable inventory cushion for refined products could quickly diminish and thus result in refined products pushing prices even higher. Based on current refinery economics and a few announcement in the media this week we would expect to see next week’s EIA fundamental report to show a decline in refinery runs and possibly a decline in inventories of refined products.
Currently the energy complex is firm as the dollar remains in negative territory.
| Current Expected Trading Range | | | ||
| | 7/11/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:34 AM | Yesterday | | |
| Aug WTI | $145.07 | $3.42 | $150.00 | $130.00 |
| Aug HO | $4.1269 | $0.0895 | $4.0000 | $2.7100 |
| Aug RBOB | $3.5752 | $0.0643 | $3.7500 | $3.0000 |
| Aug NG | $12.525 | $0.225 | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5745 | 0.0017 | 1.6000 | 1.5200 |
| Yen/$ | 0.9383 | 0.0005 | 1.0450 | 0.9000 |
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.
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