This week is the second down week in a row and the single largest down move on a weekly basis in the history of oil (as measured by WTI). As we have been indicating all week the short term bias in the market this week has been down as oil has now breached some of its key short term support levels that could suggest even further declines.
In addition to all of the drivers we discussed in yesterday’s email we now have to add one more important one that the market is focusing on…weather. The National Hurricane Center is closely watching three weather patterns in and around the Caribbean area that could potentially turn into tropical formations. A formation off of the northern coast of South America has a medium potential for further development as does a formation off of the northeastern coast of Florida. A third disturbance around Nicaragua & Honduras has a low potential. The bulls and/or the nervous shorts are concerned about this forecast and have bid the price of oil up over $1/bbl so far this morning. I think this is an overreaction from the market and one that is not likely sustainable as a sole source of pushing prices very high. As today’s trading session evolves I believe this issue will be less of a factor in the market.
The market has put in the three largest down days in a row in the history of oil as well as the single largest down week in history. This morning’s buying activity is more likely driven by a modest level of short covering ahead of the weekend as the shorts still remain very cautious after having been hurt many times during the strong oil uptrend that has been in place most of this decade. On the week oil is down over $14/bbl so far and is now trading around key support levels after breaching those levels yesterday. Crude oil is leading the oil complex lower so far with gasoline closely behind. Not only has it been a historic week based on the huge price decline but volatility has also been extremely high basis the very wide trading ranges shown in the table below. The refinery sector continues to struggle with the gasoline crack once again negative on the week as the HO crack gained modestly helping to keep the widely watched 3-2-1 crack slightly positive on the week. The fundamentals of oil in the short term indicate that there is basically no likelihood of a supply shortage of refined products anytime soon. Oil is currently well supplied, especially gasoline.
Natural gas actually put in the largest percentage decline on the week after yet another bearish inventory report that saw stocks of NG surge much higher than the expectations. NG is very close to breaching its key support level and if breached could propel NG prices back down into the low $9’s per mmbtu. If so it would be the first time NG trades in single digits since mid-March of this year. As with oil NG is short term biased to the bearish side.
| | | Trading For the Week | | | ||
| | | | | | | |
| | Current | Change | Change | % Change | Weekly | Range % of |
| | Price | From | for | For | Range | Fri Close |
| | 7:24 AM | Thurs | Week | Week | | |
| Aug WTI | $130.71 | $1.42 | ($14.37) | -9.90% | $17.73 | 12.22% |
| Aug HO | $3.7714 | $0.0276 | ($0.3052) | -7.49% | $0.3880 | 9.52% |
| Aug RBOB | $3.2175 | $0.0542 | ($0.3457) | -9.70% | $0.4380 | 12.29% |
| Aug NG | $10.603 | $0.066 | ($1.301) | -10.93% | $1.666 | 14.00% |
| Aug 08 Cracks | | | | | | |
| RBOB Crack | $4.425 | $0.86 | ($0.15) | -3.26% | $1.71 | 37.32% |
| HO Crack | $27.689 | ($0.26) | $1.55 | 5.94% | $2.58 | 9.87% |
| 321 Crack | $12.102 | $0.488 | $0.41 | 3.11% | $1.995 | 15.03% |
| | | | | | | |
| Euro/$ | 1.5796 | 0.0026 | ($0.0040) | -0.25% | $0.0253 | 1.60% |
| Yen/$ | 0.9409 | 0.0006 | ($0.0009) | -0.10% | $0.0305 | 3.24% |
Has the current energy rally run its course or is this just another short term breather in a market that is destined to trade at much higher levels during the second half of the year? A tough question to answer but here goes. I think the current sell-off that we have seen has been different that many of the previous sell-offs from the perspective of the magnitude of the sell-off in a relatively short timeframe and the current lack of new bullish drivers to suppress the selling. Even this morning’s market concern over potential storms in the Caribbean is a weak driver at best (see above comments).
Barring a complete flop in this weekend’s Iran/Western world meeting over Iran’s nuclear program and a quick return to rhetoric and war games I believe the market is now more likely to head back into the trading range of $120 to $128/bbl for spot Nymex WTI. The last time the market traded in this range was during most of May, 2008. I believe the market will consolidate in this trading range for a period of time while it digests and re-evaluates all of the main drivers discussed in yesterday’s email…Geopolitics, supply/demand, direction of the US dollar, direction of global equities, etc. As we have said we see the combination of all of these drivers as being biased to the bearish side in the short term but still modestly bullish in the medium and longer term.
Nest week should be another volatile week with a greater likelihood of prices moving into the aforementioned lower trading range. Currently prices are firm for energy and slightly weaker for the dollar.
| Current Expected Trading Range | | | ||
| | 7/18/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:24 AM | Yesterday | | |
| Aug WTI | $130.67 | $1.38 | $150.00 | $130.00 |
| Aug HO | $3.7714 | $0.0276 | $4.0000 | $2.7100 |
| Aug RBOB | $3.2175 | $0.0542 | $3.7500 | $3.0000 |
| Aug NG | $10.603 | $0.066 | $12.000 | $10.000 |
| | | | | |
| Euro/$ | 1.5796 | 0.0026 | 1.6000 | 1.5200 |
| Yen/$ | 0.9409 | 0.0006 | 1.0450 | 0.9000 |
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