The market is starting off the week with a bit of short covering on news of the Nigerian militant group claiming responsibility for two pipeline attacks belonging to Shell. In addition there were kidnappings of oil workers in Nigeria last week and later released. The Nigerian situation is once again a reminder of the Geopolitical risk that remains in the market place. On the other hand the market remains focused on the decline in demand and how that will play out over the next few months now that prices have receded off of the historical highs made in early July. Even with today’s short covering gains WTI on the Nymex is down a little over $20/bbl from two weeks ago.
The non-commercial or speculative community continues to reduce their net long exposure as the total net long position shown in the chart of the latest CFTC weekly Commitment of Traders Report is now at the lowest level since early Feb, 2007. In fact the Nymex WTI contract is now showing the spec community has now switched to a modest net short position. HO & RBOB are still showing the spec community to be net long. RBOB has the largest spec net long position in the energy group. This is very interesting since RBOB gasoline is showing the largest year on year inventory surplus (almost 13 million barrels) and we are more than half way through the US gasoline driving season. We would expect to see more shedding of net spec longs in gasoline over the next week or so especially if prices continue to fall further (which they should).The market sentiment is changing and is now solidly biased to the downside.
Further supporting prices so far today is renewed weakening of the US dollar. The dollar has made decent gains over the last two week and as we have experienced short covering in the energy complex this morning we are seeing a bit of profit taking selling in the US dollar to start the week. There will be several market moving economic data released this week (GDP, employment numbers) that are sure to impact the direction of the dollar and ultimately oil.
Overall we still believe the market has further downside as the correction is not over. However we do expect this to be a very volatile week with both gains & declines possibly from day to day and maybe even within the same trading session. Trading will be impacted by several items this week many of which may conflict with each other. This is what we will be watching on the week:
· The front end of the week will likely be driven by the ongoing problems in Nigeria and the direction of the dollar coupled by the expectations for this week’s inventories.
· The dollar will be impacted by GDP numbers on Thursday and employment data on Friday.
· We are not sure where the market consensus is going to come in on inventory projections but we think this week’s report could hold some surprises. Hurricane Dolly did not make landfall anywhere near the heart of the oil & NG industry in the Gulf but it did have an impact. A modest percentage of oil and NG was lost in the US Gulf as a result of safety evacuations. Some refinery capacity was throttled back as some refiners had delays in crude oil shipments. There were also weather problems in the Houston Ship channel and a closure of about 100 miles of the Mississippi River. None of the above were major events unto themselves but all put together we may see another large decline in crude oil inventories as well as distillate and gasoline declines due to refinery cutbacks. The report could prove to be a short term floor on prices for the week.
· Will the EIA report show another decline in demand? The market will be watching the demand figures released by the EIA and other reports now that the retail price of gasoline has dropped a bit below the $4/gallon mark. Gasoline prices on Nymex (wholesale price) are down about $0.55/gallon since hitting a high on July 11th. As lower prices slowly work their way into the retail sector it will be very interesting to observe the buying habits of the US consumer.
· Finally Iran is likely to have an impact later in the week as the two week ultimatum given to Iran at the last meeting expires on Saturday. Based on comments coming from the Iranian President it does not seem likely that anything is going to change from Iran’s part. At a minimum it is likely to result in a renewed war of words during the second half of the week.
Overall we view the market sentiment as still biased to the downside. Prices are solidly in our predicted trading ranges and we expect them to trade within the ranges shown in the table at the end of the report at least for the first half of the week and possibly beyond. We will be watching the $120/bbl level for WTI.
Currently prices are firm for the energies and weaker for the dollar.
| Current Expected Trading Range | Expected Trading Range | |||
| | 7/28/08 | Change | Low | High End |
| | | From | End Support | Resistance |
| | 7:20 AM | Yesterday | | |
| Sep WTI | $124.96 | $1.70 | $121.00 | $128.00 |
| Aug HO | $3.5803 | $0.0574 | $3.5200 | $3.7000 |
| Aug RBOB | $3.0766 | $0.0443 | $3.0300 | $3.1700 |
| Aug NG | $9.234 | $0.150 | $9.200 | $10.300 |
| | | | | |
| Euro/$ | 1.5721 | 0.0068 | 1.5550 | 1.5750 |
| Yen/$ | 0.9316 | 0.0023 | 0.9200 | 0.9470 |
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