Wednesday followed in the short term trading pattern that we suggested with the market would moving showing both gains and declines in the same trading session. There were several issues facing the market on Wednesday starting with the firing of 9 missiles by Iran as part of their war games along with a mixed inventory report that in my view was neutral at best but mostly bearish and finally a declining dollar helping to minimize any major selling in the complex. After all of that the market ended the day about unchanged for crude oil and with small gains for refined products. So far this morning prices are firm as the Iranians continue to make noise firing some additional test missiles prompting the Israelis to revel their new spy plane that is focused on Iran. The battle of words and bluster continues even as the Iranians and the West still plan to have further discussions in the next several weeks over the incentives presented by the West to Iran in return for stopping their nuclear enrichment program. As I have been saying for months this situation will continue for a long time into the future and I still do not believe any military action will occur anytime soon and thus there will be no interruption in Iranian oil flow.
A quick walk around yesterday’s fundamental report released by the EIA is summarized in the following table. Crude oil is still showing a significant deficit versus last year and the 5 year average for the same time frame. The big surprise decline this week in crude oil is mostly attributable to a decline in PADD 5 (West Coast) which happens from time to time but is not as significant as a big decline in the US Gulf Coast (heavy refining center). On the refined product side we had an above average build in both gasoline and distillate stocks. Both of these product groups are now showing a year on year surplus and above normal levels versus the 5 year average.
Refined product inventories are building even as refinery runs remain below both last year’s level and the more normal level as measured by the 5 year average. The primary reason is demand is declining across the board. Total demand in the US is down by about 750,000 barrels per day or 3.6% versus last year with gasoline leading the way lower showing a year on year decline of about 3.3%. High prices are getting the attention of the consumer as the consumption trend in the US (and in other developed nations in OECD countries) continues in a declining trend. We expect this trend to continue.
Based on the building of refined product and the ongoing demand reduction we view the report as neutral to mostly bearish.
| Oil Inventory | | 7/10/08 | | |
| Mil of Bbls | | | | |
| | Current | Change from | Change from | Change from |
| | Inv. | Last Week | Last Year | 5 Year |
| | | | | |
| Crude Oil | 293.9 | (5.8) | (58.6) | (24.9) |
| Gasoline | 211.8 | 0.9 | 6.2 | 3.3 |
| Distillate | 122.5 | 1.8 | 0.1 | 1.7 |
| Refinery % | 89.2% | 0.0% | -1.0% | -4.1% |
| Demand | | | | |
| | | | | |
| Total | 20320 | (270) | (749) | (37) |
| Gasoline | 9347 | (10) | (316) | (58) |
| Distillate | 4272 | (15) | 236 | 294 |
| Jet Fuel | 1634 | (70) | (38) | (13) |
This morning the International Energy Agency (IEA) released their monthly oil report. Following are the highlights of their report. Nothing real earth shattering as this month’s report is consistent with the last few months… OECD inventories still on the low side, demand still growing in the developing world while overall surplus capacity should increase by the end of 2008.
· Crude oil futures fell back from their early-July $145/bbl peak, but remain high, supported by a meager 2Q08 stock build, tight distillate markets and ongoing geopolitical risks. Refiners are paying record premiums for distillate-rich crudes in an effort to bolster yields; however, weak gasoline and fuel oil cracks are keeping refining margins low.
· Non-OPEC supply is seen rising 640 kb/d to 50.6 mb/d in 2009, following a late-year increase in 2008, with Asia, the Caspian, Brazil, Canada and the US adding to supplies. In addition, NGLs from Saudi Arabia, Qatar, the UAE, Nigeria and Iran underpin the 810 kb/d expansion in OPEC gas liquids in 2009.
· OPEC crude supply increased by 350 kb/d in June to 32.4 mb/d, as Saudi Arabian supply rose to 9.45 mb/d and exports from floating storage lifted Iranian supply to 3.8 mb/d. Although higher supply lowers effective OPEC spare capacity to 1.7 mb/d, increases from Saudi Arabia, Angola, Iraq and Nigeria lift overall capacity by around 1.0 mb/d by end-2008.
· Global oil product demand is expected to grow by 1.1% or 860 kb/d to 87.7 mb/d in 2009, on a par with 890 kb/d growth in 2008. High oil prices contribute to a contraction in OECD oil product demand, offset by robust growth in developing economies. Strong non-OECD consumption also offsets downward revisions elsewhere, lifting 2008 demand by a modest 80 kb/d.
· A counter-seasonal US crude stock draw restricted the May OECD total oil stock build to 23.9 mb, only half its usual gain. Preliminary June data suggest a total 2Q08 OECD stock change of around +100 kb/d, well below the five-year average 2Q build of 900 kb/d.
· 3Q08 global refinery throughput is revised down by 0.4 mb/d to 75.3 mb/d on weak OECD demand and poor margins. The addition of 2 mb/d of crude distillation capacity and significant investment in upgrading units elsewhere should keep gasoline markets well supplied and slightly ease middle distillate tightness during early 2009
On top of all of the above the Nigerian militant group MEND (Movement for the Emancipation of the Niger Delta) told the AP they were stopping their 2 week old cease fire as of Saturday night as a result of UK Prime Minister Brown’s comments at G-8 in Japan to support the Nigerian Government in its efforts to end violence in the Delta. Once again we will need to watch this situation closely as Nigeria is still only producing about 75% of its capability since early 2006 due to disruptive action by MEND. Further interruption in Nigerian crude oil flow will only exacerbate prices even further. This new announcement by MEND will likely put a floor on prices for the moment.
Lots of drivers floating around in the market including the dollar once again firming versus most major currencies this morning. Short term US fundamentals are a bit bearish, Geopolitics are a bit bullish (Iran & Nigeria), the IEA report is neutral to mildly bullish for the medium term and the firming dollar is bearish for oil in the short term. The net result should be a market continuing to trade in the pattern we predicted would start yesterday (which it did) …both price gains and losses within the same trading session. A difficult pattern to trade and one we believe will be with us at least for the rest of the week and possibly into next week.
Currently prices are firm for oil as well as the dollar as Iran & Nigeria seem to be trumping everything else for the moment.
| Current Expected Trading Range | | | ||
| | 7/10/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:41 AM | Yesterday | | |
| Aug WTI | $136.69 | $0.64 | $150.00 | $130.00 |
| Aug HO | $3.8750 | $0.0234 | $4.0000 | $2.7100 |
| Aug RBOB | $3.3870 | $0.0062 | $3.7500 | $3.0000 |
| Aug NG | $12.100 | $0.094 | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5641 | (0.0048) | 1.6000 | 1.5200 |
| Yen/$ | 0.9349 | (0.0048) | 1.0450 | 0.9000 |
Dominick A. Chirichella
Energy Management Institute
tel 646-202-1433
fax 801.383.7510
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