The short term market tone has changed this week as more bearish news hits the market. Yesterday’s rout was a result of a very bearish oil inventory report that shows supply becoming more and more comfortable in the short term. As we have been discussing all week there are many drivers impacting the energy complex at this point in time. Lets elaborate and categorize several of the key drivers.
· Bullish Side
o Surplus crude oil capacity is only about 1.6% of global consumption.
o Many stable producing areas, UK, Mexico, Norway are experiencing a decline in production.
o Russian production may be near a short term peak.
o Unplanned interruptions of oil supply from Nigeria continue to plague the market. Just today Nigerian militants blew up a small ENI pipeline. Unrest continues in Nigeria.
o A strike by Brazilian oil workers is starting to impact production.
o Demand is still growing strongly in many major developing nations around the world with China leading the way.
o Unrest in the Middle East, in particular Iran & Iraq, are contributing to the uncertainly of steady oil flow from the most important producing region in the world.
o Crude oil inventories in the US are at the lowest level since 2003(for this time of the year).
o The US dollar is hovering near all time lows as the US Central bank juggles a faltering economy and commodity driven inflation.
o The hurricane season is just beginning.
o Oil/commodities remain the best investment on the block as just about every other investment vehicle is either negative on the year or at best showing only a very small gain. Oil is still showing a year to date gain of over 40%. Money will remain in oil and additional money flow is likely to continue.
o Market technicals remains cautiously bullish as prices near short term support levels.
o The market psychology/sentiment remains medium/long term bullish.
· Bearish Side
o Additional surplus crude oil capacity is expected to come on stream by 2009 as several Saudi projects near completion.
o Iraq is becoming more stable and oil production from Iraq is slowly beginning to increase slightly.
o The west and Iran sit down this weekend in a new round of negotiations to solve the nuclear issue. Most interestingly is the planed presence of a Senior US diplomat at the negotiations suggesting that the US may be changing its position on Iran.
o Demand in OECD countries including the US is declining. 2008 will be the first time in almost 2 decades that oil demand will be lower than the previous year.
o Several developing nations are beginning to reduce their oil subsidies, but not yet eliminate them. This could result in a slowing of demand growth but not an elimination of it.
o The US economy is faltering. The financial industry is in turmoil. Energy intensive industries are struggling. All of this is likely to translate into an acceleration of the slowing of oil consumption already seen in the US.
o Global equities markets have been under pressure. Normally when equity markets falter it is interpreted as the economy faltering and thus bearish for oil consumption.
o The same situation holds in many of the other OECD countries.
o Refined product inventories (gasoline & distillate) are modestly above average for this time of the year and likely to continue to grow as demand falters and refiners keep run rates near the 90% utilization level.
o The US Central Bank is likely to raise interest rates as its next action which would be bearish for oil. However, it is not likely going to happen until much later this year at the earliest.
o Fed Chairman Bernanke indicated that dollar intervention (buying of US dollars by the Treasury) could be a possibility. If the US were to intervene by buying dollars it would be bearish for oil. For each 1% firming of the dollar we could see as much as a 7% decline in the price of WTI.
I am sure there are a few more drivers that I forgot to add to the above list. It is very easy to categorize all of the main drivers. However, the more difficult task is how they all synergize with each other and how the majority of the market will interpret them. I interpret them as short term biased to the bearish side as the market is very susceptible to a much deeper downside correction. Medium to the longer term I still view the market as biased to the bullish side with the long term uptrend still well in place even if we saw further downside corrections from the current trading level.
Currently prices are lower for oil and the dollar (versus the Euro).
| Current Expected Trading Range | | | ||
| | 7/17/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:20 AM | Yesterday | | |
| Aug WTI | $133.35 | ($1.25) | $150.00 | $130.00 |
| Aug HO | $3.8205 | ($0.0205) | $4.0000 | $2.7100 |
| Aug RBOB | $3.2654 | ($0.0140) | $3.7500 | $3.0000 |
| Aug NG | $11.460 | $0.062 | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5792 | 0.0033 | 1.6000 | 1.5200 |
| Yen/$ | 0.9492 | (0.0069) | 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.
For more info visit our website (www.energyinstitution.org), email EMI at info@energyinstituion.org or call 888-871-1207
Dominick A. Chirichella
Energy Management Institute
tel 646-202-1433
fax 801.383.7510
This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or the taking of any action in reliance on this information is strictly prohibited. If this message has come to you in error, please immediately notify the sender by telephone or return e-mail and delete the original transmission and its attachments without reading or saving in any manner. Thank you.
No comments:
Post a Comment