The market remains driven by a languishing dollar, possibility of a rate increase in the EU on Thursday( which would further weaken the dollar), concern over the evolving situation between Iran & Israel and ongoing problems in Nigeria. On the other hand the bulls are trying to assimilate and spin the continuing demand destruction data in the US. Yesterday the EIA reported actual demand figures for April showing April was lower than previously estimated, falling by 4.2% to 19.768 million barrels per day from 20.631 million barrels per day. Year on year it is 3.9% lower than in April 2007 and the lowest level for the month in six years. Interestingly the average price of WTI crude oil in April was $112.46/bbl on the Nymex. Currently the price of WTI is about $30/bbl higher than in April or over $142/bbl indicating that further demand reduction can be expected and likely at a great rate of decline than in April.
The battle between the bulls & the bears continues with the bulls consistently winning the battle. In fact as I discussed in yesterday morning’s report the net long position on the Nymex increased last week for the first time in about a month indicating the bulls are not only winning but some of the bears are switching sides. The bears have been punished each time they begin to build a short position as downside corrections remains short and shallow. After ending the day slightly down on Monday prices are already up over $2.40/bbl in overnight trading.
Today the International Energy Agency(IEA) just released their medium term oil market assessment. Despite Slowing Oil Demand, IEA Sees Continued Market Tightness Over the Medium Term. The third issue of the IEA Medium-Term Oil Market Report analyses market developments to 2013. Following are the highlights of the report:
· Record prices in the oil market in recent months have become a threat to the global economy and social welfare of millions of people – some are calling it the third oil shock. While we have seen some weakening in demand in the OECD, supply constraints, refinery limitations and continued demand growth in key emerging markets will maintain pressure in the market over the medium term.
· Market fundamentals were the main underlying factor behind high oil prices. “OPEC production is at record highs and non-OPEC producers are working at full throttle, but stocks show no unusual build. These factors demonstrate that it is mainly fundamentals pushing up the price.
· Supply growth deriving from a concentration of new project start-ups during 2008-2010, allied to weaker economic growth, sees potential spare capacity rise in excess of 4 mbpd. However, this expansion slows from 2011 onwards when global demand growth recovers, leading to a narrowing of spare capacity to minimal levels by 2013. Over 3.5 mbpd of new production will be needed each year just to hold global production steady.
· Although biofuels will add to supply growth, increasing from 1.35 mbpd in 2008 to 1.95 mbpd by 2013, announced capacity additions may be difficult to achieve given available feedstock and growing concerns due to rising food prices. “Biofuels have helped to diversify energy supply. They cannot be blamed for all of the increase in grain prices, even if they have had an impact.
· Global demand for oil products will grow by an average of 1.6% per year to 2013, from 86.9 mbpd in 2008 to 94.1 mbpd. Contrary to supply trends, demand growth will be weakest in the first two years of the period, building as global GDP growth strengthens from 2010 on. Developing countries will drive demand growth, their total consumption equaling that of mature economies by 2015.” Asia, the Middle East and Latin America will account for nearly 90% of demand growth over the five-year forecast period.
· An anticipated 8.8 mbpd of crude distillation capacity will be added to the refinery system by 2013. These additions should cover supply increases over this period and help ease current refinery tightness, which limits the flexibility of the industry to meet the structurally-strong demand growth for middle distillate fuel. A doubling of costs and longer lead times for delivery of key upgrading units have led to greater uncertainty over project plans in the refining sector. New capacity additions are primarily in China, Asia and the Middle East. Additional investment is expected in upgrading capacity and desulphurization units.
Tomorrow we get another snapshot of US oil fundamentals when the EIA releases its weekly report at 10:30 am est. The early indications are calling for a modest decline in crude oil as refinery runs most likely increased a bit, a small draw in gasoline as many wholesalers & retailers get ready for the upcoming 4th of July holiday and another above average build in distillate as demand for diesel both here and in Europe continues to wane. Weekly demand figures will show the trend of declining demand to continue.
Volatility will remain high as we saw yesterday. Liquidity in the market will continue to decline as many participants head to the sidelines for the long upcoming holiday weekend in the US. Most markets will be almost non-existent by early Thursday afternoon. The bias still remains to the upside and as we said yesterday in the short term the market has a decent probability of approaching and hitting the next threshold of $150/bbl. However, it should be of no surprise to see wide swings in the price on a daily basis with both large gains and negative numbers in the same trading session as the market experienced yesterday.
Currently prices are firm as the dollar weakens a bit.
| Current Expected Trading Range | | | ||
| | 7/1/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 6:28 AM | Yesterday | | |
| Aug WTI | $142.48 | $2.48 | $150.00 | $130.00 |
| Aug HO | $3.9824 | $0.0724 | $4.0000 | $2.7100 |
| Aug RBOB | $3.5521 | $0.0530 | $3.7500 | $3.0000 |
| Aug NG | $13.430 | $0.077 | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5739 | 0.0049 | 1.6000 | 1.5200 |
| Yen/$ | 0.9526 | 0.0055 | 1.0450 | 0.9000 |
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