The modest selling that started yesterday morning is continuing more on the lack of any news rather than on any particular item. The Iranian nuclear situation is still evolving with mixed signals coming out of Iran. The Iranian President is still talking tough indicating that Iran has no plans to stop their nuclear enrichment program while one of the chief negotiators has indicated Iran would be interested in further discussions with the West. One thing for certain this issue will be around well into the future. It is not going away anytime soon, however I do not believe it will lead to military action by the US or Israel anytime soon either. All quiet for the moment also on Nigeria.
On the supply side Mexico cut supplies to several refiners in the US Gulf as the output from its Cantarell field continues to decline. It was down 34% in May as compared to May, 2007. Also UK oil production is expected to decline about 100 to 200,000 bpd this year versus 2007. Overall the supply/demand situation is not improving significantly and not likely to do so in the short term.
On the financial side the dollar is once again off to a firm start for the day much as it did yesterday. Unfortunately the dollar was unable to hold its early gains on Monday and succumbed to selling pressure by the end of the trading day. As we have been discussing in detail a consistently firming dollar will go a long way in setting the stage for a significant decline in the price of oil. As presented in yesterday morning’s report for each 1% firming of the dollar we can expect to see about a 6 to 7% reduction in the price of WTI crude oil (basis Nymex). Further capping oil this morning is the ongoing sell-off in equity markets around the world as many developed economies are still languishing as they try to recover from the sub-prime meltdown. Weak equities/economies also put pressure on oil prices.
Tomorrow we get another snapshot of oil fundamentals when the EIA releases its latest report. The early expectations are calling for a decline of about 1.5 million barrels of crude oil, a build of about 200,000 barrels of gasoline and a build of about 1.8 million barrels of distillate. Refinery runs are likely to remain about the same as last week as refinery margins continue to tumble especially the gasoline crack. Distillate is building at a greater rate than the normal seasonal average and all signs indicate that the industry will easily reach its normal pre-winter levels. Gasoline is languishing with the year on year surplus holding steady as elasticity of demand takes hold as many American are reducing consumption. The AAA said driving was down over the long 4th of July holiday weekend for the first time in over 7 years. We expect to see a continuation of the trend of declining demand in the US to continue. Demand reduction is an extremely important part of the solution in bringing the supply & demand balance back to more comfortable conditions and ultimately capping out the price of oil. We view the EIA report expectations as neutral to bearish.
The downside correction which started yesterday could gain a bit of momentum and ultimately head back to a retest of the levels the market was at just about 10 trading days ago…the low $130’s. Barring any major bullish developments in the EIA report, Geopolitics and/or a major sell-off of the dollar this could be the week of selling and a semi-significant retracement in prices could occur. I do want to emphasize any selling is still likely to only result in a retracement within a solid long term uptrend and even if prices come back down to the low $130’s the uptrend will still be solidly in place and still very attractive to the investment community as buying dips has been a very profitable strategy over the last year or so.
For the spec community the short term trade of the week is very cautious selling with very tight stops as oil bears who have taken their eye off the prize have been punished time and time again this year. For the more conservative investor/trader the market may be setting up for another solid buying opportunity if we do retest and hold at the low $130 level. Buy side hedgers should continue to use option strategies to benefit from any downside correction while keeping their time horizon relatively short.
Currently energy is lower while the dollar is slightly firmer versus the Euro.
| Current Expected Trading Range | | | ||
| | 7/8/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:32 AM | Yesterday | | |
| Aug WTI | $139.16 | ($2.21) | $150.00 | $130.00 |
| Aug HO | $3.9111 | ($0.0585) | $4.0000 | $2.7100 |
| Aug RBOB | $3.4300 | ($0.0527) | $3.7500 | $3.0000 |
| Aug NG | $12.817 | ($0.160) | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5646 | (0.0027) | 1.6000 | 1.5200 |
| Yen/$ | 0.9394 | 0.0009 | 1.0450 | 0.9000 |
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