Another downside correction and yet another possible short and shallow move. If this morning is representative of the rest of the week we may have seen the lows for the week. This is another good example of the strong bullish market sentiment that continues to control the complex. This morning’s feature is nervousness over Iran’s war games going on in the Arabian Gulf. In particular the market raised its awareness over the possibility of supply issues as Iran tested 9 missiles during the exercises. As we said yesterday the Iranian situation is going to evolve for many, many months into the future and I still believe the possibility of a military encounter is very low as is a disruption in the flow of oil from Iran. The dollar is giving back a good portion of its gains from yesterday and that is also contributing to the firming of prices so far today.
Today the market will get a snapshot of the latest oil fundamentals when the EIA release its latest weekly report. The projections are calling for a decline in crude oil stocks and builds in both gasoline and distillate. The decline in crude stocks is likely a result of a combination of a reduction in imports and a small increase in refinery runs. Although the projection could be a bit off as refinery margins are unfavorable and we could actually see a modest decline in runs thus impacting the overall crude oil stock level. In either case the year on year deficit of crude oil is expected to remain well over the 50 million barrels mark and over 20 million barrels when compared to the 5 year average for the same week.
On the refined product front the industry is expecting another atypical build in gasoline as a result of declining demand in the US. MasterCard reported in their weekly report for the week ending July 4th a decrease of 119,000 barrels of gasoline consumption. Gasoline sold during the week was down 1.2% from the previous week and 3.9% year on year. For interest the MasterCard data is at the retail point or consumption point while the EIA implied demand data is at the wholesale point. For clarity the EIA calculates what is called implied demand as follows:
· Implied demand or product supplied is defined as production plus imports minus stock change minus exports. Product supplied measures the volume of products moving through the primary petroleum supply system, which consists of refineries, importers, storage terminals (including gasoline blending terminals), pipelines, and gas processors, rather than consumption of petroleum products by end users at the retail level. Still, product supplied remains a widely followed and useful measure of petroleum demand.
When comparing both sets of data it is important to note that there may be some lag time differences between the two. For example in last week’s numbers we saw a small increase in the EIA’s implied demand numbers most likely resulting from the retailers maximizing their purchases from wholesale in anticipation of the long holiday weekend. On the other hand the MasterCard data showed the consumer actually used less over the holiday period. This lag should be reflected this week in the EIA data as demand should have decreased at the wholesale level as lower retail demand works its way through the system.
Normally the industry goes through a destocking of gasoline during this time of the year not a building pattern as we are beginning to see emerge. On the distillate side the market is expecting an above average build of distillate (HO & diesel) as demand wanes for these products in the US. In addition with the dollar firming a bit exports of diesel fuel are likely becoming a bit less attractive.
Overall we would view today’s report as neutral to slightly bearish (if the actual data comes in as expected) based on a growing inventory profile of refined products and declining demand. However, the industry is likely to focus more of its attention on the crude oil decline and the above normal year on year deficit of crude oil stocks.
| Projections | | 7/9/08 | |
| | | | |
| | Current | Change from | Change from |
| | Projections | Last Year | 5 Year |
| mmbls | | vs. Proj. | vs. Proj. |
| Crude Oil | (1.5) | (54.3) | (20.5) |
| Gasoline | 0.2 | 5.5 | 2.6 |
| Distillate | 1.8 | 0.1 | (0.1) |
| Ref. Runs% | 0.1% | -0.9% | -4.0% |
| Change Level | 89.3% | 90.2% | 93.3% |
Yesterday we recommended trading in the very short term from the short side using very tight stops. Hopefully for anyone who followed this recommendation they should have done well and already be stopped out of the short position Anyone who is still carrying a short position should be very cautious as mentioned above we may have seen the lows for the week if the Geopolitics continue to take center stage along with another weakening of the dollar and a bullish inventory report today. Also take note that tomorrow morning the IEA will release its Monthly Oil Report, a report that has been impacting price direction over the last few months. The market is back into the jumpy mode and above normal volatility will continue. The market is very susceptible to trading in a pattern for the rest of the week that could result in showing large gains and large losses during the same trading session. A difficult pattern to trade.
Currently prices are firm across the board as the dollar once again battles some selling.
| Current Expected Trading Range | | | ||
| | 7/9/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 6:42 AM | Yesterday | | |
| Aug WTI | $137.97 | $1.93 | $150.00 | $130.00 |
| Aug HO | $3.9016 | $0.0814 | $4.0000 | $2.7100 |
| Aug RBOB | $3.4210 | $0.0579 | $3.7500 | $3.0000 |
| Aug NG | $12.420 | $0.052 | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5659 | 0.0058 | 1.6000 | 1.5200 |
| Yen/$ | 0.9351 | 0.0011 | 1.0450 | 0.9000 |
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