To say yesterday was a volatile day would be a gross understatement. In fact yesterday had the largest one day decline in 18 years. The selling has continued overnight even as the dollar has weakened once again. The growing concern over the turmoil in the US financial markets and how that may impact oil demand in the US and elsewhere has moved to the center of the stage. Many are starting to believe that the reduction in demand in the US (see the chart below) may begin to accelerate and as such put pressure on prices.
Further reigning in the bulls this morning is news that a senior US diplomat (Burns) will in fact be sitting across the table from the Iranians when discussion over the west’s incentives for Iran to halt their enrichment program begin over the weekend in Europe. So in spite of all of the ongoing tough talking coming from all sides and circulating in the media the US may be quietly changing its position on talking with Iran even without pre-conditions. This could be a distinct change in policy by the US in an effort to ratchet down the current tense situation a bit. The outcome of the meetings should prove to be interesting and are likely to impact prices next week.
Today we get another snapshot of oil fundamentals from the EIA at 10:35AM. The projections are calling for another modest decline in crude oil stocks and if the projections are met it would bring the year on year deficit for crude oil to a little over 60 million barrels and over 25 million barrels versus the 5 year average for the same week. Crude oil stocks will be at the lowest level for this time of the year since 2003. This is bullish for oil. However, refined products are very comfortable with a year on year surplus for both gasoline and distillate. In fact the year on year surplus of gasoline is projected to be over 8 million barrels in the heart of the main consumption period for gasoline. This is very bearish for oil.
So who rules after the report…bulls or bears? The deciding factor will be the markets view of demand. As shown in the chart below demand for oil in the US has been on the defensive for over a year and half. In fact total US implied demand is in a clear downtrend and with the US economy faltering the downtrend is likely to get steeper (at least that is the view of many market participants over the last few days). Demand reduction will go a long way toward easing the current oil price crisis the world is struggling with at the moment.
We would view today’s report as neutral (because of the crude deficit) to biased to the bearish side (because of demand reduction). If the short term market sentiment remains as it has been for this week the market may very well also view the report with an eye toward the bearish side due to concern over faltering demand.
| Projections | | 7/16/08 | |
| | | | |
| | Current | Change from | Change from |
| | Projections | Last Year | 5 Year |
| mmbls | | vs. Proj. | vs. Proj. |
| Crude Oil | (2.2) | (60.4) | (25.4) |
| Gasoline | (0.2) | 8.2 | 2.2 |
| Distillate | 2.0 | 2.3 | 0.7 |
| Ref. Runs% | 0.0% | -1.8% | -4.6% |
| Change Level | 89.2% | 91.0% | 93.8% |
Yesterday was a very good example of the strong relationship many markets have to each other as well as the many economies of the world. This thing called an oil market is very complex and impacted by many drivers….supply/demand, dollar direction, strength or weakness of major economies, direction of global equities markets, comments by Fed bankers (like Bernanke) inflation, recession, etc. So to say the high price of oil is due to speculators is a real stretch. To the politicians in the US and elsewhere that are continuing to focus only on the speculators as to the cause and solution to the high price environment I would like to point out that speculators also sell oil contracts as we experienced yesterday and so far today.
Expect more of the same. The main drivers today will be the direction of US equities markets, direction of the dollar, Bernanke’s second day of comments on the Hill, Iran nuclear snippets in the media and of course the EIA oil report. At the moment we see a bias to the downside when all of the above are combined. However, this is a difficult market to hang ones hat on in the very short term. We do caution that all of the previous strong moves to the downside have been very short in duration and shallow in magnitude. It is too early to say if the current downside move will or will not follow that pattern. If you chose to trade the market from the short side you should use very tight trailing stops to mitigate your exposure of a sudden reversal.
Currently both oil and the dollar are weaker on the day.
| Current Expected Trading Range | | | ||
| | 7/16/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:35 AM | Yesterday | | |
| Aug WTI | $136.56 | ($2.18) | $150.00 | $130.00 |
| Aug HO | $3.8836 | ($0.0354) | $4.0000 | $2.7100 |
| Aug RBOB | $3.3330 | ($0.0518) | $3.7500 | $3.0000 |
| Aug NG | $11.300 | ($0.177) | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5862 | 0.0039 | 1.6000 | 1.5200 |
| Yen/$ | 0.9638 | 0.0084 | 1.0450 | 0.9000 |
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