As we have been predicting the market is continuing to trade lower and has now moved into the new (lower) trading range we suggested. Hurricane Dolly remains exactly on the path it has been for the last several days and will now make landfall today in a border area of Mexico that will not impact oil or NG production or US refinery operations. In addition the Iran nuclear situation has gone quiet leaving the market to focus on the direction of the dollar and on short term oil fundamentals.
The dollar firmed strongly yesterday after some favorable comments by a Fed member. Since making a new all time low just one week ago the dollar has now firmed about 1.8% since then. A firming dollar is bearish for oil. Since last Tuesday WTI has declined about $20/bbl. We calculate that about $13/bbl of the decline in the price of WTI is attributable to the firming of the dollar while the remaining $7/bbl or so is related to a combination of bearish short term fundamentals and non-events associated with Dolly & Iran.
This morning the EIA will release its latest assessment of the current oil fundamentals for the US. The market is anticipating a mixed report that is expected to show a small decline in crude oil and builds in refined products. Refinery runs are expected to be unchanged as refinery margins continue to be under pressure. Consumption in the US is expected to continue at levels below last year.
On the supply side the year on year deficit of crude oil is still expected to remain over 50 million barrels with inventories about 20 million barrels below the normal, 5 year average level for the same week. Crude oil stocks are at the lowest level since 2003 for this time of the year. This portion of the report is bullish as crude oil is normally in a seasonal destocking pattern until about the end of September. With the heart of the hurricane season in front of US this could quickly become a major concern to the marketplace in the event a hurricane heads to the oil rich area of the US Gulf.
A different picture is continuing to evolve on the refined product supply side. Inventories are building for gasoline during a period of time when gasoline stocks normally decline while distillate (HO & diesel) stocks are building at an above normal rate for this time of the year. In fact gasoline stocks are expected to build again bringing the year on year surplus to over 10 million barrels. Gasoline inventories are approaching the highest level for this time of the year since 1998. A tough statistics for the consumer to swallow with retail gasoline prices averaging over $4/gal. On the distillate side both HO & diesel fuel are continuing to build with the year on year overhang expected to be over 4 million barrels. With refinery runs underperforming due to poor economics the primary basis for the atypical builds in refined products is mostly attributable to demand reduction and a continued flow of imports.
On the demand side the latest MasterCard report which measures gasoline demand at the consumption point (retail station) is showing demand declined for the 13th week in a row. According to MasterCard gasoline demand is down by 2.2% year to date. We expect this pattern to permeate into the EIA report which reports what is called implied demand at the wholesale level.
The refined product portion of the report is bearish. Overall I view the total report as biased to the bearish side with declining demand and refined product stock building to offset another crude oil decline. With the market sentiment now biased to the bearish side in the short term we would expect the market to also view the report with a bias to the downside.
| Projections | | 7/23/08 | |
| | | | |
| | Current | Change from | Change from |
| | Projections | Last Year | 5 Year |
| mmbls | | vs. Proj. | vs. Proj. |
| Crude Oil | (0.7) | (54.8) | (20.2) |
| Gasoline | 0.3 | 10.4 | 6.0 |
| Distillate | 2.3 | 4.3 | 3.3 |
| Ref. Runs% | 0.0% | -2.2% | -3.4% |
| Change Level | 89.5% | 91.7% | 92.9% |
In addition to all of the above the market has now breached the key support levels we have been discussing for several days and now suggest that the market will in fact trade in our predicted lower trading ranges. We expect the market to trade and consolidate in the trading ranges shown in the following table for the next week or so (barring anything unexpected on the Geo front). NG is now trading in single digits for the first time since April of this year. The market is clearly in a more realistic downside correction and one that should finally be different from all of the previous corrections over the last year or so in that the market should remain at less inflated levels for a longer period of time. The irrational exuberance in the energy complex is starting to fade.
All that said the market still remains in the long term uptrend. We do not expect the market to breach the long term uptrend as global demand & supply remain precariously tight and will remain tight for the foreseeable future especially if any of the usual Geopolitical hotspots like Nigeria flare up again. For now the edge is off the price but we believe the relief is temporary.
The spec side should continue to trade from the short side with very tight trailing stops. Buy side hedgers should begin to view the current correction as an opportunity to begin to start formulating entry targets for forward hedging. We still believe the market has more room to move to the downside but we do not see an all out collapse in prices.
Currently prices are lower for energy and firmer for the US dollar.
| Current Expected Trading Range | Expected Trading Range | |||
| | 7/23/08 | Change | Low | High End |
| | | From | End Support | Resistance |
| | 7:41 AM | Yesterday | | |
| Sep WTI | $126.30 | ($2.12) | $121.00 | $128.00 |
| Aug HO | $3.6200 | ($0.0582) | $3.5200 | $3.7000 |
| Aug RBOB | $3.0900 | ($0.0570) | $3.0300 | $3.1700 |
| Aug NG | $9.968 | ($0.099) | $9.200 | $10.300 |
| | | | | |
| Euro/$ | 1.5706 | (0.0034) | 1.5550 | 1.5750 |
| Yen/$ | 0.9308 | (0.0048) | 0.9200 | 0.9470 |
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