Friday Morning, August 1, 2008
As we said yesterday the weak shorts exited market on Wednesday, a bit prematurely. The market resumed its downward path on Thursday after looking at the EIA report and realizing that gasoline and distillate remain well supplied and as the demand trend continues lower.
As shown on the EMI Weekly Price Board this week so far has seen HO as the biggest loser while RBOB gasoline is still holding on to a minor gain with WTI slightly negative. NG also moved strongly lower on the week as inventories and short term fundamentals all indicate a very comfortable supply situation for NG.
Distillate(HO/Diesel) has gone from being the market leader to the market loser over the last several weeks as the supply situation continues to improve, the US dollar continues to firm making exports of diesel less attractive and as demand continues to head south. Interestingly it appeared that the refiners have moved from a normal max gasoline production mode to a max distillate production mode just as the distillate crack is also heading in the wrong direction. If they remain in this mode refiners are going to experience a more difficult economic situation over the next few months as distillate supplies build at an atypical rate for this time of the year. The widely followed 3-2-1 crack spread is now trading at about 50% of where it was at this time in 2006 and about 30% below where it was at this time in 2007. We can expect refinery runs to remain below the 90% utilization level for the foreseeable future.
| | | EMI Weekly Price Board | |
| | Current | Change | Change | % Change | Weekly |
| | Price | From | for | For | Range |
| | 7:46 AM | Thurs | Week | Week | |
| Sep WTI | $123.11 | ($0.97) | ($0.15) | -0.12% | $7.00 |
| Sep HO | $3.4289 | ($0.0304) | ($0.1001) | -2.84% | $0.1470 |
| Sep RBOB | $3.0450 | ($0.0259) | $0.0127 | 0.42% | $0.1461 |
| Sep NG | $8.973 | ($0.146) | ($0.111) | -1.22% | $0.540 |
| Sep 08 Cracks | | | | | |
| RBOB Crack | $4.780 | ($0.12) | $0.33 | 7.34% | $0.27 |
| HO Crack | $20.904 | ($0.31) | ($4.91) | -19.01% | $0.23 |
| 321 Crack | $10.101 | ($0.180) | ($1.40) | -10.55% | $0.260 |
| | | | | | |
| Euro/$ | 1.554 | (0.0017) | ($0.0113) | -0.72% | $0.0244 |
| Yen/$ | 0.9334 | 0.0042 | $0.0041 | 0.44% | $0.0099 |
Since the correction began (market peaked on 7/11) WTI is still down over $21/bbl or about 15% while refined products are down between 16 to 17%. We expect further moves to the downside as demand restraint is spreading beyond the shores of the US. Japan just reported a downturn in demand during the month of June. Many developing nations are continuing to reduce or even eliminate some of the subsidies on oil prices. Thailand just eliminated its subsidy on diesel prices. With the China Olympics just days away we can expect to see some demand reduction coming from China after the Olympics are over. In a nutshell we expect to see the main forecasting agencies (IEA & EIA) reducing their demand growth projections even further over the next several months. The languishing US economy is also indicative of oil demand remaining on the defensive in the US.
Let's not forget about the US dollar. As of this writing the dollar is once again trading near key resistance levels (versus the Euro) as the market awaits this morning's employment numbers. The dollar is at a one month high. The dollar has made a few passes at breaching this level. Today's economic report could contribute to further firming of the US dollar which would be bearish for oil.
On the Geopolitical front all quiet out of Nigeria and Iran. As we have mentioned all week the West's offer of incentives for cessation of Iran's nuclear enrichment program comes to an end tomorrow. The remedy is supposed to be additional sanctions. The biggest surprise is neither side has been immersed in the normal war of words this time. Possibly they are close to some form of a basis for additional negotiations or even an agreement of some sorts. If so it would be bearish for oil. This is likely to impact trading next week.
On the weather front the Tropical Storm situation is as quiet as it could be with no weather patterns anywhere in the Atlantic or Gulf that have the probability of forming into a storm. This is at least neutral of oil & ng even a bit bearish. Be aware we are not yet into the peak hurricane season so this part of the story is not over. But for the moment it will not impact trading at least through next week.
The overall market sentiment remains decidedly biased to the downside and as such we can expect any bearish news to be enthusiastically embraced while mildly bullish news will be discounted (for example this week's gasoline inventory decline). We expect the market to remain in the downward correction pattern it has been in since peaking on July 11th. The market is still trading within the ranges (shown in the table below) that we have predicted it would since late last week. We expect that to continue for the next few days and/or until a new major market moving event occurs...geopolitical, economy related or fundamental related.
Spec traders should continue to cautiously trade from the short side with trailing stops while the buy side hedging community should be setting targets but wait a bit longer before pulling the trigger. For the hedgers let's see how the market evolves into early next week.
Currently energies are lower with the dollar slightly stronger versus the Euro.
| Current Expected Trading Range | Expected Trading Range |
| | 8/1/08 | Change | Low | High End |
| | | From | End Support | Resistance |
| | 7:46 AM | Yesterday | | |
| Sep WTI | $123.09 | ($0.99) | $121.00 | $128.00 |
| Sep HO | $3.4248 | ($0.0345) | $3.5200 | $3.7000 |
| Sep RBOB | $3.0450 | ($0.0259) | $3.0300 | $3.1700 |
| Sep NG | $8.985 | ($0.134) | $9.000 | $10.300 |
| | | | | |
| Euro/$ | 1.554 | (0.0017) | 1.5550 | 1.5750 |
| Yen/$ | 0.9334 | 0.0042 | 0.9200 | 0.9470 |
Best regards,
Dominick A. Chirichella
Energy Management Institute
The Energy Management Institute operates a fleet of daily, weekly and biweekly energy publications covering various angles of the energy market, including over a decade of natural gas and power price indexing. In addition, EMI provides higher learning for energy professionals with comprehensive, fully accredited, energy education programs from basic to advanced level. It also provides critical business information services and thought leadership in the energy segments of Oil, Gas, Power, Alternative Fuels, soft commodities and metals.
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Dominick A. Chirichella
Energy Management Institute
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