Monday Morning, August 4, 2008
Last Friday was a great example that volatility in the oil/energy complex is alive and well and those trading the market from the short side remain extremely nervous and jumpy. On very little information the market staged an intraday short covering rally that exploded the trading ranges to over $5/bbl for WTI and almost $0.10/gal for refined products only to end the marginally higher for WTI & RBOB and lower for HO. The main driver of the rally was concern over a possible refinery problems in the mid-west and talk about Iran by an Israeli diplomat during a presentation. Not strong enough news to sustain the short covering rally.
So far this morning the market is mixed on the arrival of Tropical Storm Edouard (see graphic at the end of the report) which has formed in the US Gulf over the weekend and is expected to make landfall late on Tuesday. Edouard is not expected to strengthen to hurricane status and as such this will not be a major event like what we saw in the Gulf with Katrina & Rita. However, I suspect there will be some interruptions to crude oil supply coming into the Gulf as the weather pattern hovers near the Houston Ship Channel.
On another note the CFTC released their latest Commitment of Traders report on Friday. As shown in the following chart we saw a small blip up in the net long position of the non-Commercial or speculative trading sector and a corresponding small move higher in the EMI Weekly Composite Price Index. A logical relationship between price and net long positions but one that has not violated the overall trend of a lower presence of the specs from the long side and a lower price. The spec net long position remains at levels not seen since early 2007 when the price of the EMI Composite was trading around $65/bbl. Currently the EMI Composite price is trading at a tad below the $129/bbl level or at trading levels from early May of this year. These data indicate the downside correction is still in play with price having a lot of room to catch up to the relatively small net long position of the spec community. Or one could say that the spec community has little to do with the fact that the EMI Composite Price Index is currently trading at 197% higher than where it was trading when the spec net long position was at the same level as it is now. A fact we should pass on to the politicians in Washington who continue to blame the woes of the energy crisis on the spec traders.
So far the Iranian deadline came and went over the weekend as the Iranians seemingly let pass the West's deadline of two weeks for Iran to respond to the package of incentives to freeze its nuclear enrichment program. Surprisingly there have been none of the usual bluster coming from Iran nor any negative comments coming from the West as the deadline passed. In fact the Iranian President said on Sunday that diplomacy is the key to solving the problem and he and Iran were very serious about negotiating. These comments can be viewed as somewhat conciliatory as his normal remarks have always been outright belligerent and caustic on this issue. The lack of any major negative comments coming from either side may indicate that some progress may be made. On the other hand there is a report that the Iranian Revolutionary Guard has tested a new naval weapon on Monday. For the moment we are cautiously optimistic that some progress will be made in the coming weeks. However we would like to point out that this issue is widely watched by the trading community and any flare up of negativity will result in another short covering rally as we experienced on Friday.
So where do we go from here as we embark on a new trading month? For the moment we believe the market still has further downside as demand restraint remains front and center in the minds of all market participants. The market sentiment remains cautiously (if not nervously) biased to the bearish side. From a technical perspective we remain in our predicted trading ranges and have been in this pattern since around the third week of July. We expect to remain in this pattern but drift toward the lower end of the pattern once again. The dollar may play a role this week as the Fed will meet and make their usual interest rate announcement as well as the ECB. We are not expecting anything significant in this area as the economy remains caught between a compression on one side and inflationary tendencies due to high commodity prices on the other side. A difficult economy to manage for all involved.
In summary we will be watching the financial markets all week to see how the dollar reacts while waiting for another snapshot of oil fundamentals on Wednesday and any remarks from either side on the Iranian nuclear stalemate. Specs should trade with tight stops while the buy side hedging community may have a window of opportunity later this week if the upcoming fundamental report is bearish and if the Iranian situation remains out of the news.
Currently prices for energies are lower across the board while the dollar mixed.
| Current Expected Trading Range | Expected Trading Range |
| | 8/4/08 | Change | Low | High End |
| | | From | End Support | Resistance |
| | 8:26 AM | Yesterday | | |
| Sep WTI | $123.79 | ($1.31) | $121.00 | $128.00 |
| Sep HO | $3.4203 | ($0.0165) | $3.5200 | $3.7000 |
| Sep RBOB | $3.0600 | ($0.0243) | $3.0300 | $3.1700 |
| Sep NG | $9.219 | ($0.170) | $9.000 | $10.300 |
| | | | | |
| Euro/$ | 1.5541 | 0.0029 | 1.5550 | 1.5750 |
| Yen/$ | 0.9265 | (0.0044) | 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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