Tuesday Morning, August 5, 2008
The market continues to decline as we suggested it would in yesterday's report. The storm has not caused any major problems but did interrupt crude supply a bit due to the closure of the Houston Ship Channel along with some minor refinery problems. The dollar is continuing to strengthen (trading at a six week high) as the Federal Reserve meets today at their normal FOMC meeting. All expect the Fed to leave interest rates unchanged but point to inflation as the forward problem facing the US economy. This type of statement would indicate that the Fed will likely raise rates later in the year which would be bullish for the dollar and bearish for oil.
The market also pretty much ignored the West's statement yesterday that they will seek a new round of sanctions against Iran due to Iran's non-response to their offer on Saturday. Iran's chief negotiator did indicate that Iran would be responding in writing on Tuesday. Overall the situation continues as it has for the last several years…Iran continuing enrichment and the West trying to negotiate out of the situation. For the moment this ongoing event is not impacting the market at all.
Demand or lack of it remains the main catalyst driving the market and influencing the market sentiment which remains decidedly biased to the downside. Tomorrow we get another snapshot of the US short term fundamentals. The early expectations are calling for a decline in gasoline and crude oil stocks and a seasonal build in distillate inventories. Refinery runs may decline slightly as refinery economics remain under pressure. Demand is expected to decline. Any impact (if any) from TS Edouard will be reflected in next week's EIA report. The short term fundamentals remain well supplied with gasoline inventories well above both last year and the 5 year average and distillate (HO/Diesel) building at an above normal rate.
Demand reduction is the main focus of the market. We have seen it in the US and other OECD countries and we expect to see a bit of slowing of demand growth in many developing countries as fuel subsidies are either being eliminated or reduced significantly. In addition in any non US dollar denominated developed and developing countries the cost of oil is going to increase as the dollar continues to strengthen. Since peaking in mid – July the dollar versus the Euro has appreciated about 3.4% compared to current levels. In essence this means that non-dollar denominated countries have seen their cost of oil increase by a 3.4% due to dollar appreciation reducing some of the benefits of the oil price decline experienced in dollar denominated countries. Demand should be impacted going forward.
The downside correction is continuing as the predicted trading ranges that we have been in for the last week and a half are also breaking down as prices now enter a new, lower trading range. As shown in the following table oil Nymex prices have declined between 18 to almost 21% with distillate leading the way lower. Distillate (HO/Diesel) prices are down over $0.86/gal while gasoline is lower by almost $0.70/gal. Nymex refined product prices are wholesale prices. Looking at the US average retail gasoline price the decline has been a little over $0.24/gal or 6.28% so far. Retail prices lag the changes at the wholesale level a bit, especially on the downside. Barring any major events to push price precipitously higher we can expect to see retail gasoline price averaging closer to the $3 to $3.25/gal level over the next month or so.
| | | |
| Downside Oil Correction | |
| Decline Since Peak on 7/11/08 |
| | Change | Change |
| | From | From |
| | Peak, 7/11/08 | Peak, 7/11/08 |
| | $/bbl | % |
| WTI | ($26.29) | -18.12% |
| HO | ($0.8618) | -20.72% |
| RBOB | ($0.6935) | -19.10% |
| US Avg | Peak, 7/17/08 | Peak, 7/17/08 |
| Retail Gas | ($0.2430) | -6.28% |
With the market sentiment clearly bearish in the short term and with few, if any bullish news snippets circulating in the newswires we still expect prices to move lower and establish themselves in the new predicted trading ranges shown in the following table. The current downside correction is by no means an indication that the long term uptrend is anywhere near over nor does it mean that OPEC will not intervene at some point in supporting prices. The over-inflated risk premium that was built into the market this year is slowly being eliminated as a result of the short term supply situation improving. It has improved because demand has declined and inventories have increased. We expect this pattern to continue with two major cautions. One OPEC will support prices if they drop close the $100/bbl level or lower. They will support prices by starting to reduce production. Secondly in our elasticity of demand studies we have found a price range of between $100 to $110/bbl (basis a composite of Nymex prices) as a critical threshold. Above this threshold demand reduction accelerates and below it demand reduction slows. Two points to watch going forward.
As we have been recommending spec traders should continue to stay short with tight, trailing stops while buy side hedgers should wait a bit long before setting any new hedges. Currently prices are lower across the board as the dollar firms.
| Current Expected Trading Range | Expected Trading Range |
| | 8/5/08 | Change | Low | High End |
| | | From | End Support | Resistance |
| | 7:50 AM | Yesterday | | |
| Sep WTI | $118.79 | ($2.62) | $110.00 | $120.00 |
| Sep HO | $3.2968 | ($0.0533) | $3.0700 | $3.3500 |
| Sep RBOB | $2.9375 | ($0.0627) | $2.8100 | $3.0000 |
| Sep NG | $8.354 | ($0.372) | $8.100 | $8.650 |
| | | | | |
| Euro/$ | 1.5445 | (0.0109) | 1.5290 | 1.5550 |
| Yen/$ | 0.9292 | 0.0035 | 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.
For more info visit our website (www.energyinstitution.org), email EMI at info@energyinstituion.org or call 888-871-1207
To unsubscribe to this report please respond to this email with the word remove in the subject line.
Dominick A. Chirichella
Energy Management Institute
1324 Lexington Ave #322
New York, NY 10128
tel 646-202-1433
fax 801.383.7510
dchirichella@mailaec.com
www.energyinstitution.org
This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or the taking of any action in reliance on this information is strictly prohibited. If this message has come to you in error, please immediately notify the sender by telephone or return e-mail and delete the original transmission and its attachments without reading or saving in any manner. Thank you.
No comments:
Post a Comment