Wednesday Morning, August 6, 2008
As we predicted prices remained on the defensive on Tuesday. The storm was a non-event as far as energy infrastructure was concerned while the market pretty much ignored the ongoing nuclear standoff between Iran and the West. Iran responded to the West's offer of incentives with a one page letter indicating their right to develop nuclear power. In essence they once again ignored the carrot held out by the West and as such the UN security council plus Germany will start the discussions on further sanctions as early as today. As we have discussed in this report for a many months this situation is not going away anytime soon with little chance of Iran backing down as they have been successful in holding off the Western nations for several years already.
On the financial side the Fed kept interest rates unchanged at 2% but did indicate that inflation was their primary worry. They also expressed concern over the faltering US economy. All of this points to the Fed not doing anything with rates until later in the year. When they do raise rates it will be bullish for the dollar and bearish for oil. In the meantime the weak US economy is bearish for oil as energy demand should recede further. The dollar put in a strong performance on Tuesday helping to push oil prices into our newly predicted, lower trading range. The dollar (versus the Euro) is hovering near key resistance levels at the moment. Our analysis suggests that each 1% firming of the dollar results in about a 7% decline in oil prices. Since prices for oil peaked in mid July we have see a decline of between 20 to 22% for oil with the dollar firming a little over 3% over that same timeframe.
Today we get another snapshot of oil inventories. The market is looking for a decline of about 1.2 million barrels of crude, a draw of 1.4 million barrels of gasoline and a seasonal build of 1.8 million barrels of distillate. If the actuals come in as expected the year on year deficit of crude oil will have widened back to over 50 million barrels while both gasoline and distillate will still show a year on year surplus and a surplus versus the 5 year average for the same week. Implied demand is expected to decline on the week. With the market sentiment clearly biased to the bearish side the numbers are going to have to deviate from the expectations from a bullish perspective, i.e. larger than normal declines in crude and gasoline, or a smaller than expected build in distillate or an increase in implied demand for the report to be viewed as bullish. If not we think the market will discount the report and pass it off as neutral.
The correction has been significant with oils down over 20% since mid-July. We believe there is more room to the downside but we also believe the market is getting a bit oversold and susceptible to a short covering rally at any time over the next few days. There are several items that could serve as a catalyst to once again scare out the weak shorts in the market. They are:
· A bullish oil report this morning
· A build up in the war of words between Iran & the West, especially if Israel speaks out of the latest rejection by Iran
· A weakening of the dollar
· A flare up of problems in Nigeria
· A new round of tropical storms (none currently in the horizon)
· Talk of OPEC cutting production due to lower prices of late (that has not happened yet)
We do not believe the correction is over we only view the very short timeframe as an exposure for a short covering rally rather than a structural change in the market sentiment which remains bearish for the moment.
Currently price are slightly firmer for oil and slightly weaker for the dollar.
| Current Expected Trading Range | Expected Trading Range |
| | 8/6/08 | Change | Low | High End |
| | | From | End Support | Resistance |
| | 6:32 AM | Yesterday | | |
| Sep WTI | $119.50 | $0.33 | $110.00 | $120.00 |
| Sep HO | $3.3006 | $0.0186 | $3.0700 | $3.3500 |
| Sep RBOB | $2.9713 | $0.0149 | $2.8100 | $3.0000 |
| Sep NG | $8.750 | $0.024 | $8.100 | $8.650 |
| | | | | |
| Euro/$ | 1.5435 | (0.0004) | 1.5290 | 1.5550 |
| Yen/$ | 0.9236 | (0.0028) | 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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