| Thursday Morning, August 7, 2008 The downside correction continued through yesterday's trading as the market viewed the EIA short term fundamentals report as overall bearish. Also contributing to the decline was another good day for the US dollar as it firmed throughout he trading session. We are now solidly trading in our newly predicted, lower trading ranges and likely to remain in these ranges for the next few days at least. The EIA report had a few diverging surprises. Crude oil inventories built 1.6 million barrels versus an expectation for a decline of over a million barrels with gasoline declining about twice as much as the expectations while distillate built about twice as much as expected. Refinery runs declined as expected as refiners continues to struggle with margins. Once again the inventories are reflective of the refining sector maximizing production of distillate at the expense of gasoline as surplus of both categories of refined products continues to grow. The year on year deficit of crude oil narrowed for the second week in a row and is now down to 43 million barrels while the 5 year average deficit for the same week is down to 16 million barrels. On the refined product side the year on year surplus of both gasoline and distillate (HO/Diesel) continues to grow as does the surplus versus the 5 year average for the same week. With refinery utilization rates remaining below 90% and still over 4% below last year refined product inventories are still surplus. Demand is definitely impacting supply as the likelihood of any interruption in supply on the product side any time soon is extremely unlikely. | Oil Inventory | | 8/7/08 | | | | Mil of Bbls | | | | | | | Current | Change from | Change from | Change from | | | Inv. | Last Week | Last Year | 5 Year | | | | | | | | Crude Oil | 296.9 | 1.6 | (43.5) | (16.8) | | Gasoline | 209.2 | (4.3) | 6.2 | 4.5 | | Distillate | 133.3 | 2.8 | 5.8 | 7.1 | | Refinery % | 87.0% | -0.2% | -4.3% | -5.9% | | Demand | | | | | | | | | | | | Total | 20215 | 11 | (875) | (729) | | Gasoline | 9484 | 16 | (91) | (22) | | Distillate | 4152 | (47) | 42 | 154 | | Jet Fuel | 1617 | 193 | 19 | 26 | Implied demand on the week was steady for the second week in a row with both total demand and gasoline demand still lagging last year. For the moment both distillate & jet demand remains modestly higher than last year at this time. With prices off over 20% since early July we have seen a small uptick in implied demand over the last two weeks as shown in the following chart of Elasticity of Demand. The market is within $10 to $15/bbl of our calculated turning point (circled area on the chart below) where demand restraint may possibly begin to slow (as we have seen over the last two weeks). We will be watching this characteristic of the market very closely as the downside correction continues to evolve. 
As we suggested in yesterday morning's report the market remains very susceptible to a short covering rally as prices have been down almost continuously over the last few weeks. This morning we are experiencing a bit of a modest short covering rally on news that BP has shut down the BTC pipeline due to a fire on the Turkey side of the line during the night. The BTC pipeline transports about 1 million barrels of crude oil from Azerbaijan in the Caspian to the Turkish port of Ceyhan. The line is expected to be shut for about 15 days. The Kurdish rebel group PKK is taking responsibility for the disruption (although that has not yet been confirmed). This is another one of the reminders that the world remains susceptible to supply disruptions from the many unstable parts of the world. Further price support is also coming from a slightly weaker dollar in overnight trading. We do not think the BTC pipeline problem will result in a major supply disruption for the world nor do we think it will grossly change the overall market sentiment which is currently biased to the bearish side. We believe this mornings trading activity is just the weak shorts once again exiting the market. We expect the market to remain in the correction mode and within our new trading ranges over the next few days unless some unforeseen Geopolitical uprisings emerges or any other event that has the potential of interrupting supply (like a new hurricane). Overall we remain biased to the downside. We believe the market has potential for further price declines and as such buy side hedgers should still hold off entering the market while the specs should be cautious and work with very tight stops as we can foresee additional short covering over the next day or so. Currently prices are firm for energy and slightly weaker for the dollar. | Current Expected Trading Range | Expected Trading Range | | | 8/7/08 | Change | Low | High End | | | | From | End Support | Resistance | | | 7:02 AM | Yesterday | | | | Sep WTI | $120.15 | $1.57 | $110.00 | $120.00 | | Sep HO | $3.2750 | $0.0371 | $3.0700 | $3.3500 | | Sep RBOB | $2.9980 | $0.0487 | $2.8100 | $3.0000 | | Sep NG | $8.860 | $0.087 | $8.100 | $8.650 | | | | | | | | Euro/$ | 1.5433 | 0.0049 | 1.5290 | 1.5550 | | Yen/$ | 0.9154 | 0.0007 | 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. | 
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