| Thursday Morning, July 31, 2008 A combination of the firming of the US dollar and relatively neutral to bearish market analysis reports issued by both the IEA and EIA sent energy prices ever so closer to the lower end of our predicted trading range. The IEA kept demand growth the same as in last month’s report while the EIA indicated that prospects for improved oil market fundamentals over the next 18 months point to an easing in the market balance and price weakness over the near term. The combination of slower U.S. and global oil consumption growth, increased production capacity for crude oil and natural gas liquids in OPEC Countries beginning in the third quarter 2008 and continuing through 2009, and higher non-OPEC supply, raises the prospect for a drop in demand for OPEC crude oil and an increase in surplus capacity. Overall the medium term these analysis reports point to lower prices. Today the EIA will release its weekly snapshot of supply & demand. As shown in the following table the market is expecting crude oil stocks to be unchanged, gasoline to decline 1.8 million barrels and distillate to increase by 1.6 million barrels. Refinery utilization rates are expected to decline by 0.1% due to persistent poor refinery economics. The inventory picture is also becoming more bearish as the year on year crude oil inventory is projected to decline to 38.4 million barrels while the 5 year, same week deficit should be slightly above 15 million barrels. Last month the year on year crude oil deficit was close to 54 million barrels. The situation has improved significantly over the last month or so. On the refined product side the year on year and the 5 year, same week surplus continues to grow with gasoline still over 5 million barrels while distillate should now be over 7 million barrels after this week. If the actual numbers come in as projected we would view the report as bearish as supply of refined products continues to improve even as refinery run rates remain about 5 to 6% below normal. Demand is also projected to decline slightly or at best remain steady versus last week. | Projections | | 8/13/08 | | | | | | | | | Current | Change from | Change from | | | Projections | Last Year | 5 Year | | mmbls | | vs. Proj. | vs. Proj. | | Crude Oil | 0.0 | (38.4) | (15.3) | | Gasoline | (1.8) | 5.5 | 5.5 | | Distillate | 1.6 | 7.3 | 6.1 | | Ref. Runs% | -0.1% | -4.9% | -6.2% | | Change Level | 86.9% | 91.8% | 93.1% | We will have to watch the demand pattern as we approach lower numbers. Has the consumer truly changed their demand habits or has it been just a temporary phenomenon? The headline in one of the national newspapers this morning reads “Hot-small – car sales simmer down” With large, less efficient SUV prices at much lower levels than 6 months ago and with gasoline prices now down to levels from early May (on Nymex) and declining will the American public forego purchases of small cars and once again turn to the SUV class of vehicles? During previous oil price spikes over the years the majority of the elasticity of demand seen at the heart of the crisis gradually disappeared as prices fell back to more reasonable levels. Will this happen once again? Many of the fundamental reasons that have been the main catalysts in the current downside correction could quickly turn, i.e. demand, unexpected Geopolitical events or natural disasters. In addition we have to watch OPEC. Several weeks ago I indicated in this report that OPEC would being to become uncomfortable if the price of oil approaches the $100 to $110/bbl range. We are approaching that level and Iran’s OPEC Governor said yesterday that OPEC might consider cutting production at their September 9th Vienna meeting. He suggested that the market is oversupplied due to demand restraint and extra production that has come into the market from Saudi Arabia. I truly believe OPEC will intervene and support prices around the $100/bbl level which if hit would represent about a 30% decline from the highs made in mid-July. The primary offset to OPEC intervening in September is the strengthening of the US dollar. As the dollar firms OPEC’s purchasing parity also strengthens. Since mid-July the dollar has firmed by about 7.4% versus the Euro. On the weather front both tropical patterns in the eastern Atlantic are now in the category of a medium probability of strengthening further. They are still far away from the US and their projected path is very uncertain at this point in time. We view the weather situation as something that could impact energy prices next week at the earliest (if at all). As the market approaches the lower end of the trading range we expect a few rounds of short covering before any major breach of these levels. Today’s inventories, OPEC comments, Nigeria or the tropical weather patterns could quickly become a catalyst for a short covering rally at any time. Since peaking in mid-July Nymex WTI crude oil has decline 15 out of the last 22 trading days. The market is oversold at this point which could result in some of the shorts heading to the sidelines. We do not believe the complete downside move is yet over and even if we see prices bounce a bit from here we believe it will be a temporary situation and one the specs might want to sell into. We continue to recommend that the specs look for further opportunities to get short but employ tight, trailing stops for all of the above reasons. For the buy side hedgers we are not yet at a level of market stabilization but we are getting closer than we were a few weeks ago. Currently prices are firm ahead of inventories as the dollar is slightly weaker versus the Euro & Yen. | Current Expected Trading Range | Expected Trading Range | | | 8/13/08 | Change | Low | High End | | | | From | End Support | Resistance | | | 8:45 AM | Yesterday | | | | Sep WTI | $113.63 | $0.62 | $110.00 | $120.00 | | Sep HO | $3.0923 | $0.0142 | $3.0700 | $3.3500 | | Sep RBOB | $2.8780 | $0.0348 | $2.8100 | $3.0000 | | Sep NG | $8.304 | ($0.026) | $8.100 | $8.650 | | | | | | | | Euro/$ | 1.4889 | 0.0001 | 1.5290 | 1.5550 | | Yen/$ | 0.9222 | 0.0072 | 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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