| Thursday Morning, August 14, 2008 In yesterday’s report we indicated the market was very susceptible for a short covering rally with one of the possible catalysts being the EIA inventory report. On Wednesday that is exactly what happened when the EIA report surprised the mostly bearish market. As shown in the following table: · Crude oil declined by 300,000 barrels versus an expectation of unchanged · Gasoline declined by 6.4 million barrels versus an expectation for a decline of 1.6 million barrels · Distillate declined by 1.8 million barrels versus a build of about 1.6 million barrels · Refiners reduce utilization rates by a whopping 1.1% due to a poor margin environment Refinery runs are now almost 6% below last year at this time and one of the primary reasons why we had significant declines in refined products this week. The big surplus that has existed for gasoline since prior to the start of the summer driving season is now almost all gone as current sticks are only 900,000 barrels above last year at this time and only 1 million barrels above eh long term 5 year average for the same week. The year on year surplus of distillate was chopped in half to about 4 million barrels. Overall the inventories were bullish enough to cause a pretty healthy short covering rally and one that may be signaling that the huge downside correction is closer to the end than originally thought. | Oil Inventory | | 8/13/08 | | | | Mil of Bbls | | | | | | | Current | Change from | Change from | Change from | | | Inv. | Last Week | Last Year | 5 Year | | | | | | | | Crude Oil | 296.5 | (0.3) | (38.7) | (15.6) | | Gasoline | 202.8 | (6.4) | 0.9 | 1.0 | | Distillate | 131.6 | (1.8) | 3.9 | 4.3 | | Refinery % | 85.9% | -1.1% | -5.9% | -7.2% | | Demand | | | | | | | | | | | | Total | 20373 | 158 | (766) | (574) | | Gasoline | 9446 | (38) | (126) | (36) | | Distillate | 4406 | 254 | 248 | 465 | | Jet Fuel | 1674 | 57 | 54 | (52) | Another interesting aspect of the report is the slowing of demand restraint. As we discussed yesterday morning we felt this was possibly going to be an exposure in the market. This week we saw total implied demand increase by 158,000 bpd with distillate leading the way higher. Yes demand is still running about 3.6% below last year at this time. However, the year on year decline was closer to 1 million barrels a day a few weeks ago. What might be happening is the consuming public may be starting to become more comfortable as gasoline prices have moved well off of their mod-July highs. As shown in the following chart of Total US Implied Demand versus the EMI Composite Nymex Price Index, a measure of the elasticity of demand, the threshold where demand restraint has accelerated is around $110/bbl or so. As we have moved into a lower price pattern we see on the chart that as price starts to decline demand decline has started to wane. It is still a bit early to tell if the pattern has changed but one we must watch over the next few months, especially of the downside correction resumes in full force. 
Yesterday was a reminder that the market will remain volatile and a myriad of drivers will continue to push prices in both directions. This morning prices are mixed as the dollar is slightly firmer and many are still focused on the fact that demand is lower. The surprise decline in inventories had more to do with a cutback in refinery run rates than a spurt in demand. However, as mentioned above we need to watch the demand pattern as prices drift lower. We remain in our predicted trading range even with yesterday’s short covering rally. I still believe we will see a another attempt to breach the lower end of the trading range. But as I mentioned yesterday the market is susceptible to short covering rallies as we saw yesterday. Buy side hedgers should remain on the sidelines while the specs should be on the sidelines until a bit more clarity emerges over the next few days. | Current Expected Trading Range | Expected Trading Range | | | 8/14/08 | Change | Low | High End | | | | From | End Support | Resistance | | | 7:21 AM | Yesterday | | | | Sep WTI | $116.38 | $0.38 | $110.00 | $120.00 | | Sep HO | $3.1239 | ($0.0078) | $3.0700 | $3.3500 | | Sep RBOB | $2.9395 | $0.0072 | $2.8100 | $3.0000 | | Sep NG | $8.427 | ($0.029) | $8.100 | $8.650 | | | | | | | | Euro/$ | 1.4902 | (0.0005) | 1.5290 | 1.5550 | | Yen/$ | 0.9132 | (0.0015) | 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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