Friday Morning, August 15, 2008
Even with a surprise decline in refined product inventories prices in the complex moved lower on the week as the energy correction continues. HO/Diesel led the oil complex lower with WTI a very close second. For the second week in a row RBOB gasoline was the laggard falling only about half as much as HO & WTI. The downside momentum of NG also declined a bit as some players watch the potential for tropical storms over the next few weeks.
Friday Morning, August 15, 2008
The big winner in the complex this week is the refining sector who have stopped the bleeding in refinery margins by several actions over the last few weeks. First they switched to a maximum gasoline production mode about 2 or three weeks ago and second they are just simply cutting refinery run rates. Refinery run rates are now approaching only 85% of capacity which are about 6% below last year and over 7% below the 5 year average for the same week. The result has been a very quick elimination of the year on year surplus that has been overhanging the gasoline market throughout the spring and summer driving season. The year on year surplus of gasoline in inventory is now down to just 900,000 bbls. The result has been a firming in the gasoline crack spreads. The cutting of refinery runs has also reduced some of the year on year surplus of HO/Diesel inventories and as such the HO crack held about unchanged on the week. Bottom line the widely watched 3-2-1 crack spread improved modestly on the week and could be signaling an end of the declining trend in refinery margins.
| | | EMI Weekly Price Board | | ||
| | Current | Change | Change | % Change | Weekly |
| | Price | From | for | For | Range |
| | 7:32 AM | Thurs | Week | Week | |
| Sep WTI | $113.42 | ($1.59) | ($1.78) | -1.55% | $4.75 |
| Sep HO | $3.0830 | ($0.0161) | ($0.0450) | -1.44% | $0.0919 |
| Sep RBOB | $2.8735 | ($0.0385) | ($0.0139) | -0.48% | $0.1514 |
| Sep NG | $8.070 | ($0.066) | ($0.178) | -2.16% | $0.736 |
| Sep 08 Cracks | | | | | |
| RBOB Crack | $7.267 | ($0.03) | $1.20 | 19.70% | $1.21 |
| HO Crack | $16.066 | $0.91 | ($0.11) | -0.68% | $0.32 |
| 321 Crack | $10.171 | $0.283 | $0.77 | 5.77% | $0.916 |
| | | | | | |
A large contributor to the slide in energy prices has been a result of the surge in the dollar. On the week the dollar firmed strongly versus most of the major currencies, especially against the Euro. Year to date the dollar has regained almost all it lost versus other currencies. Yesterday's inflation report gave the dollar bulls another burst of energy as the likelihood of the Fed raising interest rates down the road continues to increase. A rising interest rate environment is bullish for the dollar and bearish for oil and other commodities.
The correction is alive and well as shown in the following table. Oil is down well over 20% since peaking on July 11 while the dollar (versus the Euro) has increased almost 9% during the same timeframe. Nymex RBOB gasoline, a wholesale pricing basis, is down by over $0.76/gal or 21% while the US national average retail gasoline price is down by $0.3360/gal over the same timeframe. During down markets retail prices tend to lag the decline at the Nymex or wholesale levels. Based on the current national average retail price of $3.77/gal we can expect to see retail prices fall to about $3.25 to $3.35/gal as retail prices slowing catch up to wholesale.
| | | |
| Downside Oil Correction | | |
| Decline Since Peak on 7/11/08 | ||
| | Change | Change |
| | From | From |
| | Peak, 7/11/08 | Peak, 7/11/08 |
| | $/bbl | % |
| WTI | ($31.66) | -21.82% |
| HO | ($1.0756) | -25.86% |
| RBOB | ($0.7575) | -20.86% |
| | Bottom 7/15/08 | Bottom 7/15/08 |
| $/Euro | $0.0547 | 8.75% |
| US Avg | Peak, 7/17/08 | Peak, 7/17/08 |
| Retail Gas | ($0.3360) | -8.89% |
The dollar and the slowing global economic picture are the primary catalyst feeding into the bearish market sentiment. To show how strongly the market sentiment has changed just a few months ago a war between Georgia & Russia and a surprise decline in oil inventories would have easily sent price up by over $10 to $15/bbl. Instead the market declined about $2/bbl on the week.
Prices are once again trading near the lower end of the our predicted trading ranges and readying for another attempt to breach this support area. We believe the market will probe below support over the next few trading session barring any unforeseen events that are bullish. The main events the market will be watching over the next few days are:
· The ongoing conflict between Russia & Georgia and how it plays out with the US & EU supporting Georgia
· The evolving tropical weather patterns in the eastern Atlantic. One pattern is currently over the Virgin Islands & Puerto Rico and has a high potential for strengthening while the second is further east and has a low potential for strengthening at this time.
· The Iran/West nuclear standoff has been absent from the airwaves. We expect the war of words to emerge once again as the UN gets closer to another round of sanctions.
· Next week's EIA report could be a market mover if refinery runs continue to decline pushing refined product inventories lower again.
These are just some of the usual suspects that can invoke a sudden short covering rally and/or another purge of the remaining longs in the market. We suspect there are still a considerable concentration of long investors still in the energy complex as even with the current downside correction oil remains the best investment in town with year to date gains of between 16 to 18% (the Dow is still down a little over 12% year to date).
Both spec traders & hedgers should remain cautious as volatility will remain high with the market is susceptible to sudden reversals at anytime. We still recommend bearish side trading for the spec community but with very tight, trailing stops. On the hedging side we recommend buy side hedgers remain ready on the sidelines until we see a bit more stability in prices.
Currently prices are lower for oil and firmer for the dollar.
| Current Expected Trading Range | Expected Trading Range | |||
| | 8/15/08 | Change | Low | High End |
| | | From | End Support | Resistance |
| | 7:33 AM | Yesterday | | |
| Sep WTI | $113.39 | ($1.62) | $110.00 | $120.00 |
| Sep HO | $3.0830 | ($0.0161) | $3.0700 | $3.3500 |
| Sep RBOB | $2.8735 | ($0.0385) | $2.8100 | $3.0000 |
| Sep NG | $8.070 | ($0.066) | $8.100 | $8.650 |
| | | | | |
| Euro/$ | 1.4702 | (0.0086) | 1.5290 | 1.5550 |
| Yen/$ | 0.9061 | (0.0065) | 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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Energy Management Institute
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