Tuesday Morning, August, 19, 2008
Mostly quiet on the energy front as TS Fay veers further away from the Gulf of Mexico while the dollar is trading either side of unchanged. The market remains at the lower end of the trading range with a possibility of breaching the lower support area. At the moment there is not a whole lot of bullish news snippets floating around the airwave. Most of the market drivers we have been discussing are mostly bearish, at best neutral for the moment. There are no storm threats to the Gulf, OPEC is keeping pretty quiet so far as to their intentions for the Sep 9th meeting, Iran & the West have been very quiet over the nuclear standoff, Nigeria's Mend group has also been quiet which leaves market participants with tomorrow's EIA weekly fundamental report as possibly the main market catalyst for the week.
The early indications are calling for a modest build of about 900,000 barrels for crude oil, another large decline in gasoline and a smaller than normal build in distillate. The atypical expectations for refined products (gasoline & distillate) inventories are a result of refiners keeping run rates at below normal levels and maximizing distillate production at the expense of gasoline due to the poor refinery economics of late. In particular the gasoline portion of the refinery margin (the largest portion) has been below normal for an extended period of time driving the refining sector to reduce production to thus reduce the oversupply situation that has existed since late spring of this year. However with all that said the year on year surplus of gasoline and distillate will continue for another week (albeit at smaller level than just a few weeks ago). The year on year deficit of crude oil is narrowing and has improved by about 15 million barrels over the last month or so.
We expect demand to remain below year ago levels as US consumers continue to reduce their energy consumption. As we have discussed on several occasions in this report we are still uncertain as to how much of the demand reduction seen to date is permanent or just a temporary phenomenon especially now that prices have declined by over 20% in the last month. Prices are beginning to approach the threshold that we calculated as to where demand restraint slows or accelerates. That level is about $110/bbl (based on a mix of crude oil & refined product prices on the Nymex). Furthermore it will be very interesting to see whether or not China hits the market running once the Olympics are over and the Chinese economy is back to the task of growing and expanding. A decision by Sinopec (Chinese Oil Company) to suspend imports of gasoline & diesel indefinitely could be a sign that China's voracious appetite for oil may be slowing a bit. We will watch this closely as it could turn out to be a market mover over the next few weeks.
Projections 8/19/08 Current Change from Change from Projections Last Year 5 Year mmbls vs. Proj. vs Proj. Crude Oil 0.9 (39.7) (14.7) Gasoline (3.0) 3.6 (0.1) Distillate 0.3 2.9 3.0 Ref. Runs% -0.1% -5.8% -7.8% Change Level 85.8% 91.6% 93.6%
The market will remain in the trading ranges shown in the table at the end of the report. Anything remotely bearish in tomorrow's EIA report will likely result in another push to the downside and a breaching of the lower support levels. We do not see anything on the near term horizon that is very bullish. However, we will continue to watch the evolution of the Russia/Georgia conflict as well as Iran & Nigeria.
Our recommendations remain the same. Specs trade from the short side with tight, trailing stops while buy side hedgers remain on the sidelines. Investors in buy only energy & commodity funds should be looking to protect remaining gains as a further strengthening of the dollar along with all of the reasons discussed above could result in further declines in oil & other commodity prices. In mid-July the year to date gains in the oil complex were over 45%, today they are down to around 15%.
Currently prices are lower for energies and slightly firmer for the dollar
Current Expected Trading Range Expected Trading Range 8/19/08 Change Low High End From End Support Resistance 7:38 AM Yesterday Sep WTI $112.09 ($0.78) $110.00 $120.00 Sep HO $3.0660 ($0.0188) $3.0700 $3.3500 Sep RBOB $2.8014 ($0.0138) $2.8100 $3.0000 Sep NG $7.787 ($0.101) $7.530 $8.100 Euro/$ 1.4664 (0.0011) 1.5290 1.5550 Yen/$ 0.9129 0.0039 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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