Thursday Morning August 21, 2008
Nothing like a little international tension to quickly dampen the fun the bears have been having in the energy complex. The very threatening comments coming from the West & Russia over the evolving situation in Georgia and the signing of the missile defense agreement between the US & Poland has been enough to remind all participants that these type of events could possibly impact oil flow. Russia is one of the largest suppliers of oil, NG & coal to the West. If the rhetoric continues it would not be a stretch at all for Russia to cut off supplies of any or all of the three main energy commodities supplied to Europe & the US. Over the last several years Russia has used the oil weapon in negotiations very effectively (from Russia's perspective). Instability in any area that could impact the flow of oil is a quick reminder that although the short term fundamentals are not in danger of any shortfalls the fact that the world still only has about 1 to 1.5 million barrels per day of surplus crude oil capacity (all in Saudi Arabia) drives home the point that the consuming world is exposed.
Yesterday the EIA released their latest snapshot of the short term fundamentals. Once again a report that resulted in a few surprises.
· Crude oil built significantly more than expected cutting the year on year deficit to 31.2 million barrels while the deficit versus the 5 year average for the same week is now only 6.2 million barrels. The crude shortfall versus last year was over 54 million barrels only a month ago.
· Gasoline showed a decline of about twice as much as the expectations. However inventories are still slightly higher than they were last year at this time and demand for gasoline is running about 1.4% below last year at this time.
· The 500,000 barrel build in distillate stocks was within the expectations bringing the year on year surplus to a little over 3 million barrels.
· Refinery runs declined 0.2% as refinery margins remain below normal for this time of the year. Refinery utilization rates are almost 6% below last year at this time and almost 8% below the 5 year average for the same week. The decline in refinery runs is resulting in a reduction of refined product production and inventories.
Oil Inventory 8/21/08 Mil of Bbls Current Change from Change from Change from Inv. Last Week Last Year 5 Year Crude Oil 305.9 9.4 (31.2) (6.2) Gasoline 196.6 (6.2) 0.4 (3.3) Distillate 132.1 0.5 3.1 3.5 Refinery % 85.7% -0.2% -5.9% -7.9% Demand Total 20106 (266) (1199) (1033) Gasoline 9423 (23) (339) (88) Distillate 4087 (319) (201) 56 Jet Fuel 1605 (69) (36) (78)
On the demand side of the equation the EIA's implied demand estimates declined across the board. Total implied demand (table above, chart below) is down by 1.2 million barrels per day versus last year and a little over 1 million barrels per day versus the 5 year average for the same week. Even with the price decline of over 20% for the oil complex since mid –July demand is still on the defensive.
For the moment the newly evolving situation between the West & Russia along with more and more market participants beginning to focus on what OPEC might do at their meeting in Sep is offsetting any of the bearishness associated with yesterday's EIA report. In overnight trading the dollar is trading in negative territory providing further support for the current short covering rally the oil complex embarked on late yesterday afternoon and continues into this morning so far.
As we have been warning for several days the energies are oversold and very susceptible to bouts of short covering as we are experiencing for the second day. It is a bit too early to say the downward correction is over but we will say the market is starting to show very early, preliminary signs that we may be closing in on the bottom. We remain within our predicted trading ranges and expect to remain in this pattern until the market sorts out the impact of all of what I discussed above. Going forward (the next few weeks) the market is going to be driven by:
· The outcome of the current war of words between Russia & the West. Will Russia use oil as a weapon in retaliation to NATO cutting ties with Russia and the US signing on with Poland for the missile defense system?
· Whether or not Iran will make noise over their nuclear program now that Russia is clearly on the other side of the fence with the West. I suspect Russia will not cooperate with any further pressure the West tries to put on Iran , like more severe sanctions now that they are in the cross hairs of the US & Europe.
· Whether or not the OPEC hawks will begin to voice their views in the media as we approach the Sep 9th OPEC meeting in Vienna. With prices down strongly and crude oil inventories building many in OPEC are quickly becoming more and more uncomfortable that a repeat of previous oil price collapses due to oversupply could be in the cards.
· The outcome of the evolving tropical storm season. So far the Oil & NG rich Gulf has been not experienced any major storm disruptions. However, we are just entering the most active part of the season.
We are recommending that the specs move back to the sidelines to allow the market to sort out all of the above as the weak shorts exit the market. We are maintaining our hedging recs of waiting for a clearer picture before jumping in. I would not be surprised to see the market trading in both positive and negative territory over short timeframes over the next few days.
Currently energy prices are firmer while the dollar is giving back some of its gains.
Best regards,
Dominick A. Chirichella
Energy Management Institute
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Dominick A. Chirichella
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