Dominick Chirichella's Energy Market Overview

FridayMorning, August 22, 2008

Yesterday was all about Russia and the US dollar. The dollar went into a tailspin on Thursday as concerns linger over the weakness in the US economy and the financial sector. The dollar versus the euro is still in the same trading range as it has been in for the last 10 trading sessions, however, it has been on the defensive all week. Dollar weakness help to fuel a commodity wide rally on Thursday helping to push oil prices to the highest level in weeks. The ongoing situation in Russia served notice to the market that Russia is back. It also reminded all that Russia would think nothing of using oil as a weapon in what seems to be the very early stages of Cold War, Part II.

On the week the entire complex strengthened as the dollar weakened against most major currencies in the world. As shown in the following table both crude oil & refined products increased about the same amount on the week as the market was hit with a very strong round of short covering. Nat Gas followed oil higher but much more modestly increasing less than 1.5% on the week. NG supplies are very adequate with another greater than expected build in inventories while the country is experiencing relatively moderate weather capping any excess demand. So far the tropical weather patterns have not veered into the Gulf and as such NG production (and oil) has been operating full steam ahead.  

 

The refining sector is still struggling even as refinery utilization run rates remain about 6% below last year and over 7% below the 5 year average for the same period. On the week refinery margins (as measured by the Nymex crack spreads) are about unchanged for the individual products (RBOB & HO) as well as the widely watched 3-2-1 crack spread. Refinery margins are not only under pressure in the US but also in other major export refining sectors like Singapore which has seen margins deteriorate strongly over the last month or so.

 

Weak margins can be caused by surging crude oil prices (product prices not keeping pace) due to supply problems or an oversupply (or at a minimum a very comfortable supply) of refined products as those prices decline faster than crude oil. The later has been the case as supplies of gasoline in the US have been plentiful for several months and diesel fuels have moved into an oversupply situation throughout major parts of the world. Demand restraint in the US & OECD nations have also contributed to the comfortable supply situation.  It is likely that refiners will keep runs at the lower end of normal until the economics improve.

 

As we have been mentioning the dollar is one of the main drivers for the energy (and commodity) complex. This week the dollar put in a very poor performance after several weeks of recovery. The languishing US economy and in particular the concern over the financial sector has resulted in a strong round of profit taking selling as the newly found dollar bulls exited the market once again. The dollar gave back over 1% of its value this week but still remains noticeably stronger than it was in mid-July. 

 

		EMI Weekly Price Board
	Current	Change	Change	% Change	Weekly
	Price	From	for	For	Range
	7:41 AM	Thurs	Week	Week
Oct WTI	$120.09	($1.09)	$6.32	5.56%	$9.10
Sep HO	$3.2700	($0.0306)	$0.1509	4.84%	$0.2364
Sep RBOB	$3.0186	($0.0266)	$0.1584	5.54%	$0.2736
Sep NG	$8.200	($0.052)	$0.108	1.33%	$0.608
Oct 08 Cracks
RBOB Crack	$2.420	($0.46)	$0.07	3.19%	$1.01
HO Crack	$18.371	($0.20)	$0.15	0.85%	$1.87
321 Crack	$7.684	($0.374)	$0.10	0.76%	$1.297
Euro/$	1.4805	(0.0052)	$0.0150	1.02%	$0.0277
Yen/$	0.9127	(0.0091)	$0.0065	0.72%	$0.0200

 

 Is the downside energy correction still in play? I think so. This week or should I say pretty much the last 36 hours has seen the energy complex in the midst of a short covering rally not a surging uptrend.  As shown in the table below since peaking in mid-July both WTI & RBOB gasoline are still down by almost 17% while distillate (HO/Diesel) is over 21% lower. As we have said the market was very susceptible to a short covering rally and along it came. As of now we still view this as a short covering pattern and will need to see further evidence that  the down move is completely over. Nothing structurally has changed in the last 36 hours to justify a major move to the upside. The fundamentals are still bearish. Russia is in fact finally beginning to move its troops out of Georgia this morning (as confirmed by the Georgian government). We think Russia made its point and will move to the sidelines for the near future. Finally the US dollar, although weaker for the last few days it is still almost 8% stronger than it was in mid –July. As with oil we do not think the dollar correction is over.

 

Barring any surprises we expect prices to drift lower into next week. We remain on the sidelines for both speculating & adding new buy side hedges. 

 

Downside Oil Correction
Decline Since Peak on 7/11/08
	Change	Change
	From	From
	Peak, 7/11/08	Peak, 7/11/08
	$/bbl	%
WTI	($24.96)	-17.20%
HO	($0.8886)	-21.37%
RBOB	($0.6124)	-16.87%
	Bottom 7/15/08	Bottom 7/15/08
$/Euro	$0.0500	7.99%

 

 

Currently energies are down and the dollar is slightly firmer.

  

Current Expected Trading Range			Expected Trading Range
	8/22/08	Change	Low	High End
		From	End Support	Resistance
	7:42 AM	Yesterday
Oct WTI	$120.12	($1.06)	$110.00	$121.50
Sep HO	$3.2700	($0.0306)	$3.0700	$3.3500
Sep RBOB	$3.0186	($0.0266)	$2.8100	$3.1000
Sep NG	$8.208	($0.044)	$7.530	$8.100
Euro/$	1.4805	(0.0052)	1.5290	1.5550
Yen/$	0.9128	(0.0090)	0.9200	0.9470

 

Best regards,
Dominick A. Chirichella

Energy Management Institute

 

 

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Dominick A. Chirichella

Energy Management Institute

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