Tuesday Morning, August 26, 2008
After a see saw start to the week the market is back on the defensive this morning as the dollar firms strongly in overnight trading. The dollar (versus the Euro) has breached another resistance level and appears on its way to establishing itself into a new, higher level trading pattern. The dollar is trading at levels not seen since late last year/early this year. Today's Euro rout/dollar surge is a result of declining business confidence in Europe and a growing consensus that the European Central Bank is likely to focus on cutting interest rates toward year's end or early next year to stimulate the slowing European economy. As we have been discussing, the dollar appears to have established a strong bottom and has been in a new uptrend since mid-July. We expect this pattern to continue. Since bottoming in July the dollar has strengthened by 9.75% a versus the Euro. A firming dollar is bearish for oil.
Yes oil is about the dollar and has been since mid-July. However there are a few other events brewing this week that could impact the direction of oil prices…TS Gustav and tomorrow's EIA & API inventory snapshot. TS Gustav is currently bearing down on Haiti and on a path to enter the oil & ng rich Gulf of Mexico as a hurricane sometime on Sunday. Whether or not this storm interrupts the flow of oil or ng is still very uncertain. However, with Gustav expected to enter the Gulf (see following chart) over the long US holiday weekend it is likely to move many energy participants to end the week with a balanced book. In addition there is another storm east of Gustav that now has a medium potential for strengthening according to the National Weather Service. With the uncertainty that the current tropical weather pattern is bringing to the energy complex we expect limited downside in the energy complex as we move closer to the weekend.
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Tomorrow's EIA fundamental report is expected to show another modest build in crude oil stocks, a seasonal decline in gasoline inventories and a normal build of distillate stocks. Refinery runs are expected to increase slightly even as refinery margins remain on the defensive. If the actuals come in as projected the year on year deficit of crude oil will now be down to about 27 million barrels while the shortfall versus the 5 year average will be almost eliminated. Crude oil stocks have grown substantially over the last month or so. On the refined product side of the slate gasoline is expected to decline about 2 million barrels (normal for this time of the year) but the year on year surplus will remain over 2 million barrels. Distillate stocks continue to build normally with inventories continuing to exceed both last year and the 5 year average.
We expect implied demand will continue in its downtrend. Overall we would call the EIA inventory report as biased to the bearish side if the actuals come in as expected.
Projections 8/26/08 Current Change from Change from Projections Last Year 5 Year mmbls vs. Proj. vs Proj. Crude Oil 0.9 (26.8) (3.9) Gasoline (2.0) 2.1 (2.5) Distillate 0.4 2.6 2.0 Ref. Runs% 0.2% -4.4% -7.9% Change Level 85.9% 90.3% 93.8%
· The direction of the dollar. We believe it will remain strong throughout the week keeping downward pressure on energy (and other commodity) prices. We expect this to be a major factor going forward.
· Tomorrow's EIA inventory report is likely to be biased to the bearish side but we do not expect a resulting major price impact this week due to Gustav and some of the other offsetting drivers. We could also get a few surprises, especially in gasoline inventories (greater than expected decline) as retailers stock up ahead of the long US Labor day weekend, a big driving weekend.
· Gustav will work its way into the market sentiment during the second half of the week. We believe it will keep a floor under any major push to the downside for oil and/or ng this week.
· As mentioned yesterday OPEC is starting to make noise. The Iranian oil minister made comments on Monday about OPEC cutting production as did Venezuela. The OPEC price hawks are starting to hit the airwaves as they send out test balloons into the marketplace. For the moment we would categorize this as noise. The most important comments (if they come) will be from Saudi Arabia, who has been very quiet so far.
· The Russia/ Georgia conflict has toned down a bit. We do not expect this to be a factor in the market this week.
Our recommendations remain the same. The spec community should trade cautiously from the short side with tight, trailing stops while the buy side hedging sector should remain on the sidelines as the medium term downside price movement does not appear to be over.
Current Expected Trading Range Expected Trading Range 8/26/08 Change Low High End From End Support Resistance 8:00 AM Yesterday Oct WTI $113.70 ($1.41) $110.00 $121.50 Sep HO $3.1361 ($0.0153) $3.0700 $3.3500 Sep RBOB $2.8510 ($0.0313) $2.8100 $3.1000 Sep NG $8.161 $0.336 $7.530 $8.500 Euro/$ 1.4572 (0.0169) 1.5290 1.5550 Yen/$ 0.9113 (0.0048) 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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Dominick A. Chirichella
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