Wednesday Morning August 27, 2008
The direction of the energy complex is all about Gustav with a little sprinkle of dollar trading and today' EIA short term fundamental snapshot. The latest projected path of Gustav (shown below) shows it approaching the area of the Gulf where the majority of the offshore oil and gas is produced as well as a significant portion of the US refining capacity. Gustav has been downgraded to a Tropical Storm but is expected to intensify back to a hurricane later today or early on Thursday. According to Accuweather Gustav has the potential to strengthen to a category 4 or 5 storm if it passes through the Yucatan Channel. This is a troubling event for the residents of the Gulf as well as the energy industry. Unless the projected path changes significantly southward of abruptly north Gustav will continue to impact the price of oil & NG in the comings days and depending on the actual path and strength the impact to the energy industry could last for weeks.
So far the price reaction has been muted due to a strong performance by the US dollar on Monday and the ongoing realization that demand is waning and the supply picture has improved. However, the dollar is starting on a weak note this morning and today we get the latest assessment of the supply & demand picture from the EIA (more about that in a moment). The main question associated with Gustav is how severe will the impact be to the flow of oil & gas. Following is the sequence of events we can expect and are likely to see floating around the news wires for the rest of this week and into the first half of next week.
· The major producers of oil & gas in the Gulf of Mexico will begin the evacuations of non-essential oil workers. Shell has already indicated that they may start this process as early as today. This phase of the process does not normally result in any significant reduction in oil or gas production. The result will be more psychological in the trading markets and will add a little more risk premium to the price.
· Gustav is expected to intensify back to a hurricane later today or early Thursday. This event will help to keep prices firm.
· As we approach the end of the trading week many of the shorts (who have not already exited the market) will be heading for the sidelines as long as the path shown below remains in place.
· If the storm does in fact begin to intensify to a Cat 4 or 5 before the weekend we can expect to see not only the shorts heading for the exits but some aggressive specs entering into the market from the long side. This will likely be bolstered by a contingency of physical buyers doing some pre-hurricane buying.
· If the current projected path remains in place we can expect to see some rig shut-downs and essential personnel starting to head to shore as early as over the weekend and into early Monday. Another firming price event.
· LOOP , the main offshore oil receiving port will likely start to batten down the hatches over the weekend and ships that were heading to LOOP for discharging will move to safer locations. This will result in a reduction of crude oil imports into the US and another price firming event. The impact to inventories will likely not be seen until the EIA report released on September 10 the earliest.
· Heading into next week it will be all about the path and the intensity as it approaches shore sometime late Monday or Tuesday. A direct hit as shown by the current projected path will result in a minimum of a reduction in:
o Oil & NG offshore production
o An interruption of oil imports
o An interruption in some refining capacity
o An interruption in some NG processing capacity
o A possible interruption in people operations if power losses are widespread.
Another major concern is several other storms lining up east of Gustav (see following chart) that could become problems in about a week or so. For the moment only one is rated as a medium potential to strengthen while the other two are still categorized as low potential weather events. All in all the tropics are going to impact the price direction of oil & NG for at least the next two weeks.
Today's inventory report is projected to show another build in crude and distillate and seasonal decline in gasoline stocks. As discussed in detail in yesterday's report we would view the short term fundamentals as biased to the bearish side. However with everything evolving in the tropics today's report will only impact price if it turns out to be bullish. If so prices will move higher especially with the backdrop of Gustav
Projections 8/27/08 Current Change from Change from Projections Last Year 5 Year mmbls vs. Proj. vs Proj. Crude Oil 1.0 (26.7) (3.8) Gasoline (2.5) 1.6 (3.0) Distillate 0.5 2.7 2.0 Ref. Runs% 0.2% -4.4% -7.9% Change Level 85.9% 90.3% 93.8%
On one hand a firming dollar and a bearish oil inventory report will help to quell some of the buying emotions that Gustav will be bringing to the market. However with the current projected path showing Gustav heading for the same area of the Gulf as Katrina & Rita the market is going to have a very difficult time in moving lower anymore this week. Speculators who are still short should quickly move to the sidelines. The more aggressive traders may want to dabble from the long side as more clarity emerges as to the path and projected intensity of Gustav. Buy side hedgers may want to protect their positions for the next few days/into the long holiday weekend by adding long hedge potions for coverage during the aforementioned period.
The caution flag is raised to any long side specs of hedge buyers that tropical storms can change direction and intensity on a dime and even if the path remains in place the energy industry has many checks and balances in place to mitigate the impact. So even a direct hit could result in minimal supply problems.
Finally although we are approaching a 3 day holiday weekend electronic trading will still be available on the Nymex/CME and ICE platforms on Monday.
Currently prices are firm for the energies and weaker for the dollar.
Current Expected Trading Range Expected Trading Range 8/27/08 Change Low High End From End Support Resistance 8:08 AM Yesterday Oct WTI $117.58 $1.31 $110.00 $121.50 Sep HO $3.2525 $0.0426 $3.0700 $3.3500 Sep RBOB $3.0150 $0.0453 $2.8100 $3.1000 Sep NG $8.654 $0.376 $7.530 $8.500 Euro/$ 1.4742 0.0108 1.5290 1.5550 Yen/$ 0.9175 0.0043 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.
For more info visit our website (www.energyinstitution.org), email EMI at info@energyinstituion.org or call 888-871-1207
To unsubscribe to this report please respond to this email with the word remove in the subject line.
Dominick A. Chirichella
Energy Management Institute
1324 Lexington Ave #322
New York, NY 10128
tel 646-202-1433
fax 801.383.7510
This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or the taking of any action in reliance on this information is strictly prohibited. If this message has come to you in error, please immediately notify the sender by telephone or return e-mail and delete the original transmission and its attachments without reading or saving in any manner. Thank you.
1324 Lexington Ave #322, , New York, New York, 10128, USA
t: 646-202-1433 | f: 801-383-7510
e: dchirichella@emimail.org | w: http://www.energyinstitution.org/
No comments:
Post a Comment