Thursday Morning August 28, 2008
As we have been discussing all week the energy complex is all about the tropical weather patterns. We now have two events brewing in the waters both of which should intensify to hurricane status over the weekend. Gustav is still a tropical storm after making landfall on Haiti and should intensify to a hurricane by Saturday. It is on its way into the Gulf of Mexico with a projected path taking it to Louisiana sometime on Tuesday (see first chart below). It is projected to be a category 2 or 3 by the time it makes landfall on Tuesday. Right behind Gustav is Tropical Depression 8 (see second chart below) which should hit category 1 hurricane status by Sunday. It is still too early tell whether TD 8 will wind up in the Gulf. For now it seems to be on a path for southern Florida with landfall likely the second half of next week.
Both are troubling events for the residents in the path of the storms. They are also troubling to the energy industry. As we discussed in detail in yesterday's report at a minimum oil & NG flow will be impacted if for no other reason other than defensive shut-ins. Offshore non-essential people have been in evacuation mode since yesterday with essential people likely to be begin to be evacuated over the weekend as a more definitive path emerges. It is very difficult to predict if either of the storms will have a lasting impact on the energy infrastructure in the Gulf. Based on the latest information from NOAA neither of the storms are projected to reach the extreme intensity that Katrina & Rita reached. Thus we can expect less impact on the infrastructure based on projected intensity and paths but enough of a potential problem to supply that prices should be biased to the firm side for the next week or so.
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Yesterday's EIA snapshot once again had a few surprises as shown in the following table:
· Crude oil showed a small decline versus an expectation for a modest build. However, the year on year deficit narrowed once again. However, with Gustav clearly heading for the Gulf and TD 8 a possibility crude oil imports are likely to be curtailed as operations in the Gulf slow down. This will likely result in a widening of the deficit over the next two to three weeks.
· The gasoline decline was about half of what was expected. Gasoline is still comfortably supplied with the year on year surplus widening to almost 3 million barrels are we approach the last big summer driving weekend.
· Distillate stock built less than expected but also remain very comfortable and well supplied versus both last year and the 5 year average for the same week.
· Implied demand was relatively flat on the week but is still significantly lower than year ago levels and the 5 year average (with the exception of distillate). However, I want to point out that the EIA demand figures are a calculation or estimate of demand and can be volatile from week to week. The main conclusion drawn from the demand data is total consumption is still running about 5.3% below the same week last year. That is significant and bearish.
Oil Inventory 8/28/08 Mil of Bbls Current Change from Change from Change from Inv. Last Week Last Year 5 Year Crude Oil 305.8 (0.2) (27.9) (5.0) Gasoline 195.4 (1.2) 2.9 (1.7) Distillate 132.1 0.1 2.2 2.1 Refinery % 87.3% 1.6% -3.0% -6.5% Demand Total 20133 27 (1127) (954) Gasoline 9411 (12) (215) (104) Distillate 4188 101 (11) 153 Jet Fuel 1406 (199) (146) (232)
Overall the report was neutral to slightly bearish but as we mentioned yesterday of no consequence to the market this week as all eyes stay focused on the evolving weather patterns. Further helping to support energy prices this morning is the weakening dollar. After making a new high on Tuesday (vs. the Euro) the dollar has been on the defensive for the last two days. A weaker dollar is bullish for oil & other commodities.
Tomorrow is expiration day for the Nymex September products contracts as well as the last trading day prior to the 3 day holiday weekend (electronic trading will be open on Nymex/CME 7 ICE platforms on Monday). Volatility should be above normal for the next two days as lots of book squaring and short covering continues as market participants view each new report from NOAA. As we have been predicting we expect energy prices to remain firm as any ongoing or new bearish information is likely to be discounted until the trading and hedging community becomes assured that the storms will not cause major problems. Right now the uncertainty is way too high to come to that conclusion and as such a disruption premium will remain in the price and likely grow if the forecasts show an increase in the projected intensity.
Caution remains the keyword as trading around storms is a risky business as forecasts change on an hourly basis. Currently prices are firm for the energies and weaker for the dollar.
Current Expected Trading Range Expected Trading Range 8/28/08 Change Low High End From End Support Resistance 7:20 AM Yesterday Oct WTI $119.67 $1.52 $110.00 $121.50 Sep HO $3.2960 $0.0343 $3.0700 $3.3500 Sep RBOB $3.0945 $0.0273 $2.8100 $3.1000 Oct NG $8.790 $0.182 $8.350 $9.200 Euro/$ 1.4763 0.0068 1.5290 1.5550 Yen/$ 0.9157 0.0027 0.9200 0.9470
Best regards,
Dominick A. Chirichella
Energy Management Institute
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