Monday Morning August 25, 2008
Not much energy market moving news over the weekend. Russia has now pulled back most of its troops from Georgia but some residual presence still remains. Russia also formally recognized the breakaway regions of South Ossetia and Abkhazia as independent states. A move that will not sit well with Georgia or the West. So the tension continues but at a significantly lower level than a week ago.
The CFTC released their latest Commitment of Traders Report on Friday. As shown in the following chart the non-commercial (speculative) sector increased their net long position third time in the last 4 weeks. The EMI Weekly Nymex Composite Price Index also increased slightly on the week. Even with the modest increase in the spec net long position it is still at levels from about a year ago when the price of the EMI Composite Price Index was trading around $75/bbl. The Index closed at $118/bbl on Friday suggesting that the market may still have over $40/bbl of risk premium in the price.
The risk premium mentioned above is likely a combination of the ongoing concern that supply could be interrupted at some point in time from either a Geopolitical event (Russia, Iran & Nigeria to name a few) and/or a natural disaster like a Katrina. As demand for oil and other energy products have eased significantly in the developed world (and showing signs of slowing growth in the developing world) the overall supply/demand balance continues to improve thus reducing the exposure if an event does occur. In addition the direction of the US dollar is impacting energy prices and the resulting risk premium.
The dollar has strengthened significantly (almost 8.5%) since bottoming in mid-July. Year to date the dollar is only 1% lower than it was at the end of 2007 versus the Euro & the Yen ( and many other currencies). I believe the strong downtrend in the dollar is over for now as it is showing many of the early signs that a more permanent bottom may be in place with the probability of further strengthening increasing.
The dollar appears to be getting most of its momentum from the economic slowdown finally hitting many non-dollar denominated countries rather than the US economy surging. The housing slump has hit places like the UK and other countries in the EU. In fact developed economies grew at the slowest rate in almost 7 years during the second quarter according to an OECD report released last week. The report further showed that Japan, France, Germany and Italy all experienced contractions. The US economy was the best performing in G7. Also with inflation still a threat (Fed Chairman Bernanke's comment on Friday) the Fed may still be looking at raising interest rates toward the end of the year. What this is all suggesting is the dollar is likely to continue to gain ground versus other major currencies which is bearish for oil and most commodities.
The dollar has broken out (to the upside) of the trading range it has been in for all of 2008 and is now solidly in the trading pattern that was in place in the 4th quarter of 2007. If all of the above continues to evolve we would expect the dollar to strengthen to mid Aug 2007 levels when WTI was trading in the $70 to $80/bbl range. Interestingly the current CFTC spec net long position (discussed above) is at about the same level as it was last August which is also suggesting a WTI price of $70 to $80/bbl.
When one asks the question as to what is the fair value of oil based on the current fundamentals $70 to $80/bbl comes to mind based on the above analysis. We do not believe the price of oil will drop down to that level as we wholly expect OPEC to intervene prior to the downslide getting out of control. We believe OPEC will support oil prices basis a Nymex WTI price level of between $90 to $100/bbl by cutting production and driving US and OECD crude oil inventories back down to the lower end of normal. With 2009 expected to see some growth in surplus crude oil capacity and with demand for energy products slowing around the globe we believe OPEC will be very aggressive in protecting their franchise. OPEC meets on Sep 9th in Vienna. News snippets should be hitting the airwaves leading up to the meeting as both the hawks and doves start to verbalize their concerns. Most importantly pay attention to what the Saudi's say as generally what they say is likely what will happen.
Back to the short term. We expect more of the same…high volatility with a bias to the downside. However, we are watching another tropical weather pattern over the central Caribbean Sea that has a high potential for strengthening (according to NWS). If it evolves it could play into price direction later in the week.
Current Expected Trading Range Expected Trading Range 8/25/08 Change Low High End From End Support Resistance 7:48 AM Yesterday Oct WTI $115.56 $0.97 $110.00 $121.50 Sep HO $3.1640 $0.0329 $3.0700 $3.3500 Sep RBOB $2.8831 $0.0145 $2.8100 $3.1000 Sep NG $7.847 $0.004 $7.530 $8.100 Euro/$ 1.4748 (0.0010) 1.5290 1.5550 Yen/$ 0.9109 0.0007 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