Tuesday Morning September 2, 2008
Today's trading is all about what the storm did not do. Since Friday's close prices are significantly lower. As we discussed in yesterday's report the underlying market was bearish before Gustav and now that it appears there was no major damage to the energy infrastructure it remains bearish. The market sentiment is bearish as a result of:
· Growing concern that demand restraint is spreading across the globe. Not only is the US & other OECD countries showing significant reductions in energy demand we are now beginning to see some of the major energy growth areas (developing countries) starting to recede. With many developing nations (i.e. China, India, etc.) lowering their subsidies for oil demand is starting to be impacted. Just yesterday the Indian Oil Corp said it will not need to import any diesel until early next year as demand is coming down.
· With demand on the defensive global supply should be more than adequate over the medium term. Global inventories should start building along with some modest growth in surplus capacity (as demand for crude oil declines coupled with additional capacity coming on stream in Saudi Arabia later in the year).
· As we have been predicting the US dollar has turned the corner and continues to gain strength versus most major currencies. Yesterday the British pound & the Euro broke below key support levels and are falling fast. The collapsing pound/euro has spread to the other major currency pairs with the dollar now firm versus everything. The dollar versus the Euro has solidly entered the new higher trading range we suggested last week and remains in an evolving uptrend. The dollar recovery is a result of a combination of weakening global economies which may result in central banks around the globe lowering interest rates (bullish for the dollar) while the US Central bank continues to focus on inflation which could result in raising interest rates later in the year (bullish for the dollar). All of the above is absolutely bearish for oil and most other commodities.
On the other side of the equation we cannot lose site that next week OPEC is meeting in Vienna (Sep 9th) and the hurricane season is just entering its peak period.
· The early news snippets floating around the media wires from several OPEC members have indicated that a rollover agreement was most likely (no production cut). However, with oil now below its key support level this morning and possibly on its way to test the $100/bbl level prior to the meeting OPEC could quickly change course and announce a cut. The OPEC situation is becoming a bit complex. As we approach a level that many believe will be a point where OPEC will intervene to support the price of oil ($90 to $100/bbl basis Nymex WTI) the dollar has continued to firm resulting in OPEC not experiencing the full impact of the decline. A firming dollar increases OPEC's purchasing parity and could result in OPEC in fact keeping production levels as is for now and wait and see how demand evolves over the next month or two. Finally higher prices have impacted demand and the global economy. This is a concern for many OPEC nations, especially Saudi Arabia. Unless prices absolutely collapse and drop below $100/bbl before the meeting I believe OPEC will in fact formally rollover the existing agreement for the moment. The Saudi's will likely be in the forefront of this strategy especially after the big meeting in June in Saudi Arabia and their firm statement that high oil prices no in producers or consumers interest.
· On the hurricane front although Gustav is now weakened and heading inland there are three other storms in progress in the Atlantic and two other low potential weather events.
o The closest is Hurricane Hanna which is currently projected to head to the southeastern US likely making landfall in the Carolinas sometime Friday or Saturday
o Tropical Strom Ike and Tropical Depression 10 are weather events not likely to impact any US areas (if at all) until well into next week. It is too early to tell where these storms will ultimately head and how intense they will become.
As we have been suggesting the downside correction remains well in place (see the following table) with oil down between 26 to 28% since peaking on July 11th Nat Gas down over 47% since peaking July 2. Nat Gas supply is more than adequate after a summer that could only be categorized as normal as far as temperatures were concerned and as a result of growing production. On the oil front distillate (HO/diesel) has been leading the way lower. This is a direct result of demand declines for diesel on the international front (see comment on India above) and a firming dollar making exports of diesel from the US significantly less attractive. Since bottoming on July 15th the US dollar versus the Euro is lower by almost 10.5% and is now trading at levels not seen since early Feb of this year when Nymex WTI was trading around $90/bbl. Based on the level of the dollar one would say oil is still overvalued by about $15 to $20/bbl even after the rout so far this week.
Finally retail gasoline prices in the US still have some catch up. As we predicted a few weeks ago we believe the US national average retail gasoline prices is likely to decline to the $3 to $3.25/gal range over the next month or so barring any major surprises from storms or OPEC actions.
Downside Oil & NG Correction Decline Since Peak on 7/11/08 Change Change From From Peak, 7/11/08 Peak, 7/11/08 $/bbl % WTI ($36.69) -25.29% HO ($1.1387) -27.38% RBOB ($0.9655) -26.59% Peak 7/2/08 Peak 7/2/08 NG ($6.351) -46.38% Bottom 7/15/08 Bottom 7/15/08 $/Euro $0.0644 10.29% US Avg Peak, 7/17/08 Peak, 7/17/08 Retail Gas ($0.4300) -11.67%
What's next? Volatility will remain high. OPEC stories will likely ramp up. More detailed Gustav damage assessment will emerge into the airwaves today and tomorrow. EIA & API inventories will be delayed until Thursday due to the holiday this week. By the second half of the week we should have a better feel as to the projected path of TS Ike. Starting with next week's EIA inventory report we will see the impact of production shut-in's from Gustav. Bottom line we believe the market has a decent probability of working its way down to the $100/bbl mark over the next few weeks barring any new storms entering the Gulf of Mexico and/or OPEC cutting production at their meeting next week.
Currently energy prices are lower across the board while the dollar continues to firm.
Current Expected Trading Range Expected Trading Range 9/2/08 Change Low High End From End Support Resistance 7:49 AM Yesterday Oct WTI $108.41 ($7.05) $100.00 $112.00 Oct HO $3.0199 ($0.1720) $2.8300 $3.0700 Oct RBOB $2.6655 ($0.1887) $2.5000 $2.8100 Oct NG $7.339 ($0.604) $6.920 $7.600 Euro/$ 1.4496 (0.0135) 1.4300 1.4600 Yen/$ 0.9187 (0.0015) 0.9000 0.9300
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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