Monday Morning September 8, 2008
What a difference a few days make in the life of a hurricane. Hurricane Ike is now clearly headed into the Gulf of Mexico with landfall now expected sometime next weekend. Ike is currently projected to make landfall someplace around the south east coast of Texas as a category 3 hurricane (see latest forecast chart below). This is close to the area that Hurricane Rita hit three years ago which raised havoc with many refineries in the area. If Ike continues on its current path it could be more of a refining event than Gustav turned out to be and less of an offshore producing event. However, as we have said on many occasions storms are very unpredictable and the projected paths and intensities change from hour to hour.
As of now the trading week is setting up to be influenced by several factors, many of which are biased to the bullish side of the equation. Following is a discussion of this week's likely energy price drivers and how they will most likely influence the direction of energy prices.
· Hurricane Ike will be in the news all week. Ike is bullish for the energy complex and will provide a floor to prices (at a minimum) but it could also be an event that could cause a severe spiking of prices.
o We expect that at a minimum Ike will cause preventive shut-ins of both offshore oil & nat gas production operations from Louisiana to Texas. In fact some companies like Shell have already indicated that they are keeping minimum staff at many offshore facilities until the direction of Ike is more certain. Many offshore producers were still in the process of fully staffing back up from Gustav.
o We expect preventive shut-ins of many refineries from western Louisiana to Texas.
o We expect LOOP (the offshore oil port) to stop operations toward the later part of the week.
o We expect the Houston Ship Channel to be closed by week's end.
o The SPR will announce by mid to late this week that they will make available crude oil from the SPR if needed by any refiner
o The International Energy Agency (IEA) will indicate they are monitoring the situation and will make refined products available from the IEA system worldwide reserves if needed.
o The EPA will temporarily waive product specs in the area.
o The above is the minimum that will occur. If Ike does not cause any major infrastructure problems than the result will be much the same as from Gustav… crude oil imports will be down, refined product production will be down and nat gas production will be down. The impact would be reflected in the weekly inventory reports starting with the report to be released on the 17th of September. A minimum impact Ike would basically reduce inventories of oil & Nat Gas about the same amount as from Gustav. We will get a feel of just how much Gustav impacted oil & gas inventories this week in Wednesday's round of reports.
· OPEC meets tomorrow to establish their official position on crude oil production for the next few months (next meeting is in December). I am of the belief that OPEC will not formally/officially cut production as it would be a political bomb for OPEC. The Saudi's have been in the forefront since late spring indicating that the price of oil was too high. They held an emergency meeting attended by producers, consumers, Wall Street Companies, governments from around the world, etc. to discuss the cause and how to get the price down. I do not think the Saudi's are ready to jump off of that band wagon just yet especially with Ike lurking in the oil rich Gulf of Mexico. OPEC will simply let production fall as a result of consumers buying less if in fact global demand is declining as much as many are starting to project. OPEC will wait until the December meeting to reset the official production level. The OPEC meeting will be neutral to bearish for oil prices if my scenario occurs.
· This week's inventory reports will be reflective of some of the Gustav shut-ins of offshore oil & gas production as well as about 13 refineries. We expect above average declines in everything. Crude oil could show a decline upwards of 10 million barrels while refined products inventories (gasoline & distillate) could be reduced by 3 to 5 million barrels each. Nat Gas inventories could be lower by upwards of 50 BCF on the week. Overall this week's reports will be supportive to the market and with Ike in the backdrop and inventories likely to decline again in the report released on Sep 17th I believe the market will view the EIA data as bullish.
· Just when we thought all was quiet on the western front Geopolitics are back in the media. Over the weekend the Iranians announced a three day military exercise while Venezuela's Chavez said Russia would be holding military exercises in his neck of the woods. None of this will impact the flow of oil anytime soon rather it serves as a reminder that the world is not quiet and oil flow still remains at a high risk of potential disruption from some geopolitical event in the future. The evolving Geopolitical situations mentioned above will be supportive to prices.
· On the financial front the bailout of Freddy & Fanny will go a long way to pushing equity prices higher around the globe. Already this morning stock prices are higher on many international bourses. If the gains hold over the week it would reduce some of the market concern that global economies are heading much deeper into contraction and thus resulting in much lower energy demand. We view the current action as supportive to energy prices. On the other side of the coin is the surging dollar. The dollar is clearly in an uptrend and all signs point to it staying in an uptrend for the near future. This is bearish for oil. Overall we would rate the complete financial picture as neutral for oil at the moment.
· From a technical perspective the complex has been trading in ranges for periods of two to three weeks at a time. The market has been in the current, lower trading range for about a week and has not yet come anywhere near testing the lower end of the range. With all that is going on we expect that prices now have a higher probability of breaching upside resistance this week and moving back into the previous higher trading range from a couple of weeks ago.
Overall we believe the energy complex will be biased to the upside for most of the week unless we see significant changes in the direction of Ike or changes in any combination of the aforementioned bullish drivers. We have already seen a short covering rally in overnight trading led by gasoline which is expected since gasoline was the big loser last week. We expect further short covering throughout today's session. The market will then move on each and every news snippet about the Ike, OPEC, Iran, Russia, etc. We expect the week to experience a high level of volatility with a higher probability of ending the week with price gains rather than price losses. As always storm trading is very risky as conditions, projected paths, etc, can change form hour to hour.
We recommend that the spec community head to the sidelines until a bit more clarity emerges. However, for the more aggressive traders we would trade cautiously from the long side with a very low tolerance to losses. For the buy side hedgers we would recommend locking up a small amount of their price exposure (a portion of this week's/early next week's consumption) but also recognize that this is a high risk hedge.
Currently prices are higher across the board for energies and the dollar.
Current Expected Trading Range Expected Trading Range 9/8/08 Change Low High End From End Support Resistance 7:56 AM Yesterday Oct WTI $107.65 $1.42 $100.00 $112.00 Oct HO $3.0320 $0.0492 $2.8300 $3.0700 Oct RBOB $2.7728 $0.0867 $2.5000 $2.8100 Oct NG $7.646 $0.197 $6.920 $8.000 Euro/$ 1.4222 (0.0014) 1.4300 1.4600 Yen/$ 0.9209 (0.0129) 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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Dominick A. Chirichella
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