Dominick Chirichella's Energy Market Analysis

 

Wednesday Morning Septemebr 10, 2008

The most constant ingredient in the energy markets is change. This has been the week of change and a few surprises and it is only mid-week. OPEC  pretty much did what most expected but with a bit of a twist. They officially readjusted all members quotas to include new members Ecuador and Angola and to exclude Indonesia who is dropping out of OPEC.  The quota is at 28.8 million barrels per day or in essence the same level it has been at except it now does not include Indonesia. The quota is about 520,000 bpd below actual July production levels. The official communiqué went on to say that OPEC members should strictly adhere to the quotas. Basically everything is the same for now and the overproduction (most of which is all from Saudi Arabia) should gradually decline as demand for Saudi crude declines over time. Next meeting is in Algeria on Dec 17^th. No emergency meeting is scheduled as of now but OPEC indicated they would quickly respond to anything that jeopardizes the stability of the oil market.  The fact that WTI is approaching the $100/bbl level while Brent traded below $100/bbl on Tuesday seems to have made many OPEC ministers a bit nervous. A few indicated that the $100/bbl level could be a point where intervention is required. Overall we view the OPEC meeting as neutral for moment as the market will wait and see how quickly the overproduction declines.

On the other side of the fence the IEA  released their monthly oil assessment. The IEA consists of the 27 major consuming nations (US a member). The IEA (as the EIA reported in its Tuesday report) reduced global oil demand growth figures once again. It lowered its 2008 number by another 100,000 bpd to 690,000 bpd of growth in 08 while also decreasing its 2009 demand projections by another 40,000 bpd. It also indicated that it was seeing signs that some of the demand reduction in the US may be more of a result of a structural change rather than just reactionary to high price.  Overall we view both the EIA and IEA reports as bearish for oil prices. Following are some of the main highlights from the IEA report:

 

·        August global oil supply fell by 1.0 mb/d to 86.8 mb/d on North Sea maintenance, the BTC pipeline outage and lower OPEC supply. Non-OPEC output is revised by -180 kb/d for 2008 and by -85 kb/d for 2009, with hurricane outages impeding 2H08 supply. Non-OPEC growth including OPEC NGL is now 580 kb/d in 2008 and 1.56 mb/d in 2009.

·        OPEC crude supply in August fell by 195 kb/d to 32.5 mb/d on field and pipeline outages in Iraq, Angola, Libya and Nigeria, while effective spare capacity rose from 1.5 mb/d to 1.9 mb/d. The 'call' on OPEC is revised up to 32.2 mb/d for 3Q08 and 31.7 mb/d for 4Q08. This report went to press ahead of the OPEC 9 September meeting in Vienna.

·        Hurricane activity in the US Gulf of Mexico results in a 1.4 mb/d downward revision to US refinery crude throughput in September, to an average of 13.9 mb/d. Global September crude runs could decline by 1.3 mb/d from August. OECD crude runs are forecast to average 37.4 mb/d in September, their lowest level since October 2002.

·        OECD stocks rose by 47 mb in July to 2,646 mb. A large, unseasonal crude build from a revised June base and weaker demand leave end-July OECD cover at 54.5 days. Higher OECD end-June stocks now imply a 380 kb/d OECD stock build in 2Q08 versus last month's estimate of flat second-quarter stocks, and a seasonal 2Q average build of 0.9 mb/d.

·        Forecast global oil demand has been lowered for both 2008 and 2009, following weaker deliveries in the OECD. World demand averages 86.8 mb/d in 2008 (+0.8% or +0.7 mb/d versus 2007 and 100 kb/d lower than previously estimated) and 87.6 mb/d in 2009 (+1.0% or +0.9 mb/d year-on-year and 140 kb/d lower than in our last report).

 

Ike is still in the picture albeit on a different path than it was in the beginning of the week. For the last day or so its projected path has it heading for the Corpus Christi area of Texas. An area that has several refineries but not the concentration of refineries that  exists in the area where Rita hit nor does it have the large concentration of offshore oil & NG producing operations. Yes some oil flow will be interrupted but the exposure to oil & NG flow (as of now) is not nearly as great as it was when Ike was on a path for the Texas/Louisiana border. Landfall should be late Friday or early Saturday. Overall we view Ike as neutral for oil & NG prices at the moment.

 

Today we get a snapshot of oil inventories and supply. The projections are calling for significant draw downs in everything as a result of Gustav barreling through the heart of the energy sector last week.  The expected declines are..crude down by about 4.5 million barrels, distillate lower by 2.5 to 3 million barrels and gasoline falling 4 to 4.5 million barrels. As we said yesterday the report could be full of surprises and I would not be the least bit surprised if the declines were much greater or less than those projected. Overall I would view the report to be neutral if the actual numbers come in as expected and a bit biased to the bearish side if implied demand shows a sizeable decline.

 

Finally the dollar continues to strengthen as we have been predicting for weeks. This is simply bearish for oil and commodity prices in general. It was also likely a factor in yesterday's OPEC meeting as a stronger dollar has offset some of the sting associated with the 30% declines in the dollar value of oil prices since peaking on July 11^th.

 

Where do we go from here? At the moment the market is a bit firmer as some light short covering enters the market after the OPEC decision. So far the response has been as expected. After inventories are released this morning we will get a better feel as to how many participants head to the sidelines and the impact they make on price. For the next few days we see prices remaining within the current trading ranges (shown in the table at the end of the report). The market sentiment is still bearish as demand remains on the defensive, the dollar continues to firm and supply is comfortable. The next few days will likely be volatile as many adjust their position after they review the inventories and ahead of Ike.

 

I continue to recommend that both the spec community and the buy side hedgers remain on the sidelines until a bit more clarity emerges. Currently prices are firm for oil as well as the US dollar.

 

Current Expected Trading Range			Expected Trading Range
	9/10/08	Change	Low	High End
		From	End Support	Resistance
	8:09 AM	Yesterday
Oct WTI	$103.58	$0.32	$100.00	$112.00
Oct HO	$2.9356	$0.0109	$2.8300	$3.0700
Oct RBOB	$2.6810	$0.0284	$2.5000	$2.8100
Oct NG	$7.545	$0.010	$6.920	$8.000
Euro/$	1.4081	(0.0083)	1.4000	1.4300
Yen/$	0.9371	0.0024	0.9000	0.9300

Best regards,
Dominick A. Chirichella

Energy Management Institute

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Dominick A. Chirichella

Energy Management Institute

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