Please take a moment today to give thought to all of those who lost their lives in the senseless acts of 911.
The day is starting out with a mixed view…crude oil down and refined products firm. The market is still focused on what Ike may do to the several refineries in and around the Corpus Christi, Texas area. As shown in the following chart Ike is expected to make landfall early Saturday morning around the Corpus area. The projected path has held pretty constant for the last few days as well as the intensity predictions. Some of the predictions indicate that Ike could make landfall as a very strong Category 4 storm. A considerable amount of oil & NG producing operations remain shut-in. The latest Minerals Management Service (MMS) numbers still show about 1.2 million bpd of oil shut-in (95.9% of Gulf production) and 5, 405 mmcf/d of NG shut in (73.1% of production). In addition we do expect that LOOP and the Houston Ship Channel will be closed for a minimum of several days as well as refineries in the Corpus Christi area and maybe as far northeast as Houston. Although the exact number is not know at this point these preventive refinery shut downs will certainly have a significant impact on inventories.
Speaking of inventories the EIA report released yesterday did hold a few surprises as promised. As shown in the following table:
· The crude oil decline was only slightly greater than anticipated
· The gasoline decline was about 30% larger than projected
· The distillate draw was less than half of expectations
· Refinery utilization declined about as expected.
· The decline in implied demand was greater than we have been seeing on a weekly basis
Overall the report was viewed as neutral to slightly bearish for everything other than gasoline which was able to squeak out a small price gain on Wednesday. In looking at the table below although everything is now below both last year's level as well as the 5 year average for the same week the deficit is still small. In fact the crude oil year on year deficit is still less than half of what it was about 6 weeks ago. However, the most important piece of information to take into consideration is the impact Ike is starting to have and may have depending on the actual touchdown point on land. As mentioned above about 1.2 million barrels per day of crude oil remains shut-in in the Gulf. As we look at next week's inventories we can expect a substantial decline in crude oil inventories likely something in the 10 to 15 million barrel range. In addition Ike will cause another decline in refinery runs and thus a decline in both gasoline and distillate stocks. Hard to put a number on that just yet. In any event it will be a decline. At the moment the fundamental cushion that has been building over the last few months is now starting to diminish. Until Ike is out of the way and operations in the Gulf are returned to normal (from both Gustav & Ike) we are starting to view the short term fundamentals as neutral to even slightly bullish even though we still view the longer term fundamentals as bearish primarily due to global demand reduction.
Oil Inventory 9/11/08 Mil of Bbls Current Change from Change from Change from Inv. Last Week Last Year 5 Year Crude Oil 298.0 (5.9) (24.6) (9.6) Gasoline 187.9 (6.5) (2.5) (8.9) Distillate 130.5 (1.3) (3.5) (2.2) Refinery % 78.3% -10.4% -12.2% -14.2% Demand Total 19784 (771) (665) (678) Gasoline 9090 (334) (303) (186) Distillate 3895 (453) (172) (42) Jet Fuel 1702 209 189 74
As shown in the following chart of US implied demand versus the EMI Composite Nymex Price we saw a big decline in demand this week (some of it was hurricane related) as well as another big decline in the EMI Composite Nymex price. The main question looming is what happens when price gets back down to around the turning point level of about $106/bbl (point where demand reduction began to accelerate. Will the US consumer revert back to previous consumption habits or has the reduction in demand to date been more structural? The IEA indicated in their report yesterday that they see a portion of the demand reduction in the US to be more structural rather than reactionary to high prices. Time will tell as the EMI Composite Nymex Price Index is now only about $6/bbl above the turning point shown on the chart.
Staying with gasoline and the impact of price. The US economy/consumer is experiencing a considerable addition to disposable income as gasoline (as well as other energy commodities) have declined since peaking in mid-July. The chart below captures an estimate of the savings from the decline in US gasoline prices. The chart shows the daily savings (additions to disposable income) based on the US national average retail price since peaking on July 17th as well as the same number calculated based on the Nymex price (peaked on July 11), which is basically equivalent to the wholesale price. The specifics of the calculations are shown on the chart.
The daily savings at the retail level are still lagging the Nymex/wholesale level by about 50% as a result of the normal price lag time from wholesale to retail. To date the economy/consumer has seen approximately $6.5 billion dollars in saving from lower gasoline prices at the pump or about $170 million dollars per day. At the Nymex/ wholesale level the saving are $13.7 billion or about $338 million per day. Not as large as some previous tax cuts but still a welcome addition to an economy that is still underperforming.
The rest of the week will be all about Ike with a little sprinkle of the dollar. The dollar continues to firm as we have been predicting and will strengthen further. This is bearish for oil prices while the short term fundamentals (including OPEC's decision to start to reduce the overproduction) is becoming less bearish and slightly supportive. We think the market is heading for a consolidating period over the next week or so as the industry sorts out the final impact of Gustav & Ike as well as OPEC and the dollar. Prices should remain within the trading range shown in the table at the end of the report.
We still recommend the sidelines for both specs and the buy side hedging sector. Currently prices are mixed.
Current Expected Trading Range Expected Trading Range 9/11/08 Change Low High End From End Support Resistance 8:09 AM Yesterday Oct WTI $101.72 ($0.86) $100.00 $112.00 Oct HO $2.9074 $0.0050 $2.8300 $3.0700 Oct RBOB $2.7027 $0.0411 $2.5000 $2.8100 Oct NG $7.456 $0.063 $6.920 $8.000 Euro/$ 1.3939 (0.0091) 1.4000 1.4300 Yen/$ 0.9372 0.0089 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.
For more info visit our website (www.energyinstitution.org), email EMI at info@energyinstituion.org or call 888-871-1207
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