Today is all about Ike. Hurricane Ike now a category 2 storm that could still intensify to a Cat 3 storm is expected to make landfall in the early hours of Saturday around Galveston, Texas and then Houston beyond that. The latest projected path is shown below. Ike is a large storm and many are concerned that the storm surge could be upward of 20 feet. As we have been indicating this storm is more about the impact on refining than it is on producing operations. In the projected hit area some of the largest US refineries are located and at a minimum they will be down for anywhere from 4 to 7 days assuming no structural damage. A category 2/3 storm should not cause major energy infrastructure damage, however, there will be massive power outages, pipelines will not be functional and crude oil flow into the refineries from LOOP and the Houston Ship Channel will come to a halt. In addition the MMS report still shows about 96% of offshore oil production and 93% of offshore Nat Gas production still remains shut-in and will likely remain that way until well into next week.
Simply put the oil supply cushion (to a lesser extent NG) has all but been eliminated. Inventories of crude oil and refined products are already below year ago levels as well as the 5 year average for the same week. The deficit will widen over the next few weeks as the actual impact of Ike begins to be incorporated into the EIA weekly inventory reports. The storm remains bullish for oil prices in the short term.
The most interesting point associated with all of the seemingly bullish news this week is the muted reaction in the financial markets as shown in the following table. On the week only gasoline is showing gains while crude oil, HO and NG are all still negative for the week so far. WTI even made its first assault on the $100/bbl level during yesterday's trading getting as low as $100.10/bbl. With gasoline very firm and crude oil weak refiners fared very well this week as measured by the Nymex crack spreads which actually went through the roof. That is the good news, the bad news is several refineries in the path of Ike will not be able to realize the improved economics just yet as they will likely be shut-in.
The dollar had another solid week showing a gain of almost 1% on the week versus the Euro and about 25 basis points versus the Yen. The dollar remains in a solid up trend for now (although it is currently getting hit with a strong round of profit taking selling in overnight trading) and will continue in this pattern which will be bearish for oil.
EMI Weekly Price Board Current Change Change % Change Weekly Range % of Price From for For Range Fri Close 7:38 AM Thurs Week Week Oct WTI $101.90 $1.03 ($4.33) -4.08% $8.85 8.33% Oct HO $2.9329 $0.0174 ($0.0499) -1.67% $0.2600 8.72% Oct RBOB $2.8111 $0.0623 $0.1250 4.65% $0.2207 8.22% OCT NG $7.235 ($0.013) ($0.214) -2.87% $0.583 7.83% Oct 08 Cracks RBOB Crack $16.166 $1.59 $9.58 145.46% $6.19 #REF! HO Crack $21.282 ($0.30) $2.24 34.04% $2.30 34.92% 321 Crack $17.854 $0.964 $7.16 53.95% $4.903 36.95% Euro/$ 1.4069 0.0122 ($0.0167) -1.17% $0.0544 3.82% Yen/$ 0.9325 (0.0048) ($0.0013) -0.14% $0.0258 2.76%
The market sentiment remains medium term bearish but is in a holding pattern until Ike becomes history. Most market participants remain focused on four major drivers, all of which are bearish for oil:
· Global demand reduction. Each month the major forecasters (IEA, EIA) continue to adjust demand growth lower and lower. China is out of the refined product import business for awhile as they work down inventories built ahead of the Olympics. Many nations (including China) are lowering their subsides for oil and as such demand will be impacted. This part of the equation is bearish for oil.
· OPEC realigned their quotas to reflect the new members, Angola and Ecuador and their exiting member Indonesia. They also said that all members should strictly adhere to the quotas. OPEC is overproducing versus the quotas by a little over 500,000 bpd. Most of this is from Saudi Arabia. The Saudi's indicated just yesterday that they will not change their policy at this point in time suggesting that the majority of the overproduction will continue. The result of the OPEC meeting (in particular Saudi's statement) is bearish for oil.
· Up until Gustav & Ike inventories were building at a steady pace in the US and elsewhere. The storms have derailed the building in the US but not outside the US. On the premise that Ike does not cause any structural damage most refining capacity will return within a week or so and imports for both crude oil & refined products will resume in a market where demand is still on the defensive. Inventories should recover over the next several months as the market readies for the upcoming winter heating season. The inventory situation is short term bullish, medium term biased to the bearish side.
· The dollar has been on a tear since bottoming mid-July. Since then the dollar has strengthened over 13% versus the Euro. Oil has declined almost 30%. The firming dollar has also contributed to OPEC turning the other cheek for the moment on sliding oil prices. As an example since peaking on July 11th WTI has declined about $43/bbl in US dollars. However, when the decline is adjusted for the Euro during the same period WTI actually has declined less than half of the dollar amount in terms of purchasing parity for OPEC. One can easily understand why the meeting went as it did. The dollar remains bearish for oil.
Overall we still believe the market has more to the downside just not today. Ike has to pass and the damage assessments made public before we see the next major move in prices. We believe that move will be a breaching of the $100/bbl level for WTI with gasoline prices falling much lower if the refining system is not damaged. For the moment prices are surging in the physical markets, especially in the Gulf Coast area where some wholesale prices have approached $5/gallon from around $3/gallon just a week or so ago.
We recommend the sidelines for today.
CME/Nymex have announced that they will open electronic Globex trading at 9:30 am est on Sunday rather than the normal opening of 6 pm for those that require to manage their exposure or to get a head start on next week's trading once more is known about the impact of Ike.
All those in the path of Ike stay safe and healthy our thoughts are with you.
Currently prices are firm across the board as the dollar weakens in overnight trading.
Current Expected Trading Range Expected Trading Range 9/12/08 Change Low High End From End Support Resistance 7:38 AM Yesterday Oct WTI $101.94 $1.07 $100.00 $112.00 Oct HO $2.9329 $0.0174 $2.8300 $3.0700 Oct RBOB $2.8111 $0.0623 $2.5000 $2.8100 Oct NG $7.235 ($0.013) $6.920 $8.000 Euro/$ 1.4063 0.0116 1.4000 1.4300 Yen/$ 0.9325 (0.0048) 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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