Tuesday Morning, September 9, 2008
Oil & NG are on the defensive this morning as the projected path of Ike moves away from the heart of the Gulf producing & refining center along with OPEC leaning toward a rollover production agreement. As shown in the latest chart of Ike the projected path has moved considerably to the south (since yesterday's projections) and is now expected to make landfall close to the Texas/Mexico border. If this path holds the majority of the producing and refining infrastructure will not be in harm's way. This is a major turn of events for the energy industry and one that should result in very little oil and NG being lost and/or interrupted from Ike. For the moment Ike is now a bearish influence on energy prices.
The second major event of the day is the OPEC meeting. The formal meeting takes place later today but most of the comments circulating around the airwaves indicate that OPEC is likely to formalize keeping production quotas where they are and instead focus on the current overproduction. OPEC is currently producing about 750,000 per day more than their official quotas. Most of this is from Saudi Arabia who increased production after the June oil meeting. Several of the OPEC members would be happy to see greater compliance to the existing quotas which in essence would result in a cut from current above quota levels. However the Saudi Minister has been quoted in the press this morning indicating that oil markets were fairly well balanced and inventories were healthy. He said OPEC has worked hard since June to bring prices to where they are now. Finally he did say that Saudi Arabia will satisfy customer demand for oil.
What this all means is Saudi Arabia is not going to be in favor of any formal production cuts nor are they going to agree to any formal reduction in the current over quota production levels. Rather they will allow production levels (in Saudi Arabia) to be dictated by customer demand. If demand continues to decline Saudi overproduction will decline as well bringing total OPEC production more in line with existing quotas. As I have discussed in previous reports it is very important to pay attention to what Saudi Arabia says as generally what they say is usually what emerges as OPEC policy. I interpret the Saudi comments as no formal cut at this time in either quotas or the overproduction levels. I believe the formal statement will call for greater compliance to the quotas with no numerical commitment. With the next scheduled OPEC meeting not until Dec 17th OPEC will likely say that they could call an emergency meeting in November if needed.
We view today's OPEC meeting as neutral to bearish for oil prices unless a major surprise emerges later today.
Tomorrow we will get the latest snapshot of oil inventories. This round of inventory reports will include some of the preventive disruptions associated with Hurricane Gustav. The early projections are calling for a decline of 4 to 5 million barrels of crude oil, a decline of 2 to 3 million barrels of distillate and a decline of 4 to 4.5 million barrels of gasoline. Refinery runs are also expected to show a strong reduction in utilization rates as a result of about 13 refineries preventively shut down ahead of Gustav. This week's projections are very uncertain and surprises versus the projections are highly likely. If the actual numbers come in as projected and with Ike now less likely to cause any major oil disruptions we would expect the market will view the report as neutral to only slightly bullish (at best).
On the Geopolitical front little more has emerged about Iran, Venezuela & Russia and as such for the moment the discussed military exercises are out there but are not being viewed by the market as anything that will result in an increase in the probability of an oil flow disruption. The Geopolitics are neutral to oil prices for the moment.
The dollar surged once again on Monday and is now solidly in the new , higher trading range. We continue to expect the dollar trend to the upside to continue. The dollar has been and remains bearish for oil prices.
Overall the medium term market sentiment remains bearish as supply continues to build while demand continues to decline. Today the EIA will release their monthly oil assessment while the IEA will release their report tomorrow. All eyes will be focused on the global demand projections in each of these reports (they are generally in agreement). If the demand is once again adjusted downward the reports will be viewed as very bearish and could be the catalyst to push WTI down to a test of the $100/bbl support level.
The short term or let's call it the temporary market sentiment which was a bit bullish yesterday based on the projected path and intensity of Ike has now turned more bearish as Ike's projected path is now away from the heart of the energy infrastructure. As we warned trading around storms is very risky business as conditions change on an hourly basis. We recommend the sidelines for specs and buy side hedgers until more clarity emerges on Ike, OPEC, inventories and both the EIA and IEA reports.
Currently prices are lower across the board with the dollar giving back some of yesterday's gains.
Current Expected Trading Range Expected Trading Range 9/9/08 Change Low High End From End Support Resistance 7:31 AM Yesterday Oct WTI $105.01 ($1.33) $100.00 $112.00 Oct HO $2.9677 ($0.0454) $2.8300 $3.0700 Oct RBOB $2.6838 ($0.0665) $2.5000 $2.8100 Oct NG $7.181 ($0.346) $6.920 $8.000 Euro/$ 1.4156 0.0055 1.4000 1.4300 Yen/$ 0.9264 0.0002 0.9000 0.9300
Best regards,
Dominick A. Chirichella
Energy Management Institute
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Dominick A. Chirichella
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