Friday Morning August 29, 2008
The energy complex is still all about the storms. Even after bearish oil and NG inventories prices are once again pushing higher this morning and as predicted remain higher for the week so far. There is a lot of activity in the Atlantic with at least one of the storms clearly heading to the Gulf. The following two charts show the latest paths for Tropical Storms Gustav and Hanna.
Gustav will be the first to arrive. The projected path has Gustav heading to an area very close to where Rita hit 3 years ago. This is an area where a significant amount of oil & NG are produced offshore as well as being a major refining center. According to the latest by NOAA the storm should intensify back to hurricane status by early Saturday and remain a hurricane until it makes landfall sometime between Tuesday and Wednesday (depending on the actual path).
Hanna is still out in the Atlantic with the latest projected path showing the storm hanging around the Caribbean through the projection period. It is still very unclear as to whether or not this storm will work its way into the Gulf. It is expected to intensify to hurricane status by sometime on Sunday. If this storm does work its way to the Gulf it will not likely be a threat to the energy infrastructure (if at all) until the end of next week or early the following week.
Whether or not these storms make a direct hit on the energy infrastructure in the Gulf Gustav is already causing a reduction in supply of offshore crude oil & NG. Following is a listing of what appears to be in process at this point and what to expect next:
· Several of the major offshore operators (Shell, BP, etc) have already evacuated non- essential personal and are in the beginning stages of moving essential personnel back to shore.
· Some producing rigs are starting to be shut down which will result in a loss of production (how much at this point is hard to say). The Mineral Management Service has already starting gathering these statistics and updates them on their website daily. Their site is at www.mms.gov
· LOOP, the offshore oil port in the Gulf is planning on curtailing operations over the weekend.
· The EIA has already announced they will make crude oil available from the SPR if any refiners request it. This is normal procedure as the SPR is there to help mitigate any shortfalls in crude oil.
· I am certain (although it has not been announced) that the International Energy Agency (IEA) is already looking at plans to supply refined products from SPR'S around the world if the US experiences a shortfall of products as it did during Katrina & Rita.
Bottom line if neither of the storms cause structural damage then the current firmness in prices will quickly dissipate and the market will move back into the downward pattern that it has been in since peaking on July 11th. If either storm results in lasting problems then the downtrend may be capped for a period of time and prices could work their way to higher ground. This would be more pronounced for Natural Gas as there is no SPR or IEA sharing plan for NG.
The market sentiment is still bearish. We saw several bearish reports this week. The OPEC noise circulating in the market so far seems to be pointing to a rollover agreement at the Sep 9th meeting. The short term fundamentals continue to show oil stocks growing while demand is still falling. The dollar clearly remains in at least a short term uptrend which is bearish for oil. Most interesting was Thursday's trading action which saw the market trade lower throughout the session reducing the so called storm risk premium significantly even as the weather updates continued to show Gustav heading into the heart of the energy infrastructure. However, as shown in the following table the complex is still showing across the board gains for the week with gasoline leading the way higher. So far RBOB gasoline on the Nymex is up almost 6.5% on the week with NG a close second at a little over 4%. Both HO (diesel) and crude are lagging with gains of just a bit over 2%.
The refining sector were the main recipients of the firmness in gasoline prices showing margin gains across the board with the gasoline crack clearly in command. Refinery runs also showed a surprise increase of 1.7% this week which may be a result of slightly better refinery margins. How long this will last will be dependent as to the impact of the storms.
The dollar has lost some ground since peaking on Tuesday but still remains strong versus the Euro on the week. We remain bullish on the dollar and expect further gains heading into the rest of the year. I thought yesterday's revised 2nd quarter GDP of 3.3% from the original 1.9% clearly indicates that the US economy is not heading into a devastating recession as many forecasters have been predicating. It also raises the attention of the Fed to continue to focus on inflation as a threat to the economy which could result in an increase in interest rates toward the end of the year. All of this is bullish for the dollar and bearish for oil.
| EMI Weekly Price Board | |||||
| Current | Change | Change | % Change | Weekly | |
| Price | From | for | For | Range | |
| 7:52 AM | Thurs | Week | Week | ||
| Oct WTI | $116.70 | $1.11 | $2.11 | 1.84% | $5.45 |
| Sep HO | $3.2061 | $0.0235 | $0.0750 | 2.40% | $0.1240 |
| Sep RBOB | $3.0415 | $0.0201 | $0.1729 | 6.03% | $0.3090 |
| OCT NG | $8.052 | $0.002 | $0.209 | 2.66% | $1.028 |
| Oct 08 Cracks | |||||
| RBOB Crack | $4.533 | ($0.18) | $1.83 | 67.94% | $3.04 |
| HO Crack | $18.511 | ($0.39) | $0.41 | 2.27% | $2.43 |
| 321 Crack | $9.146 | ($0.250) | $1.36 | 10.28% | $2.841 |
| Euro/$ | 1.472 | 0.0031 | ($0.0038) | -0.26% | $0.0244 |
| Yen/$ | 0.9205 | 0.0071 | $0.0103 | 1.13% | $0.0218 |
Now what happens to the market? Today should be a volatile trading day. It s the last trading day for the Nymex September oil product contracts. Liquidity should be lower than normal as many participants head out early to enjoy the last big summer holiday weekend. Over the weekend the path and intensity of both storms will become clearer. Although electronic trading will be open on Monday liquidity will most likely be lower than normal thus possibly exposing the market to wild swings and/or over or under reactions to storm news that emerges over the weekend.
Bottom line we expect prices to quickly shed any and all of the storm risk premium if the weather forecasts begin to indicate that neither storm will cause major problems. Until then the premium will remain and if the projections become more troubling we can then expect further price increases. As we have been indicating storm trading/hedging is a risky proposition as conditions/projection change on an hourly basis. Be cautious with anything you do on either the spec side or the short term hedging side.
We will produce a report on Monday morning to update the situation in the market . In the meantime have a great holiday weekend.
Currently prices are firmer as the dollar trades either side of unchanged.
| Current Expected Trading Range | Expected Trading Range | |||
| 8/29/08 | Change | Low | High End | |
| From | End Support | Resistance | ||
| 7:52 AM | Yesterday | |||
| Oct WTI | $116.69 | $1.10 | $110.00 | $121.50 |
| Sep HO | $3.2061 | $0.0235 | $3.0700 | $3.3500 |
| Sep RBOB | $3.0421 | $0.0207 | $2.8100 | $3.1000 |
| Oct NG | $8.055 | $0.005 | $8.350 | $9.200 |
| Euro/$ | 1.472 | 0.0031 | 1.5290 | 1.5550 |
| Yen/$ | 0.9204 | 0.0070 | 0.9200 | 0.9470 |
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
Energy Management Institute
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