Friday Morning Septemebr 5, 2008
The decline in oil prices continues overnight with everything in the complex trading solidly in the new lower trading range for the 4th trading session in a row. As we have been predicating prices are under pressure as a result of:
· The fortunate lack of infrastructure damage from Hurricane Gustav.
· The reduced likelihood that any of the three storms churning away in the Atlantic will wind up in the Gulf. Based on the latest projected paths only Ike may still have a possibility of working its way into the Gulf after it makes landfall in Florida sometime the middle of next week. Hanna will be an east coast with Josephine continuing to veer northwestward looking more and more like an east coast event (if it hits the US at all)
· The dollar continues to strengthen. It is now trading (versus the Euro) at a level not seen since late October of 2007. The entire decline in the dollar in 2008 has now been wiped out and then some. The last time the dollar was trading at these levels versus the Euro the Nymex WTI spot contract was trading around $88/bbl. Based on the dollar level alone WTI still has at least another $20/bbl or so to fall. As we have been saying for weeks we expect dollar strength to continue into the medium term.
· The market consensus view is biased toward OPEC not making any aggressive moves when they meet on Sep 9th. I believe OPEC will simply let production fall naturally as the call on OPEC crude oil continues to decline as a result of easing global demand for oil. This is the optimum political and economic strategy for OPEC and one I believe Saudi Arabia will be in the forefront of. Also with the dollar continuing to strengthen many OPEC nations purchasing parity is increasing and thus partially offsetting some of the current dollar value decline in crude oil prices.
· Yesterday's round of inventory reports were relatively neutral with demand still noticeably below year ago levels. As we have discussed next week's report will be reflective of the preventive shut-ins as a result of Gustav.
On the week energy prices have declined across the board (see following table) with gasoline leading the way lower. As the official summer driving season comes to an end gasoline inventories remain above last year's level for the same week with gasoline implied demand down about 1.5% year on year. The rest of the energy complex declined strongly also but a tad less than gasoline. Refiners were once again on the defensive with the gasoline crack losing over 30% of its value on the week. Refinery margins are still in a decline modes (as measured by the widely watched 3-2-1 crack spread) and may continue in that mode as refiners have increased refinery runs strongly over the last three week. This week saw another aggressive increase in utilization rates of 1.4%
| EMI Weekly Price Board | |||||
| Current | Change | Change | % Change | Weekly | |
| Price | From | for | For | Range | |
| 8:12 AM | Thurs | Week | Week | ||
| Oct WTI | $106.98 | ($0.91) | ($8.48) | -7.34% | $2.91 |
| Oct HO | $2.9928 | ($0.0309) | ($0.1891) | -5.94% | $0.1038 |
| Oct RBOB | $2.7181 | ($0.0223) | ($0.2918) | -9.69% | $0.3518 |
| OCT NG | $7.387 | $0.065 | ($0.556) | -7.00% | $1.107 |
| Oct 08 Cracks | |||||
| RBOB Crack | $7.180 | ($0.03) | ($3.78) | -34.46% | $3.22 |
| HO Crack | $18.718 | ($0.39) | $0.54 | 4.91% | -$14.69 |
| 321 Crack | $10.988 | ($0.146) | ($2.35) | -17.73% | -$2.692 |
| Euro/$ | 1.425 | (0.0067) | ($0.0381) | -2.60% | $0.0523 |
| Yen/$ | 0.9408 | 0.0058 | $0.0206 | 2.24% | $0.0294 |
We expect the energy price decline to continue with prices testing and possibly breaching the lower trading ranges shown in the table at the end of the report. Next week the market will be watching and likely be impacted (one way or the other) by:
· OPEC's official decision as to production levels when they meet on Tuesday.
· The direction of Ike. Will it or will it not enter the Gulf of Mexico.
· The direction of the dollar.
· How much of an impact did Gustav make on oil & NG inventories. On Wednesday the market will get a better feel.
· The direction of the global equities markets. They are once again on the defensive indicating that global energy demand could ease at an even greater rate than it already is.
Our recommendations remain the same…specs should trade cautiously from the short side with tight, trailing stops while buy side hedgers should remain patiently on the sidelines until we become more convinced that we are in a bottoming pattern.
Currently oil is down as the dollar firms.
| Current Expected Trading Range | Expected Trading Range | |||
| 9/5/08 | Change | Low | High End | |
| From | End Support | Resistance | ||
| 8:12 AM | Yesterday | |||
| Oct WTI | $106.98 | ($0.91) | $100.00 | $112.00 |
| Oct HO | $2.9928 | ($0.0309) | $2.8300 | $3.0700 |
| Oct RBOB | $2.7181 | ($0.0223) | $2.5000 | $2.8100 |
| Oct NG | $7.387 | $0.065 | $6.920 | $7.600 |
| Euro/$ | 1.425 | (0.0067) | 1.4300 | 1.4600 |
| Yen/$ | 0.9408 | 0.0058 | 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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