As we have been suggesting the market has made it to the top of the mountain once again. In fact this is the third time the market has traded up to the $100/bbl mark for WTI only to fall back (so far). As we have also been discussing there is no compelling single reason as to why prices have moved to current levels just a shift in the market sentiment based on many issues, all of which are not bullish. Following is a summary of how I see the main market drivers that are working in the complex at this time:
· Fundamentals – Neutral to Bearish
o We see the fundamentals as neutral to bearish as oil inventories are building once again. With refinery maintenance season upon us we are seeing crude oil stocks build in both the US and Europe. In fact when inventories are released tomorrow (delayed one day due to the Presidents Day holiday this week) we expect another neutral to bearish inventory picture. Crude oil is expected to build for the 6th week in a row with this building pattern also likely to be in place until about mid-April (historical pattern) as the refinery maintenance season gets into full swing. Gasoline is also expected to build again adding to the already record year on year surplus for this time of the year. This will be the 9th week in a row that gasoline stocks have built bringing stocks to the highest level(for this time of the year) since 1994. On the distillate side the market is expecting a modest seasonal decline. Overall, we view tomorrow’s report are biased to the bearish side as stocks remains well above the longer term average level.
| Projections | | 2/20/08 | |
| | | | |
| | Current | Change from | Change from |
| | Projections | Last Year | 5 Year |
| mmbls | | vs. Proj. | vs. Proj. |
| Crude Oil | 2.2 | (24.3) | 3.7 |
| Gasoline | 0.5 | 7.6 | 12.2 |
| Distillate | (2.0) | (3.3) | 8.6 |
| Ref. Runs% | 0.0% | -0.1% | -2.7% |
| Change Level | 85.1% | 85.2% | 87.8% |
| | BCF | BCF | BCF |
| NG, BCF | (165) | (88) | 112 |
· OPEC – Neutral
o Although there has been talk of OPEC cutting production at the March 5th meeting we do not believe this will happen. We are expecting a roll-over agreement as the normal conditions for OPEC to intervene (by cutting production) are not there yet. OPEC mostly looks at inventories and prices. Although inventories are building modestly they remain well below the normal threshold level that worries OPEC. Both OECD and US inventories are still below the levels that existed in Oct , 2006 when OPEC last intervened by cutting production.
o Prices are at the highest level EVER at the moment and not a good political scenario for OPEC to cut production and risk prices surging even higher which could result in a negative impact on an already weakening world economy.
o We expect OPEC will indicate to the market that they will re-look at the situation in April and adjust production if needed. For March they will keep production levels as is.
· Geopolitics – Neutral to Slightly Bullish
o The market has focused on two main areas at the moment…Nigeria and Venezuela.
o In Nigeria the insurgent group MEND (Movement for the Emancipation of the Niger Delta) has been promising a new round of attacks on oil infrastructure if the government did not explain the status of the group’s leader (was he killed in a military hospital?). Nigerian authorities have said he is still alive. Whether or not this situation results in more violence or not the threat remains in Nigeria. However, nothing has happened and shut in production has been coming back of late.
o Venezuela is in a court dispute with EXXON and has stopped selling crude oil to Exxon (minor impact at best) and did threaten cutting off the US last week. Since then Chavez has rescinded his remarks and now says he will only cut the US off if the US attacks Venezuela. Since Venezuela would lose about $70 million/day by cutting off US crude oil supplies it is no wonder Chavez has changed his stance. We see the situation in Venezuela as being a non-event.
· Technicals – Bullish
o Clearly the most bullish driver in the overall complex has been the technicals. Technically the market (WTI) has rebounded (3rd time) off of the lower end of the trading range (about $85/bbl) just 9 trading days ago and has since increased by about $15/bbl on strong technical buying as well as long only index fund buying. The market is now a bit oversold as a result of this meteoric move and as such we would not be surprised to see a bit of profit taking (already seen overnight). Whether or not there is enough technical momentum to continue the surge is still unclear. We think prices will retrace, consolidate and look for support for another pass at clearly breaching and staying above this psychological price level.
· Market Sentiment – Bullish
o In spite of the limited amount of bullish support in the energy complex the market has decidedly moved into a bullish sentiment and continues to discount any bearish news and thoroughly embrace any bullish news (irrespective as to the strength of this news). We will remain in this mode until the market starts paying attention to some of the other overriding factors (as discussed above).
We expect the current trading pattern to remain in place…high volatility , upward bias and susceptibility to change direction quickly and strongly with little or no warning. Currently oil has given back some of yesterday’s gains as it looks for the next catalyst to march higher.
| Current Expected Trading Range | | | ||
| | 2/20/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:33 AM | Yesterday | | |
| Mar WTI | $99.21 | ($0.80) | $100.00 | $85.25 |
| Mar HO | $2.7321 | ($0.0293) | $2.7500 | $2.4000 |
| Mar RBOB | $2.5625 | ($0.0406) | $2.6500 | $2.2000 |
| Mar NG | $9.093 | $0.116 | $9.250 | $8.250 |
| | | | | |
Dominick A. Chirichella
Energy Management Institute
tel 646.202.1433
fax 801.383.7510
dchirichella@emimail.org
www.energyinstitution.org
www.advancedenergycommerce.com
