Dominick A. Chirichella's Energy Market Analysis

Friday Morning, August 1, 2008 As we said yesterday the weak shorts exited market on Wednesday, a bit prematurely. The market resumed its downward path on Thursday after looking at the EIA report and realizing that gasoline and distillate remain well supplied and as the demand trend continues lower.  As shown on the EMI Weekly Price Board this week so far has seen HO as the biggest loser while RBOB gasoline is still holding on to a minor gain with WTI slightly negative. NG also moved strongly lower on the week as inventories and short term fundamentals all indicate a very comfortable supply situation for NG. Distillate(HO/Diesel) has gone from being the market leader to the market loser over the last several weeks as the supply situation continues to improve, the US dollar continues to firm making exports of diesel less attractive and as demand continues to head south. Interestingly it appeared that the refiners have moved from a normal max gasoline production mode to a max distillate production mode just as the distillate crack is also heading in the wrong direction. If they remain in this mode refiners are going to experience a more difficult economic situation over the next few months as distillate supplies build at an atypical rate for this time of the year. The widely followed 3-2-1 crack spread is now trading at about 50% of where it was at this time in 2006 and about 30% below where it was at this time in 2007. We can expect refinery runs to remain below the 90% utilization level for the foreseeable future.     EMI Weekly Price Board     Current Change Change % Change Weekly   Price From for For Range   7:46 AM Thurs Week Week   Sep WTI $123.11 ($0.97) ($0.15) -0.12% $7.00 Sep HO $3.4289 ($0.0304) ($0.1001) -2.84% $0.1470 Sep RBOB $3.0450 ($0.0259) $0.0127 0.42% $0.1461 Sep NG $8.973 ($0.146) ($0.111) -1.22% $0.540 Sep 08 Cracks           RBOB Crack $4.780 ($0.12) $0.33 7.34% $0.27 HO Crack $20.904 ($0.31) ($4.91) -19.01% $0.23 321 Crack $10.101 ($0.180) ($1.40) -10.55% $0.260             Euro/$ 1.554 (0.0017) ($0.0113) -0.72% $0.0244 Yen/$ 0.9334 0.0042 $0.0041 0.44% $0.0099 Since the correction began (market peaked on 7/11) WTI is still down over $21/bbl or about 15% while refined products are down between 16 to 17%. We expect further moves to the downside as demand restraint is spreading beyond the shores of the US. Japan just reported a downturn in demand during the month of June. Many developing nations are continuing to reduce or even eliminate some of the subsidies on oil prices. Thailand just eliminated its subsidy on diesel prices.  With the China Olympics just days away we can expect to see some demand reduction coming from China after the Olympics are over. In a nutshell we expect to see the main forecasting agencies (IEA & EIA) reducing their demand growth projections even further over the next several months. The languishing US economy is also indicative of oil demand remaining on the defensive in the US. Let's not forget about the US dollar. As of this writing the dollar is once again trading near key resistance levels (versus the Euro) as the market awaits this morning's employment numbers. The dollar is at a one month high. The dollar has made a few passes at breaching this level. Today's economic report could contribute to further firming of the US dollar which would be bearish for oil. On the Geopolitical front all quiet out of Nigeria and Iran. As we have mentioned all week the West's offer of incentives for cessation of Iran's nuclear enrichment program comes to an end tomorrow. The remedy is supposed to be additional sanctions. The biggest surprise is neither side has been immersed in the normal war of words this time. Possibly they are close to some form of a basis for additional negotiations or even an agreement of some sorts. If so it would be bearish for oil. This is likely to impact trading next week. On the weather front the Tropical Storm situation is as quiet as it could be with no weather patterns anywhere in the Atlantic or Gulf that have the probability of  forming into a storm. This is at least neutral of oil & ng even a bit bearish. Be aware we are not yet into the peak hurricane season so this part of the story is not over. But for the moment it will not impact trading at least through next week. The overall market sentiment remains decidedly biased to the downside and as such we can expect any bearish news to be enthusiastically embraced while mildly bullish news will be discounted (for example this week's gasoline inventory decline). We expect the market to remain in the downward correction pattern it has been in since peaking on July 11th. The market is still trading within the ranges (shown in the table below) that we have predicted it would since late last week. We expect that to continue for the next few days and/or until a new major market moving event occurs...geopolitical, economy related or fundamental related. Spec traders should continue to cautiously trade from the short side with trailing stops while the buy side hedging community should be setting targets but wait a bit longer before pulling the trigger. For the hedgers let's see how the market evolves into early next week. Currently energies are lower with the dollar slightly stronger versus the Euro. Current Expected Trading Range Expected Trading Range   8/1/08 Change Low High End     From End Support Resistance   7:46 AM Yesterday     Sep WTI $123.09 ($0.99) $121.00 $128.00 Sep HO $3.4248 ($0.0345) $3.5200 $3.7000 Sep RBOB $3.0450 ($0.0259) $3.0300 $3.1700 Sep NG $8.985 ($0.134) $9.000 $10.300           Euro/$ 1.554 (0.0017) 1.5550 1.5750 Yen/$ 0.9334 0.0042 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. For more info visit our website (www.energyinstitution.org), email EMI at info@energyinstituion.org or call 888-871-1207 To unsubscribe to this report please respond to this email with the word remove in the subject line. Dominick A. Chirichella Energy Management Institute 1324 Lexington Ave #322 New York, NY 10128 tel 646-202-1433 fax 801.383.7510 dchirichella@mailaec.com www.energyinstitution.org   This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or the taking of any action in reliance on this information is strictly prohibited. If this message has come to you in error, please immediately notify the sender by telephone or return e-mail and delete the original transmission and its attachments without reading or saving in any manner. Thank you.         1324 Lexington Ave #322, , New York, New York, 10128, USA t: 646-202-1433 | f: 801-383-7510 e: dchirichella@emimail.org | w: http://www.energyinstitution.org/

Dominick A. Chirichella's Energy Market Analysis

Thursday Morning, July 31, 2008 As we have been suggesting for several days this week's EIA short term fundamental report certainly did have several surprises. Interestingly all of the surprises and the ultimate numbers did not send the same message nor were they the result of any one event. Following are the main highlights and some comments: Crude oil inventories declined only 100,000 bbl versus an expectation for a decline of 1.5 million barrels and possibly more due the passing of Hurricane Dolly and closure of the Houston Ship Channel. A big surprise but in the other direction. A bearish surprise. Gasoline inventories declined by 3.5 million barrels versus an expectation for a build of about 200,000 barrels. This was the surprise of the day and the one that ultimately led to a pretty strong short covering rally in the complex on Wednesday. The surprise seems to have little to do with the passing of Dolly or the closure of the Mississippi River and more to do with poor refinery economics as refiners seemed to have prematurely switched to a max distillate (HO/Diesel) production mode from a max gasoline production mode as production of gasoline declined while distillate production increased. This was a neutral to slightly bullish surprise. Distillate stocks increased more than expected and the year on year surplus is quickly beginning to accumulate. With refiners appearing to be on a max distillate mode of production the year on year surplus is likely to grow even further. Another bearish surprise. Refinery utilization increased slightly versus an expectation for another decline. A bearish surprise.     Oil Inventory   7/31/08     Mil of Bbls           Current Change from Change from Change from   Inv. Last Week Last Year 5 Year           Crude Oil 295.2 (0.1) (49.3) (19.9) Gasoline 213.6 (3.5) 8.9 6.2 Distillate 130.5 2.4 4.0 6.2 Refinery % 87.2% 0.1% -6.4% -6.5% Demand                   Total 20204 301 (696) (588) Gasoline 9468 126 (194) (57) Distillate 4199 122 89 293 Jet Fuel 1424 3 (184) (196) Moving on to the demand side of the equation the report showed across the board gains in demand on the week. We could call this a surprise but it is important to point out that the weekly implied demand numbers reported by the EIA are a bit volatile on a week to week basis and should be viewed more from a longer period of time trending relationship as shown in the chart below. Also in spite of the demand increase on the week gasoline demand is still about 2% below last year for the same week while total oil demand is still about 3.3% below last year's levels. I would not yet interpret this week's demand gains as the US consumer returning back to their old habits. Rather I would say it is just normal week to week data noise as the trend is still lower. Total US oil demand continues to trend lower and is likely to do so as long as prices remain well above the $100 to $110/bbl mark. Where do we go from here? The oil report served as a catalyst for the the weak shorts to once again jump out of the market on fear that they will lose the battle. I think this time they jumped prematurely as the overall inventory report is not all that bearish. In a nutshell the year on year deficit of crude oil narrowed, while the year on year and 5 year surplus of both gasoline and distillate indicate a more than adequate upcoming supply situation. In fact Colonial pipeline is allocating space for shipping distillate from the Gulf Coast to the East Coast due to more barrels nominated to ship versus available space.  This is bearish. Overall we still rate the short term fundamental situation as bearish. The US dollar is still firmer on the week even after losing some ground in yesterday's trading. Today and tomorrow the market will get some potentially market moving economic news (GDP, employment numbers) that could have an impact on the direction of the dollar. The dollar is currently trading around key resistance areas (vs. Euro) that if breached could put strong downside pressure on oil. The economic reports will be the catalyst in determining where the dollar heads for the rest of the week. The normal Geopolitical suspects (Nigeria & Iran) have been quiet most of this week and that is bearish. However on Saturday the most recent edict by the West to Iran to stop their nuclear enrichment program comes to an end. The remedy is supposed to be further sanctions. So far both sides have been very quiet indicating that this event could pass with little or no impact on the oil complex in the short term. The tropical storm front seems to be clear of any threats in the short term. There is a tropical pattern off of the West Coast of Africa that the NWS believes has a low probability of strengthening into anything significant in the near term. Weather is neutral to bearish for energy. Overall we do not believe anything significant has structurally changed with the release of the EIA report. Based on all of the above discussed market movers we still view the market as biased to the downside. The complex is still trading within our predicted trading ranges and has been since the second half of last week. We do believe we will remain within the trading ranges (shown in the following table) for the rest of this week and possibly into the first half of next week. Today is expiration day for the August Nymex RBOB, HO & Propane contracts. Also NG inventories are due out this morning. The expectations are calling for an injection of about 70 BCF. NG inventories are clearly in a pattern to reach very normal levels prior to the start of the upcoming winter heating season. Currently oil & ng are lower while the dollar is slightly weaker. Current Expected Trading Range Expected Trading Range   7/31/08 Change Low High End     From End Support Resistance   7:41 AM Yesterday     Sep WTI $126.02 ($0.75) $121.00 $128.00 Aug HO $3.5030 ($0.0173) $3.5200 $3.7000 Aug RBOB $3.1004 ($0.0347) $3.0300 $3.1700 Sep NG $9.196 ($0.052) $9.000 $10.300           Euro/$ 1.5577 0.0044 1.5550 1.5750 Yen/$ 0.9263 (0.0009) 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. For more info visit our website (www.energyinstitution.org), email EMI at info@energyinstituion.org or call 888-871-1207 To unsubscribe to this report please respond to this email with the word remove in the subject line. Dominick A. Chirichella Energy Management Institute 1324 Lexington Ave #322 New York, NY 10128 tel 646-202-1433 fax 801.383.7510 dchirichella@mailaec.com www.energyinstitution.org   This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or the taking of any action in reliance on this information is strictly prohibited. If this message has come to you in error, please immediately notify the sender by telephone or return e-mail and delete the original transmission and its attachments without reading or saving in any manner. Thank you.           1324 Lexington Ave #322, , New York, New York, 10128, USA t: 646-202-1433 | f: 801-383-7510 e: dchirichella@emimail.org | w: http://www.energyinstitution.org/