Dominick A. Chirichella's Energy Market Analysis

Monday Morning, August 4, 2008 Last Friday was a great example that volatility in the oil/energy complex is alive and well and those trading the market from the short side remain extremely nervous and jumpy. On very little information the market staged an intraday short covering rally that exploded the trading ranges to over $5/bbl for WTI and almost $0.10/gal for refined products only to end the marginally higher for WTI & RBOB and lower for HO. The main driver of the rally was concern over a possible refinery problems in the mid-west and talk about Iran by an Israeli diplomat during a presentation. Not strong enough news to sustain the short covering rally.   So far this morning the market is mixed on the arrival of Tropical Storm Edouard (see graphic at the end of the report) which has formed in the US Gulf over the weekend and is expected to make landfall late on Tuesday. Edouard is not expected to strengthen to hurricane status and as such this will not be a major event like what we saw in the Gulf with Katrina & Rita. However, I suspect there will be some interruptions to crude oil supply coming into the Gulf as the weather pattern hovers near the Houston Ship Channel.   On another note the CFTC released their latest Commitment of Traders report on Friday. As shown in the following chart we saw a small blip up in the net long position of the non-Commercial or speculative trading sector and a corresponding small move higher in the EMI  Weekly Composite Price Index. A logical relationship between price and net long positions but one that has not violated the overall trend of a lower presence of the specs from the long side and a lower price. The spec net long position remains at levels not seen since early 2007 when the price of the EMI Composite was trading around $65/bbl. Currently the EMI Composite price is trading at a tad below the $129/bbl level or at trading levels from early May of this year. These data indicate the downside correction is still in play with price having a lot of room to catch up to the relatively small net long position of the spec community. Or one could say that the spec community has little to do with the fact that the EMI Composite Price Index is currently trading at 197% higher than where it was trading when the spec net long position was at the same level as it is now. A fact we should pass on to the politicians in Washington who continue to blame the woes of the energy crisis on the spec traders.     So far the Iranian deadline came and went over the weekend as the Iranians seemingly let pass the West's deadline of two weeks for Iran to respond to the package of incentives to freeze its nuclear enrichment program. Surprisingly there have been none of the usual bluster coming from Iran nor any negative comments coming from the West as the deadline passed. In fact the Iranian President said on Sunday that diplomacy is the key to solving the problem and he and Iran were very serious about negotiating. These comments can be viewed as somewhat conciliatory as his normal remarks have always been outright belligerent and caustic on this issue. The lack of any major negative comments coming from either side may indicate that some progress may be made. On the other hand there is a report that the Iranian Revolutionary Guard has tested a new naval weapon on Monday. For the moment we are cautiously optimistic that some progress will be made in the coming weeks. However we would like to point out that this issue is widely watched by the trading community and any flare up of negativity will result in another short covering rally as we experienced on Friday.   So where do we go from here as we embark on a new trading month? For the moment we believe the market still has further downside as demand restraint remains front and center in the minds of all market participants.  The market sentiment remains cautiously (if not nervously) biased to the bearish side. From a technical perspective we remain in our predicted trading ranges and have been in this pattern since around the third week of July. We expect to remain in this pattern but drift toward the lower end of the pattern once again. The dollar may play a role this week as the Fed will meet and make their usual interest rate announcement as well as the ECB. We are not expecting anything significant in this area as the economy remains caught between a compression on one side and inflationary tendencies due to high commodity prices on the other side. A difficult economy to manage for all involved.   In summary we will be watching the financial markets all week to see how the dollar reacts while waiting for another snapshot of oil fundamentals on Wednesday and any remarks from either side on the Iranian nuclear stalemate. Specs should trade with tight stops while the buy side hedging community may have a window of opportunity later this week if the upcoming fundamental report is bearish and if the Iranian situation remains out of the news.    Currently prices for energies are lower across the board while the dollar mixed.   Current Expected Trading Range Expected Trading Range   8/4/08 Change Low High End     From End Support Resistance   8:26 AM Yesterday     Sep WTI $123.79 ($1.31) $121.00 $128.00 Sep HO $3.4203 ($0.0165) $3.5200 $3.7000 Sep RBOB $3.0600 ($0.0243) $3.0300 $3.1700 Sep NG $9.219 ($0.170) $9.000 $10.300           Euro/$ 1.5541 0.0029 1.5550 1.5750 Yen/$ 0.9265 (0.0044) 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

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/