As we discussed in yesterday’s report the market was all about the inventories and the Fed. The inventories were bearish with a few surprises while the Fed was as expected and somewhat bullish. The Fed announced they were keeping interest rates steady but clearly indicated that inflation was a greater risk than recession. With the economy still in a bit of a fragile condition raising interest rates to fight the potential of inflation did not seem to be in the cards at the moment. However, with inflation risk on their radar the odds are they will likely raise rates later in the year. The currency market viewed this with a ho hum resulting in the dollar with a bias to the weak side and thus moving further away from the break out range. Oil viewed this as a positive event for the bulls as a weak dollar translates to higher oil prices. In fact the Fed decision came out about 4 hours after the US oil inventories were released contributing to the oil market halving its losses from the bearish inventory report.
On the inventory front the first surprise was the unexpected build in crude oil stocks and the decline in refinery runs. The Industry was expecting runs to increase and thus resulting in another draw of crude oil stocks. The second surprise was the larger than expected build in distillate (ho/diesel) stocks and the smaller than expected draw in gasoline both occurring as refinery runs declined. On the stock side the year on year deficit of crude oil narrowed slightly but still remains a point of interest and something to watch as we progress through the summer. On the other hand as we head in to the 4th of July holiday week the year on year surplus of gasoline has widened slightly and is now over 6 million barrels above last year at this time and just about at the average level versus the 5 year average(for the same weeks). Distillate is now building at a faster weekly rate than normal almost eliminating the year on year deficit and showing a surplus versus the 5 year average. Overall the inventories were bearish.
On the demand side of the equation the expectations were mostly meet with demand continuing to decline. Elasticity of demand has firmly set in with the consumer seemingly determined to reduce their consumption of all forms of oil. Total demand declined strongly on the week and is now significantly below last year and the 5 year average (for the same week). This same pattern exists for both distillate and Jet fuel with gasoline not far behind. Overall the demand side of the equation is bearish.
| Oil Inventory | | 6/26/08 | | |
| Mil of Bbls | | | | |
| | Current | Change from | Change from | Change from |
| | Inv. | Last Week | Last Year | 5 Year |
| | | | | |
| Crude Oil | 301.8 | 0.8 | (49.1) | (20.7) |
| Gasoline | 208.8 | (0.2) | 6.2 | (0.1) |
| Distillate | 119.4 | 2.8 | (1.0) | 3.3 |
| Refinery % | 88.6% | -0.7% | -0.8% | -0.8% |
| Demand | | | | |
| | | | | |
| Total | 20079 | (377) | (1008) | (493) |
| Gasoline | 9334 | 83 | (241) | 31 |
| Distillate | 4040 | (30) | (351) | (43) |
| Jet Fuel | 1545 | (63) | (181) | (157) |
With little else impacting prices as of this writing the market is likely to remain in a struggle between the comfortable bulls and the always nervous bears. The problems in Nigeria continue keeping a bullish undertone in the market while current supply & demand present a very comfortable and bearish overtone in the market. On top of these drivers is a dollar still trying to embark on a firming recovery move which would be bearish for oil. With the Fed’s decision to hold interest rates steady the long awaited dollar rally may also be on hold.
Expect volatility to remain high with the market susceptible to strong moves in either direction as many participants begin the process of book squaring ahead of the upcoming holiday week.
Currently oil prices are firm while the dollar is slightly weaker.
| Current Expected Trading Range | | | ||
| | 6/26/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:02 AM | Yesterday | | |
| Aug WTI | $135.02 | $0.47 | $140.00 | $99.20 |
| July HO | $3.7745 | $0.0253 | $4.0000 | $2.7100 |
| July RBOB | $3.4070 | $0.0129 | $3.5000 | $2.5200 |
| July NG | $12.731 | ($0.022) | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5654 | 0.0051 | 1.6000 | 1.5200 |
| Yen/$ | 0.9320 | 0.0010 | 1.0450 | 0.9000 |
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