As we discussed in the beginning of the week, this week would be important for determining whether the long awaited downside correction had begun last week. Based on the trading pattern for this week, we can say it has not and for now we would call last week just a short-term blip in the emotional move to higher and higher over-valued prices.
It was an interesting week as the energy complex shed some of its relationship with the currency markets and focused on a combination of geopolitics and a surprising inventory report. On the geopolitical front, the renewed violence in Iraq and the attack on a pipeline in southern Iraq brought the mind the importance of oil flow out of Iraq and the possibility of a reduction of supply from the region if the violence continues. So far all signs indicate that oil flow from Iraq has not been impacted but the violence continues for the moment. On the inventory front the market reacted bullishly on news that crude oil stocks did not build as much as expected while products and refinery runs declined more than expected. Bullish for the week, but the market still remains comfortably supplied especially with gasoline inventories still over 23 million barrels above last year at this time.
As shown in the following table for the week we had another crude oil led rally with HO a close second. With the huge overhang of gasoline inventories it should be no surprise that gasoline was once again lagging the rest of the complex. On the refining sector crack spreads declined across the board with the RBOB gasoline crack leading the way lower. Even with refinery runs declining over 1% on the week margins (as measured by the Nymex cracks) remained under pressure.
Also shown in the table is the activity of the US dollar for the week. Versus the Euro the dollar weakened about 3.4% on the week, also after recovering in a short covering rally last week. On the other hand the U.S. dollar versus the Yen gained about 2.44% on the week leaving the market with a mixed bag and the reason why I indicated above that the energy complex was less (than has been the case) influenced by U.S. dollar trading on the week.
Trading For the Week
Current
Change
Change
14-Mar
Weekly
Range % of
Price
From Thurs
For Week
Settle
Range
Fri Close
7:22 AM
May WTI
$106.86
($0.72)
$5.02
$101.84
$9.09
8.93%
Apr HO
$3.1370
($0.0113)
$0.1598
$2.9772
$0.3039
10.21%
Apr RBOB
$2.7091
($0.0072)
$0.1040
$2.6051
$0.1847
7.09%
May NG
$9.687
$0.000
$0.937
$8.750
$0.681
7.78%
May 08 Cracks
RBOB Crack
$6.926
$0.46
($0.95)
$7.876
$4.87
61.85%
HO Crack
$20.371
$0.38
$0.15
$20.220
$2.87
14.19%
321 Crack
$11.363
$0.435
($0.59)
$11.950
$4.211
35.24%
Euro/$
1.5767
0.0047
$0.0406
$1.5361
$0.0523
3.40%
Yen/$
1.0044
(0.0012)
($0.0143)
$1.0187
$0.0249
2.44%
What is in store for next week? We believe more of the same. The market will be watching the evolving situation in southern Iraq as well as the upcoming oil inventories. I do not believe the U.S. will allow the Iraqi situation to get to far out of control after spending the last year in bringing more stability to the country as a result of the surge. Thus I do not see any major long term disruptions of oil flow from Iraq.
On the inventory side this week should be interesting. I think we will see a noticeable increase in crude oil inventories as last week’s numbers should have showed a bigger than reported build as a result of a big decrease in refinery runs but was likely impacted by bad weather in the Houston ship channel slowing imports. On the distillate side, we do expect another healthy draw as the weather has still been on the cold side. Gasoline should also continue its decline as we are now pretty much on a normal pattern of drawing gasoline stocks. With poor refinery margins it is unlikely that refinery runs will show any significant increases. Overall we expect a neutral inventory report next week. The market might not view it that way.
The market sentiment is inching back to the bullish bias. We have seen the change starting this week as the market quickly discounts any bearish news and strongly embraces all bullish. Volatility will remain high and a choppy trading pattern will remain in place.
Currently prices are lower.
Current Expected Trading Range
3/28/08
Change
Upper
Lower
From
Resistance
Support
7:22 AM
Yesterday
May WTI
$106.85
($0.73)
$112.50
$99.20
Apr HO
$3.1370
($0.0113)
$3.2500
$2.7100
Apr RBOB
$2.7091
($0.0072)
$2.9000
$2.5200
May NG
$9.687
$0.000
$10.250
$8.700
Euro/$
1.5766
0.0046
1.5818
1.5200
Yen/$
1.0046
(0.0010)
1.0450
0.9900
Dominick A. Chirichella
Energy Management Institute
dchirichella@mailaec.com
www.energyinstitution.org
www.advancedenergycommerce.com
