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 U.S. 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 U.S. oil demand continues to trend lower and is likely to do so as long as prices remain well above the $100 to $110 per barrel mark.
Where do we go from here?
The oil report served as a catalyst for 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 five-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 & natural gas 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
Dominick A. Chirichella
Energy Management Institute
1324 Lexington Ave #322
New York, NY 10128
dchirichella@mailaec.com
www.energyinstitution.org
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