As we have been saying all week the downside correction is not yet over. Prices are ending the week in the same pattern as they started the week…on the defensive. The combination of the surging dollar and bearish short term fundamentals (both building inventories and declining demand) have more than mitigated the concern over supply interruptions. The market quickly discounted the fire on the Turkish side of the BTC pipeline as well as the non-resolution of the Iranian nuclear standoff. The market sentiment remains decidedly bearish as prices look to move to the lower end of our predicted trading range.
On the week prices declined across the board for the energies while the dollar continued to strengthen against most major currencies around the globe. On the oil side distillate (HO/Diesel) continues to lead the market lower falling over $0.25/gal this week or 7.5%. A combination of declining demand, a strengthening dollar making exports of diesel oil less attractive and the fact that the US refining sector has switched to a max distillate production mode resulting in more supply have all contributed to HO/Diesel taking over the leadership position in the current downside correction pattern of the energy complex. RBOB gasoline which is the most oversupplied of the energy commodities is trailing behind the rest of the complex but has still declined a little over $0.12/gal on the week.
The refiners remain under the gun as margins (as measured by the crack spreads shown in the table below) declined for yet another week. However the decline has slowed a bit as the gasoline portion of the crack spread has actually put in a solid week increasing almost $2/bbl. The move by many refiners to minimize production of gasoline is currently working to shore up the economics of the largest contributor to the overall refinery margins…gasoline.
A major contributor to the ongoing decline has been the strengthening of the US dollar. The dollar firmed 2.7% on the week versus the Euro and almost 2% versus the Yen. The dollar has been firming versus most currencies around the world. As the dollar firms oil and most commodities) declines. The dollar/euro relationship bottomed out on 7/15/08 and since then the dollar has firmed almost 6% while oil has declined between 18 to a little over 23% since peaking on July 11.
EMI Weekly Price Board
Current
Change
Change
% Change
Weekly
Price
From
for
For
Range
7:01 AM
Thurs
Week
Week
Sep WTI
$117.53
($2.49)
($7.57)
-6.05%
$8.05
Sep HO
$3.1700
($0.0636)
($0.2668)
-7.76%
$0.2180
Sep RBOB
$2.9472
($0.0555)
($0.1371)
-4.45%
$0.2140
Sep NG
$8.519
($0.052)
($0.870)
-9.27%
$1.265
Sep 08 Cracks
RBOB Crack
$6.252
$0.16
$1.81
40.82%
$0.96
HO Crack
$15.610
($0.18)
($3.63)
-18.87%
$2.11
321 Crack
$9.340
$0.047
$0.02
0.12%
$1.336
Euro/$
1.5097
(0.0197)
($0.0415)
-2.68%
$0.0393
Yen/$
0.9127
(0.0030)
($0.0182)
-1.96%
$0.0208
The dollar is in the front of the pack of drivers leading the price of oil and most other commodities to lower levels. As much as the market sentiment of the oil complex has turned decidedly bearish the market sentiment in the currency market has now switched to biased to the bullish side for the dollar versus most currency pairs. This week the US, England and EU Central banks all left interest rates unchanged with the US Fed indicating that inflation was their primary concern indicating that their next move would likely be to raise rates. The market has interpreted all of the above moves (or lack thereof) as bullish for the dollar which in turn is bearish for oil.
The dollar/euro has breached through key resistance and is now solidly in a new, higher trading area that could result in the dollar firming another 1 to 2% in the next few weeks. A move of that magnitude could result in another $10 to $14/bbl decline in oil prices from current levels. The dollar/euro is now trading at levels not seen since late February of this year and has clearly entered a new trading range.
Downside Oil Correction
Decline Since Peak on 7/11/08
Change
Change
From
From
Peak, 7/11/08
Peak, 7/11/08
$/bbl
%
WTI
($27.68)
-19.08%
HO
($0.9912)
-23.83%
RBOB
($0.6838)
-18.83%
Bottom 7/15/08
Bottom 7/15/08
$/Euro
$0.0368
5.89%
As we have been predicting for several weeks the downside oil correction is well in place and not yet over. We continue to see more downside potential as a result of the surging dollar, improving short-term fundamentals and languishing economies. Oil is solidly in our predicted trading ranges and potentially on the way to the lower end. We think the downside correction could bring the Nymex WTI price down to around the $110/bbl level before stabilizing. Part of the stabilization is likely to come from OPEC beginning to become uncomfortable if prices move down another $10 to $15/bbl and more likely to intervene via cutting production as we approach that level. In addition we see the $100 to $110/bbl price level as a possible turning point whereby the consumer could become less diligent in their energy consumption habits.
We expect more of the same next week. The specs should continue to trade cautiously from the short side with tight, trailing stops while the buy side hedgers should remain ready to move as the market moves closer to the lower end of the trading ranges shown in the following table.
Currently energy prices are lower across the board as the dollar continues to surge
Current Expected Trading Range
Expected Trading Range
8/8/08
Change
Low
High End
From
End Support
Resistance
7:01 AM
Yesterday
Sep WTI
$117.41
($2.61)
$110.00
$120.00
Sep HO
$3.1674
($0.0662)
$3.0700
$3.3500
Sep RBOB
$2.9472
($0.0555)
$2.8100
$3.0000
Sep NG
$8.510
($0.061)
$8.100
$8.650
Euro/$
1.5099
(0.0195)
1.4900
1.5300
Yen/$
0.9127
(0.0030)
0.8950
0.9200
Dominick A. Chirichella
Energy Management Institute
1324 Lexington Ave #322
New York, NY 10128
dchirichella@mailaec.com
www.energyinstitution.org
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