As we said last week, we are in the hurricane period and the energy markets are very much about the storms. However, the most interesting aspect associated with all of the storms so far is how little they have affected prices to date. When one views the lineup of storms in the Atlantic heading west (see chart below) the first reaction would be oil and natural gas prices will surge. Interestingly prices have been on the defensive all week and are starting out the day in negative territory. If the current active hurricane season were occurring when the market sentiment was frothing a few months ago, prices would be moving up about $10/bbl per day rather than falling more than $7/bbl this week so far. Of the line of storms shown in the chart, it seems that only Ike currently has a possibility of moving to the Gulf of Mexico. Hanna is clearly a southeast U.S. coastal event-making landfall over this coming weekend somewhere in the Carolinas. Ike will be in the Caribbean by the weekend with its path a possibility to then head into the Gulf next week while Josephine looks like it is already turning northwest and if it heads to the U.S. It also could be a U.S. east coast event in a week or so.
With the energy infrastructure seemingly out of harm’s way all eyes are once again focused on the more normal market drivers, which overall are still painting a bearish picture.
Tomorrow the EIA will release both Oil and natural gas inventories. Nat Gas stocks are expected to build about 60 BCF closing the year on year gap even further while increasing the five-year same week surplus. On the oil side, the expectations are for a relatively neutral report with a small decline in crude, a seasonal decline in gasoline and a normal build in distillate. Refinery runs may increase slightly. If the actual numbers come in as expected the year on year deficit of crude will be less than half of what it was about a month or so ago with both gasoline and distillate stocks still above last year’s level when demand was noticeably higher. We expect the demand figures to continue within the downward trend.
Next week’s numbers should be reflective of the impact of preventive oil and natural gas production shut-ins associated with Gustav. We would expect a considerable decline in both crude oil and natural gas inventories as essentially 100% of Gulf crude oil production and about 95% of natural gas production has been shut for about five or six days along with closures of LOOP and the Houston ship channel. We would not be surprised to see crude oil stocks decline about 10 million barrels in next week’s report. On the refined product side we should also see some modest declines in both gasoline and distillate as about 13 refineries have also be shut down for preventive measures and are not likely to reach full operations until later this week. With demand on the defensive and current inventory levels very comfortable, the loss of supply from Gustav (as reflected in next week’s inventory report) will not cause any supply disruptions anytime soon.
Projections
9/3/08
Current
Change from
Change from
Projections
Last Year
5 Year
mmbls
vs. Proj.
vs. Proj.
Crude Oil
(0.1)
(24.0)
(2.6)
Gasoline
(1.2)
3.2
(2.6)
Distillate
0.5
0.5
0.5
Ref. Runs%
0.1%
-4.7%
-5.3%
Change Level
87.4%
92.1%
92.7%
The dollar remains in an upward trend and for all of the reasons we have been discussing for weeks will remain in an upward trend over the next few months. The dollar is bearish for oil.
Next Tuesday, Sept. 9 OPEC will be meeting to discuss production levels. Early indications (as well as my opinion) point to a rollover agreement (leave production at current levels). With demand easing around the globe OPEC production (in particular Saudi Arabia) will likely fall because of a declining call on OPEC crude oil. In fact, Saudi production is down about 50,000 bpd but still above their quota. The decline is a result of a lack of demand for the extra crude. OPEC will likely let production fall on its own rather than make an aggressive statement that they are cutting production to raise prices when so many economies around the globe are struggling.
Technically the market has entered another new, lower trading range and is now positioned to test the next major support level of $100/bbl basis WTI. We believe prices will eventually trade down to that level unless OPEC and/or another storm changes the supply balances.
Overall, the supply and demand situation is well balanced now. The market sentiment is clearly bearish and will remain so for the near future barring any storm problems or OPEC surprises. The specs should continue to look at selling opportunities employing tight, trailing stops while the buy-side hedge community should remain on the sidelines for now.
Currently prices are lower while the dollar is firm across the board.
Current Expected Trading Range
Expected Trading Range
9/3/08
Change
Low
High End
From
End Support
Resistance
7:50 AM
Yesterday
Oct WTI
$107.89
($1.82)
$100.00
$112.00
Oct HO
$3.0440
($0.0296)
$2.8300
$3.0700
Oct RBOB
$2.6925
($0.0412)
$2.5000
$2.8100
Oct NG
$7.172
($0.089)
$6.920
$7.600
Euro/$
1.4419
(0.0085)
1.4300
1.4600
Yen/$
0.9221
0.0009
0.9000
0.9300
Dominick A. Chirichella
Energy Management Institute
dchirichella@mailaec.com
www.energyinstitution.org
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.
