Prices are starting the day slightly firmer on a light round of short covering ahead of today’s oil and natural gas inventory reports. Gustav is quickly moving out of the picture as the energy infrastructure in the Gulf returns to normal operations. The remaining three storms, Hanna, Ike and Josephine, are all steaming toward the U.S. but with projected paths that look more likely to be evolving as U.S. east coast weather events rather than Gulf of Mexico events. Of the three storms, Ike still looks like it can go either way at this point. However, the projected path shows it veering a bit further north than previous projections indicating that an east coast event is starting to look more probable.
The three main drivers the market is watching closely are:
The direction of the dollar: The overall trend remains upward versus most major currencies. This morning the UK Central Bank left interest rates unchanged (as expected by the market). But with the UK and EU economies struggling, many believe the European Central Banks will likely change their bias to fighting recession by lowering interest rates later this year. All of this remains bullish for the dollar and bearish for oil and most other commodities. So far this morning the dollar is slightly firmer.
OPEC will meet on Tuesday, Sept. 9. Most all of the prognosticators expect OPEC will ignore the calls of the more hawkish Iran and Venezuela and keep production levels as is. The Saudis and other more conciliatory members of OPEC do not want to be seen as the cause of another unjustified price spike simply by announcing a production reduction at this meeting right at the peak of the Atlantic hurricane season. This is especially important to the Saudis after they hosted the big meeting last June on the topic of how to bring the overvalued oil market back to reality. OPEC has been producing above their quotas (pretty much from Saudi Arabia) and I believe they will simply let the market set the production level for the moment. If the global growth in oil consumption is slowing, the call on OPEC crude will gradually decline as a result. This is a more acceptable policy at a time when many global economies are facing the prospects of recession.
Today we get another snapshot of energy fundamentals when the EIA releases both oil and Nat Gas inventories.
The Nat Gas report is expected to show an injection of about 90 BCF (see below). This would be another above average build for this time of the year. If the actual injection level is as projected, a year on year surplus of 3 billion cubic feet (BCF) will now emerge while the five-year surplus (for the same week) will be at 15 BCF. A very comfortable inventory situation for natural gas and one that indicates that total inventory levels are clearly on a path to hit normal historical targets prior to the start of the upcoming heating season. For next week, we should see the impact of the preventive shut-ins of natural gas production in the Gulf. Inventories could show a withdrawal of upwards of about 50 BCF next week. However, this will have no impact on the current natural gas supply situation or a lasting effect on prices.
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 production shut-ins associated with Gustav. 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
9/4/08
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%
Nat Gas
90
3
15
Overall the market remains solidly in the downside correction that started in mid-July for energies. Oil prices are still down about 25% since peaking while the natural gas retracement is approaching the 50% level. Both substantial and indicative of the absolute switch in market sentiment to clearly bearish for the moment. We expect the downside momentum will eventually bring oil and natural gas prices down to the lower support levels shown in the table at the end of the report. We do not think it will happen immediately rather the market will be a bit cautious for the rest of this week as many await a clearer view as to the direction and intensity of the three storms in the Atlantic as well as OPEC’s official stance on production levels next Tuesday.
Our recommendations remain the same: specs should cautiously look for selling windows, while buy side hedgers should remain on the sidelines a bit longer. Currently prices are slightly firmer for oil in a light short covering rally while the dollar is marginally stronger.
Current Expected Trading Range
Expected Trading Range
9/4/08
Change
Low
High End
From
End Support
Resistance
8:05 AM
Yesterday
Oct WTI
$109.92
$0.57
$100.00
$112.00
Oct HO
$3.0869
$0.0081
$2.8300
$3.0700
Oct RBOB
$2.7815
$0.0147
$2.5000
$2.8100
Oct NG
$7.240
($0.024)
$6.920
$7.600
Euro/$
1.4475
(0.0006)
1.4300
1.4600
Yen/$
0.9236
(0.0012)
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.
