"To think is easy. To act is difficult. To act as one thinks is the most difficult."~ Johann Wolfgang Von Goethe ~ (1749-1832, German Poet, Dramatist, Novelist)
Uncertainty rules all of the markets as the U.S. Congress remains unable to move quickly to stabilize and solve the financial crisis. It is no wonder that the approval rating of the U.S. Congress is at 18% in the latest Gallop Poll. Their performance so far this week is certainly not going to improve an already abysmal job approval rating. That said the President is convening a meeting of both presidential candidates and top leaders of Congress today to try to get a deal done. While all of the posturing continues equities remains weak, interbank lending is at a standstill, the dollar is wavering, oil is experiencing an above normal level of volatility as price relationships remains out of sync, the stress level for the American public is at an all time high and to top it all off the financial problems in the U.S. are also present in markets around the globe: Russia, China and the U.K. to name a few. The Congress needs to act quickly as next week the American public will begin to receive their quarterly performance reports in the mail from their 401-k’s, IRA’s, etc. It is not going to be a pretty picture. Year to date the U.S. equity indices remain down over 20% and if a deal is not done that number will get significantly worse and a real serious downturn in the U.S. Economy (and elsewhere) will take hold if nothing is done. Dismal for the public, bearish for oil.
At times oil moves based on what is evolving in the financial markets and at times it moves based on the fundamentals and technicals. Yesterday we got a snapshot of the latest short-term fundamentals from the EIA. As shown in the following table the report was mixed and reflective of all of the problems related to Gustav and Ike.
Following are the highlights of this week’s report:
The crude oil inventory decline was lower than expected keeping the year on year deficit to a level that is about half of what it was in midsummer, a period absent of any disruptions. There are absolutely no signs that crude oil supply is going to pose any problems based on the current inventory picture as Gulf Coast offshore oil producing operations are now only about 60% shut-in. Returning crude oil production coupled with the SPR continuing to provide oil to any refiner requesting supply continues to eliminate any type of disruption scenario.
Both gasoline and distillate showed a much larger than expected decline in inventories because of the significant downturn in refinery utilization rates (down 10.7% this week) stemming from Ike. However when viewing the year on year deficit as well as the five-year average for the same week, although negative, it is not a level where supply is in jeopardy especially with only five refineries still shut down(out of 14) from Ike. These remaining plants are likely to return to normal operating levels in the very near future.
Demand was mostly lower once again. Total U.S. implied demand is at the lowest level for this time of the year since 2001 (resulting from 9/11). Total implied demand is down almost 7% year on year with gasoline demand down by 5.3%. The reduction in demand is going a long way toward eliminating any major short-term supply problems associated with Gustav and Ike. Demand restraint is the single biggest fundamental factor impacting market sentiment.
Overall, I view this week’s report as biased to the bearish side as inventories will return to more normal operating levels in a reasonable period but demand is likely to remain under pressure for the foreseeable future. The fallout from the financial turmoil has not even begun to set-in. It will impact energy demand irrespective of the deal that emerges from the U.S. government.
Oil Inventory
9/25/08
Mil of Bbls
Current
Change from
Change from
Change from
Inv.
Last Week
Last Year
5 Year
Crude Oil
290.2
(1.5)
(30.4)
(10.6)
Gasoline
178.7
(5.9)
(12.6)
(19.2)
Distillate
125.4
(4.2)
(11.6)
(10.1)
Refinery %
66.7%
-10.7%
-20.2%
-23.7%
Demand
Total
18784
(265)
(1400)
(1339)
Gasoline
8741
(166)
(494)
(350)
Distillate
3732
4
(335)
(253)
Jet Fuel
1447
(1)
(145)
(92)
What do we expect in the short term? Really hard to predict but as we have been saying all week we are still view the medium term market sentiment as still biased to the bearish side for oil. I see the short-term sentiment starting to shift slowly back to a more downside view. The situation in the Gulf is improving on a daily basis, the U.S. economy is on the brink of a major downturn, especially if a bailout deal is not done, and demand is on the defensive around the globe. That does not sound like a prescription for a surging market. We still believe the market will retest the lows of around $90.50/bbl for WTI made on Sept. 16. Exactly how we get to that point and when are still a bit unclear. What evolves over the next week or so on the financial side will dictate the how and when.
Some possibilities and their potential impact follow:
If the deal that is on the table gets done by the U.S. government there should be a significant relief rally on Wall Street. Equity indices will likely increase strongly. If this occurs, the immediate reaction in the oil pits will be a firming of prices as many will quickly view rising equities as a sign that the economy will not deteriorate further and oil/energy demand will rebound.
Further supporting the above scenario in the short term will be a declining dollar. The bailout deal will likely result in the dollar getting sold into and thus supportive of oil prices in the short term. Depending on how deep similar problems are outside the U.S. and how quickly other governments reign in their financial problems it may turn out that the dollar bears quickly switch sides and return to being dollar bulls and resume the upside correction in the dollar which began in early July.
There is currently a significant amount of cash in the hands of both institutional and individual investors. How and when that cash is deployed into the equities markets will determine how quickly and how deep a recovery in asset values occurs and thus how the equity indices move over the next few months. A deep, lasting correction will postpone any major decline in oil prices until much later in the year. Remember the entire equity complex has been sold into for many reasons leaving many very good investing opportunities that many are scouring the market for now while waiting for a sign that stability may be coming (a bailout deal).
If a deal is not done and Congress chooses to play partisan politics in this election year I truly believe and agree with Bernanke’s comment that recession problems are looming. This scenario would result in oil prices moving significantly lower and quickly but likely interrupted at a point, as it would bring an OPEC intervention into the picture. This scenario could result in oil prices declining to the low 70s before OPEC regains control.
The above are just a few of the possible outcomes with many more scenarios possible but impossible to cover in this morning’s report. As the situation evolves, we will modify/adjust as well as interpret what the market is telling us. For the moment, oil is lower, equity indices and the dollar are trading either side of unchanged as all await today’s very important meeting in Washington. We recommend the sideline for all today as major events in the financial crisis may emerge. Oil will be a follower, not a leader today.
Current Expected Trading Range
Expected Trading Range
9/25/08
Change
Low
High End
From
End Support
Resistance
8:24 AM
Yesterday
Nov WTI
$103.92
($1.81)
$100.00
$110.00
Oct HO
$2.9675
($0.0458)
$2.7500
$3.0000
Oct RBOB
$2.5827
($0.0120)
$2.5000
$2.8100
Oct NG
$7.629
($0.050)
$8.000
$9.000
Euro/$
1.4707
0.0052
1.4300
1.5000
Yen/$
0.9511
(0.0013)
0.9300
0.9800
Dominick A. ChirichellaEnergy Management Institutedchirichella@mailaec.comwww.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.
