"The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands in times of challenge and controversy." ~Martin Luther King Jr.
After a day when many thought the U.S. Congress was close to a deal on the proposed bailout plan things deteriorated into the evening with both side blaming each other (as usual) as to why there is no deal. Seems to me Congress is more comfortable in spending time blaming each other rather than getting thing done. As we have been saying the market is erratic and unpredictable as the current direction of everything is dependent on if and when the bailout deal is done. Recall in yesterday’s report the scenarios I presented if the deal gets done. Well the current scenario with no deal in place reverts back to weak equities, slightly stronger dollar and weaker oil and energy prices. That is where we are at the moment. As all readers have seen this week it is far easier to predict where markets will go versus picking how politicians will respond and act in times of crisis.
On the week (refer to the following table) the energy complex is showing small gains with HO (distillate) leading the way higher as market participants are more focused on the upcoming winter heating season rather than the out of season gasoline market. In addition, the overall distillate market is a bit tight in Europe and product is flowing in that direction from many locations. Finally, distillate is supported by the modestly weaker dollar this week making exports of diesel more attractive. Overall the energy complex has been driven by the events unfolding in the financial markets and the slowly evolving return to normal operations in the Gulf as a result of Gustav and Ike. Significant progress has been made but operations are not yet 100% normal. This has impacted supply and inventories as well as demand.
Refiners have not experienced much of a hurricane bounce to their margins. In fact the RBOB gasoline crack is negative on the week while the HO crack is modestly positive. As of yesterday only 4 refineries remain shut down out of the 14 that were shut ahead of the storms. It is anticipated that the remaining refineries will restart during the first week of October. Not overly bullish for the refining sector.
On the financial side equities deteriorated over 4% on the week as uncertainty reigns over the bailout plan. The dollar was modestly weaker versus most major currencies as international investors continued to whittle down their exposure to the U.S. markets. This pattern is bearish for oil.
EMI Weekly Price Board
Current
Change
Change
% Change
Weekly
Price
From
for
For
Range
7:23 AM
Thurs
Week
Week
Nov WTI
$105.46
($2.56)
$0.91
0.87%
$26.78
Oct HO
$2.9660
($0.0598)
$0.0682
2.35%
$0.1500
Oct RBOB
$2.6355
($0.0618)
$0.0358
1.38%
$0.1890
OCT NG
$7.650
($0.074)
$0.119
1.58%
$74.239
Nov 08 Cracks
RBOB Crack
$3.131
($0.04)
($1.51)
-32.48%
$12.72
HO Crack
$19.923
($0.09)
$2.77
16.17%
$15.55
321 Crack
$8.672
($0.058)
($0.09)
-1.07%
$13.654
Key Financials
DJ Futures
10855
(163)
(504)
-4.44%
590
SandP
1193
(20.5)
(53)
-4.25%
70
Euro/$
1.4599
(0.0022)
$0.0156
1.08%
$0.0432
Yen/$
0.9566
0.0093
$0.0151
1.60%
$0.0189
After all of the ups and downs in the energy complex over the last two or three weeks the downtrend that started in mid-July is still in place, albeit not as it was pre-Gustav/Ike. Oils are still down about 28% since peaking, natural gas is down almost 44% and even with a bit of dollar weakening this week the dollar versus the Euro is firmer by almost 10% since bottoming in mid-July.
As we end another stressful and uncertain week the outcome of the bailout plan will still be the single most significant event that will impact the direction of the energy complex in the short term. Secondarily the return to normal in the Gulf and the slowing of U.S. and global energy demand will likely be the drivers that keeps prices under rap in the medium term. As we have been saying the fundamentals are comfortable… demand is still in a decline, supply/inventories are lower than where they were a few weeks ago but this is a temporary pattern that will be rectified over the fourth quarter.
In the short term we expect prices to remain volatile with significant swings in both directions as we saw this week. I may be naïve but I still believe the Congress will come up with something over the next few days. If so prices will likely firm a bit in the early part of next week. As the Gulf situation continues to improve and as inventories turn the corner and start to rebuild we would then expect prices to be back on the defensive. This could happen as early as the end of next week or the following week. If the U.S. bailout (or some other version) does not get approved prices are likely to head into a very quick free-fall bringing an OPEC intervention quickly into the picture. The latter scenario is the least likely event.
We continue to recommend both the specs and buy side hedgers remain on the sidelines as the risk/reward of energy market involvement in the short term remains strongly biased to the risk side.
Currently prices are lower across the board with the dollar slightly firmer on the day. To know where oil is gong today follow the news snippets coming out of Washington, DC. As of this writing, the market does not think a deal will get done today as the Dow Jones futures are already down about 150 points. As we closed last week…thank goodness for weekends.
Current Expected Trading Range
Expected Trading Range
9/26/08
Change
Low
High End
From
End Support
Resistance
7:23 AM
Yesterday
Nov WTI
$105.43
($2.59)
$100.00
$110.00
Oct HO
$2.9660
($0.0598)
$2.7500
$3.0000
Oct RBOB
$2.6355
($0.0618)
$2.5000
$2.8100
Oct NG
$7.650
($0.074)
$8.000
$9.000
Euro/$
1.4599
(0.0022)
1.4300
1.5000
Yen/$
0.9567
0.0094
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.
