Quote of the Day
"Success seems to be largely a matter of hanging on after others have let go."~ William Feather ~
The markets have been in disarray since Hurricane Gustav hit the Gulf Coast in late August followed by the meltdown in the financial markets a few weeks ago. Financials and weather have been and remain the two main market drivers for the energy complex. The financial turmoil has been front and center for the last three weeks and will likely have the single biggest influence on the direction of prices in the oil & natural gas markets as the situation unfolds.
Weekends used to be a quiet time for the markets. That has not been the case over the last several weeks. This weekend was no exception. The U.S. Congress seems to have gotten the job done and come up with a bailout plan that both parties in Congress and the White House will likely pass rather quickly. Voting could start today in the House and Wednesday in the Senate. The plan on the table provides (some of the major points) the Treasury with the necessary funding while adding strong oversight by Congress, the ability for the taxpayer to benefit if the asset values appreciate and limits on executive pay and parachute deals for executives in companies that chose to participate in the program. This is one of the largest and most significant bills in a long time and one that will probably be the most unpopular bill passed in the U.S. Based on polls released over the weekend only about 30% of the American public are supportive of the bailout program or as it is being called the Economic Stabilization Act.
The $700 billion dollar bailout program was just one of several events evolving over the weekend. Wachovia is in advanced talks to sell itself to Wells Fargo. Also the epicenter of the financial earthquake is moving from Wall Street to Europe. We have already seen HBOS rescued by Lloyds bank in the UK about a week or so ago and now we see the second event in the UK with the takeover of UK mortgage lender Bradford & Bingley. The UK government said Bradford & Bingley's branch network will be sold to Spanish bank Santander and the remainder of the group would be nationalized. Another financial conglomerate, Fortis NV, a Dutch-Belgian bank and insurance giant was given a 11.2 billion euro ($16.4 billion) lifeline to avert insolvency as part of a wider bailout plan agreed to by Belgium, the Netherlands and Luxembourg, The deal will force the bank to sell its stake in Dutch bank ABN Amro, which it partially took over last year.
As uncertainty and anxiety spreads around the world on concerns over where the next shoe will drop the market remains in turmoil. So far this morning equities are down around the globe, participants are pretty much ignoring the U.S. bailout plan, the U.S. dollar is surging and oil is strongly lower.
The entire energy complex will be driven by what happens on the financial side while everything else takes a back seat. The strong dollar coupled with concerns that the global economy is moving closer into a recession (which would result in a strong reduction in oil & energy consumption) is pressuring oil to start the week. WTI is already down over 4% since Friday and looking more and more like it is positioning itself for another test to the lows made few weeks ago. We have been and remain with the view that oil prices will retest the lows (around $90.50/bbl basis spot Nymex WTI) made on 9/16. When this occurs is still a big uncertainty. For the moment the financial situation remains bearish for oil.
On the storm front the situation in the Gulf continues to improve in the aftermath of Ike. Normal operations are slowly returning with about 60% of oil and 56% of natural gas still shut-in in the Gulf while only three of the 14 shut down refineries remain shut with expectations of restarting over the next week or so. Over the next 2 to 4 weeks most all of the oil & natural gas operations should be close to normal. However, we will still see several weeks of lower than normal oil inventories although refinery utilization rates should increase strongly this week. For the moment the short term fundamentals are neutral.
On a more positive note the U.S. consumer is spending a whole lot less on gasoline since the retail gasoline price peaked on July 17th. As shown in the following chart the American consumer has saved about $8.9 billion to date and is spending almost $170 million dollar a day less today than on July 17th to fill their tanks. This is comparable to a tax cut or as Congress calls them a stimulus package. This will help as the average consumer’s discretionary income increases on a daily basis. With the oil complex still on the defensive and the situation in the Gulf improving I do expect retail gasoline prices to continue in a downtrend and likely fall at least another $0.50 to $0.60/gallon before possibly bottoming out. This would bring the total increase to discretionary spending (less paid for gasoline since July 17th) from the current $8.9 billion to something approaching $25 to $30 billion dollars. A significant assistance program for the American people.
I do not expect much stability this week. The financial situation is very fluid and not confined to the shores of the US. The bailout program will be approved this week and most likely signed by the President before the week is out. We may see more problems both inside and outside of the US. The dollar is likely to remain strong throughout the week versus most major currencies as more problems emerge outside the US. The market is becoming more bearish on the growth of the global economy and thus more bearish on energy consumption. The medium term market sentiment has remained biased to the bearish side throughout the hurricanes and financial turmoil. The only thing that has changed has been the view in the short time from bearish to modestly bullish. The short term view is now swinging back to neutral at best and as the Gulf returns to normal and as the dollar continues to firm both the short & medium term sentiment will once again be in sync and biased to the bearish side.
Volatility will remain above normal again this week. Oil will remain under pressure at least for the 1st half of the week while the market digests this week’s round of inventory reports. We do not see any reason why oil prices will surge unless something major happens on the supply side, i.e. OPEC intervention, natural disaster (another hurricane) or an unexpected interruption in places like Iran or Nigeria, etc. Demand for energy is and will remain on the defensive at least through the end of the year and likely into next year.
Caution remains the keyword. The spec community should look for selling windows while employing very tight stops and smaller than normal positions as the market remains erratic and susceptible to reversals on little information. Buy side hedgers should happily remain on the sidelines.
Currently energy prices are down as the dollar firms versus most major currencies in the world. The global equity markets are also lower with the Dow pointing to lower opening by about 130 points as of this writing.
Current Expected Trading Range
Expected Trading Range
9/29/08
Change
Low
High End
From
End Support
Resistance
8:07 AM
Yesterday
Nov WTI
$101.96
($4.93)
$100.00
$110.00
Oct HO
$2.8846
($0.1103)
$2.7500
$3.0000
Oct RBOB
$2.5606
($0.1045)
$2.5000
$2.8100
Nov NG
$7.459
($0.169)
$7.000
$8.000
Euro/$
1.4379
(0.0244)
1.4300
1.5000
Yen/$
0.9497
(0.0006)
0.9300
0.9800
Dominick A. Chirichella
Energy Management Institute
1324 Lexington Ave #322
New York, NY 10128
tel 646-202-1433
fax 801.383.7510
dchirichella@mailaec.com
www.energyinstitution.org
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