Action may not always bring happiness; but there is no happiness without action.
~Benjamin Disraeli
EMI QuickView Market Overview
Price Drivers
Impact on Oil Prices
Neutral
Bearish
Bullish
Oil Supply
X
Oil Demand
X
Oil Inventories
X
U.S. Dollar
X
Global Equities
X
Geopolitics
X
Technicals
X
Market Sentiment
X
Overall Oil Market
XXX
The new table above will be included in each report and is meant to present a quick overview of how the normal energy market drivers will impact the price of oil. The table shows my current view as to how each individual driver, as well as the overall of all drivers, will impact price: neutral, bearish and bullish.
Much to the surprise of many the U.S. House of Representatives defeated the Federal bailout bill or Economic Stabilization Act. Although many people were not overly enthused about the bill most of the people, like myself thought it would be passed anyway in an effort to simply clear up a substantial amount of uncertainty. It just did not happen and equities markets went into a tailspin falling almost 800 points, the dollar stayed firm and oil absolutely plunged on concern that the global economy is now poised to head into a deep downturn. About the only thing I got right about the bailout in yesterday’s report was it was going to be the single biggest driver on oil prices. That turned out to be an understatement.
Now what? Nothing will get done on Capitol Hill until Thursday at the earliest leaving a new bill to be developed and passed by all three areas of government until well into next week at the earliest. In the meantime it is very difficult to determine what the impact will be until a new plan is developed and approved. Credit has been drying up at an exponential rate, banks/financial firms around the globe are struggling with several bailouts completed over the last few days by both the private and public sector in the U.S. and in Europe. Likely more are to come. How the market handles the uncertainty and whether or not participants panic more than they have already will clearly have long-term implications on the global economies and on energy prices.
Oil prices are now within shouting distance of retesting the lows made on 9/16. It is now looks like the retest will occur sooner than later. As I mentioned in yesterday’s report the likelihood of prices surging anytime soon is very low. In fact all signs are clearly pointing to lower prices for oil (and most everything else) before any attempt of a recovery will emerge. As shown in the EMI Quick View Oil Market Overview our view is bearish as well as our belief that this is the view of the global energy market for the time being.
Tomorrow we will get another snapshot of the short-term oil fundamentals. Refinery runs most likely increased strongly versus last week as now only two of the 14 shut-in refineries remain down. Shut in production in offshore Gulf operations are still about 60% shut-in. We should see a relatively large decline in crude oil inventories as a result. Refined product inventories likely declined about 3 million barrels for both gasoline and distillate. Demand remains unseasonably low. We view this week’s report as neutral to slightly bearish.
It is difficult to discuss anything that is not negative. Yesterday was truly Black Monday on many counts. Although many are calling this a Wall Street bailout it is hitting Main Street America in the form of strongly lower equity prices impacting typical Americans 401-k’s, Ira’s, individual investments and possibly their jobs going forward. I saw a number yesterday that indicated about 50% of Americans have stock market exposure in one form or another and about $1 trillion dollars was taken out of the stock market yesterday. What happens in the financial markets will have everything to do with what happens in the oil pits. The breakdown in Congress on a plan that had minimal popular support (only about 33% of the American public supported the plan) was a major surprise to many.
Where oil and natural gas prices go over the next several weeks will be totally dependent on the following:
How many more major financial institution will have to be rescued and by who?
Will the U.S. get a new version of the bailout bill in place before the end of the week?
With 36 days to a major election in the U.S. will Congress completely freeze-up and get nothing done?
Will more financial failures begin to emerge in Europe? In Asia?
Will the credit markets and flow of cash completely freeze up?
Is this the beginning of the end of double digit growth in China and elsewhere in Asia?
Will China fall in line with most OECD countries and experience a reduction in energy consumption?
How strong will the U.S. dollar get in the short term? Medium Term?
Energy demand will be impacted the question is by how much?
When will OPEC intervene to support a price level as all signs now point to prices likely breaching the lows ($90.50/bbl) of 9/16?
Do we still have time for a soft landing?
These are just some of the questions that once played out will have strong implications as to the price direction for the energy market. We think it will be lower at least through this week with a stopping point/short covering rally likely occurring when the U.S. finally puts a plan in place that can be approved by both houses of Congress. Until then stay buckled up, try to not panic, view your investments from a longer term perspective and always remember every time the markets have experienced severe breakdowns they ultimately recovered in a reasonable period of time.
Oil/energy prices will remain on the defensive at least through the middle of the week and likely resume their downward trend once this week’s inventories are digested. Remember the stopping point for the downward move in oil will come from any combination of an approved bailout plan and/or an OPEC intervention. Our recommendations remain the same…specs trade cautiously from the short side while buy side hedgers should now be extremely happy to be on the sidelines.
Currently prices are firm across the board as equity markets around the world handled the lack of a U.S. bailout plan quit well and as such Dow futures are looking higher by about 200 points. However, it will be a long day and the market is very nervous and will respond to most any new 30-second news snippet related to the financial situation in the U.S.
Current Expected Trading Range
Expected Trading Range
9/30/08
Change
Low
High End
From
End Support
Resistance
6:16 AM
Yesterday
Nov WTI
$97.64
$1.27
$100.00
$110.00
Oct HO
$2.7975
$0.0371
$2.7500
$3.0000
Oct RBOB
$2.4235
$0.0265
$2.5000
$2.8100
Nov NG
$7.290
$0.069
$7.000
$8.000
Euro/$
1.4403
(0.0085)
1.4300
1.5000
Yen/$
0.9618
(0.0043)
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.
