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~Frank Lloyd Wright
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What should have been a great day for consumers, with oil prices declining by over $6/bbl, turned out to be a rather dismal day as equity markets were absolutely pummeled once again. The government bailout was designed to ease credit markets, not solve the basic problems that exist in the U.S. and the rest of the global economies. Monday was proof again that the market is clearly scared, as fear has taken over. The volatility in the equity markets soared with the Dow down over 800 points at one point in time only to close down 370 points and below the 10,000 mark for the first time in four years.
Last week I outlined a set of headlines we were likely to see this week. I repeat them for comparison basis below:
Congress passes the bailout bill
The President signs the bailout bill
Credit markets loosen up and banks are lending again
Global equity market reacts passively to the U.S. bailout bill as the weakening economies take center stage
WTI trades in the high $80’s, the lowest price since early February of this year.
More financial firms require a lifeline both in the U.S. and outside the U.S.
Talks of interest rate cuts in Europe sends the dollar to new yearly highs as the dollar surge continues
Various OPEC Members say the world is oversupplied and OPEC will need to cut production sooner than later
Oil and natural gas inventories build across the board and greater than expected
Energy demand is revised downward in both the IEA and EIA global market assessments
It is only Tuesday morning and all but the last two have already come to fruition while we wait for the EIA report later today and inventories tomorrow to see if the last two items are on target. Good we were able to project but bad that these events took place as they all suggest bad economic times. The market will remain primarily driven by the direction of both the equity and dollar market for the near term. The equity markets are due for some form of a rebound and thus we are already seeing a short covering rally in oil in overnight trading.
Equity markets in Asia staged a modest rebound closing mostly higher in most locations after the Reserve Bank of Australia cut interest rates by a whopping 100 basis points of 1%. The market is interpreting this strong response as positive and raised hopes that other major Central Banks around the world will follow suit. There is also talk the UK government will put in about $80 billion into their banking system. Things are moving, but a bit slower than what the markets were hoping to see. Time will tell how this all unfolds but for this morning the bleeding in the Asian equity markets has stopped and oil prices have firmed along the way.
Oil will move based on the direction of equities and the U.S. dollar in the short term. As of this writing, equities are mostly higher and the dollar is currently giving back some of its gains from yesterday. This is neither the end of the problem nor the bottom of any of the major markets. It is way too early to say if any of the these moves are nothing other than a short covering rally in a very deep bear market or the beginning of a change of direction. One overnight market does not make a trend.
The markets continue to muddle through a deleveraging process across all asset classes by many of the major players thus putting downward pressure on mostly everything. This process will continue for the short term. The spreading of the crisis across the oceans to Europe has been troubling for the oil complex since it is another clear signal that the global economy is weak and demand for good and services from places like China will decline putting further downside pressure on oil demand and thus prices. Simply put, demand for oil is going down and will decline even further as the impact of the crisis hits places like China. Remember the main energy demand growth areas for oil has been Asia, in particular China.
Tomorrow we get another snapshot of oil inventories. The situation in the Gulf has continued to improve and as such, the latest estimates are calling for a build in everything except for a small decline in distillate stocks. This report is very susceptible to surprises like we have seen over the last month or so because of the problems experienced in the Gulf from Ike and Gustav. As shown in the following table the year on year deficit of both crude and gasoline is expected to decline while the distillate deficit may widen very slightly. The overall situation is improving and the likelihood of any major supply problems is diminishing on a weekly basis. I believe we have turned the corner and we should see builds in everything going forward. It could start with this week’s report. We also expect demand to decline in this report. We view the report as bearish if the actual numbers come in as projected.
Projections
10/7/08
Current
Change from
Change from
Projections
Last Year
5 Year
mmbls
vs. Proj.
vs. Proj.
Crude Oil
1.8
(23.8)
(7.2)
Gasoline
0.8
(12.6)
(21.1)
Distillate
(0.5)
(12.7)
(9.8)
Ref. Runs%
3.5%
-12.0%
-10.4%
Change Level
75.8%
87.8%
86.2%
The EIA will release its Short Term Energy Outlook Report this afternoon while the IEA will release their monthly report on Friday. Everyone will be looking at the global demand numbers. I expect both reporting agencies will revise downward their projections for energy demand for the rest of 2008 and 2009. Both of these reports will be viewed as bearish by most participants if demand is revised downward.
The OPEC President was in the newswires yesterday indicating that he felt prices would decline into next year and OPEC will be looking very closely at production levels at the Dec. 17 meeting. The Qatari minister also indicated they would be cutting production slightly. This is just the beginning of the OPEC comments that will hit the airwaves over the next week or so. As I have been mentioning OPEC will set the bottom in oil prices and I believe that will be in the $80 to 90/bbl range. We are close to OPEC trying the regain control as the main market driver of oil prices. I believe they will eventually be successful in their endeavors. It is just not clear to me if they will be able to stay ahead of demand restraint.
The following table of the impact to the energy complex since peaking must be troubling to OPEC.
Downside Oil and NG Correction
Decline Since Peak on 7/11/08
Change
Change
From
From
Peak, 7/11/08
Peak, 7/11/08
$/bbl
%
WTI
($54.28)
-37.41%
HO
($1.6211)
-38.98%
RBOB
($1.5284)
-42.09%
Peak 7/2/08
Peak 7/2/08
NG
($6.717)
-49.05%
Bottom 7/15/08
Bottom 7/15/08
$/Euro
$0.1100
17.59%
U.S. Avg.
Peak, 7/17/08
Peak, 7/17/08
Retail Gas
($0.6340)
-18.22%
For the moment the financials and currency markets remain the main driver for the energy complex with what OPEC does quickly becoming number two on the list. Confusion, uncertainty and fear will continue to dominate the market sentiment. The result will be above normal volatility, bouts of short covering (as we are already seeing this morning) and prices still in a downtrend for now. A sustained rally in the global equity markets will help to stop the selling in the energy complex but it will take a firm production cutback by OPEC to reverse the downward trend in oil prices.
We see today as a bit of a transition day. The buy side hedgers should remain on the sidelines. Specs should remain on the sidelines also unless their trading time horizon is very short term.
Currently prices for energies are firm across the board as the dollar is modestly weaker and Dow futures in the U.S. are up about 65 points.
Current Expected Trading Range
Expected Trading Range
10/7/08
Change
Low
High End
From
End Support
Resistance
7:31 AM
Yesterday
Nov WTI
$90.80
$2.99
$86.00
$99.50
Nov HO
$2.5375
$0.0635
$2.4000
$2.8300
Nov RBOB
$2.1026
$0.0435
$2.1000
$2.3600
Nov NG
$6.975
$0.140
$6.900
$7.600
Euro/$
1.3596
0.0135
1.3400
1.3800
Yen/$
0.9889
(0.0107)
0.9500
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.
