Quote of the Day
“ The only thing we have to fear is fear itself”
Franklin Delaney Roosevelt FDR
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This morning is starting out with a lower interest rate environment. The Fed led a unified global interest rate cut of 0.5% along with the EU Central Bank, Bank of England, Swiss, Canadian and Swedish banks. They join Australia and Hong Kong in Asia who lowered their rates also. So far this morning the equity market in the U.S. is reacting positively while the plunge in Europe has been arrested for the moment. The problem is so deep and the market sentiment is so negative that is it unclear as to whether or not the positive jump in equities so far this morning is sustainable even throughout the day. We saw the market jump quickly yesterday morning when the Fed entered the Commercial paper market only to disappear and end the day significantly lower.
The situation is precarious at best at the moment as far as the equity markets are concerned even after all of the intervention by the Fed and US government. All are positive and are addressing the problem like the Fed’s involvement in the Commercial Paper market to get funds flowing between corporations & the unified interest rate cut just announced. The bailout plan approved last week is slowly working its way through the Treasury Department and will still require a bit more time to works its way to the market place. Confusion and fear are still the main emotions leading the markets lower. The problems are not going to disappear any time soon. The main question is can the Central Banks around the world get their hands around it soon enough. As a result oil and NG prices remain driven by the negative sentiment spewing over from the financial sector. The market sentiment in the financial markets have to change in order to change the direction of energy prices.
Today is inventory day. As shown in the following table the market is expecting inventories to increase across the board with the exception of distillate which is projected to show a small decline. Overall the inventory situation is still running at below normal levels but is currently on the mend as inventories are building and should continue to build over the next month or so. Not only has the situation in the Gulf mostly cleared out and now quickly returning to normal operating modes but the forward curve for everything remains in a contango/carry providing an economic incentive to build inventories.
Projections
10/8/08
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 released their latest Short Term Energy Outlook on Tuesday. As expected they reduced their forecast for demand growth and are now projecting Global oil consumption to rise by only 300,000 barrels per day (bbl/d) in 2008 and by 800,000 bbl/d in 2009 compared with year-earlier levels. Growth for 2008 is nearly 350,000 bbl/d lower than last month’s projection, reflecting the deteriorating global economic outlook. Solid growth in non-OECD countries, especially China, Latin America, and oil-exporting countries in the Middle East, is partly offset by sharp declines in U.S. oil consumption as well as lower oil consumption in many other OECD countries.
In 2008, non-OECD consumption is expected to rise by 1.4 million bbl/d, while OECD consumption is expected to fall by 1.1 million bbl/d. China’s oil consumption remained high in August 2008 as imports for crude and oil products climbed 12 percent and 32%, respectively, from year-earlier levels according to Chinese government data. These trends are similar for 2009, although the decline in OECD consumption in 2009 is expected to be about half of the amount seen in 2008. The level of Chinese demand growth following the Olympics will have an important impact on non-OECD consumption growth and will depend on the domestic economy as well as the level of exports to other countries.
On the winter front the National Oceanic Atmospheric Administration’s (NOAA) most recent projection of heating degree-days, the Lower-48 States are forecast to be 2.4% colder this winter compared with last winter, but 1.7% warmer than the 30-year average (1971 to 2000). However, regional heating degree-day projections vary widely; for example, the West North Central region is projected to be almost 5% warmer than last winter.
Overall the report painted a bearish picture for oil & NG and one that will likely impact the price of oil more directly once the financial situation moves to the background. The fundamentals are improving and are the main reason why OPEC is currently getting nervous and likely to intervene in supporting the price of oil sooner than later.
Where the energy complex goes over the next few months continues to be more related to how quickly the financial markets calm down. As I mentioned above the Fed and many other central banks and governments around the world all seem to be responding with positive actions that should get funds flowing between banks, companies and consumers. They have reduced the cost of doing business as a result of the global interest rate cut of 50 basis points this morning and they already bailed out several financial institution both here in the U.S. and abroad. So far none of this has impacted the overall market sentiment very much. The market sentiment remains downright negative toward the financial markets and the global economies. As a result the market sentiment for oil & NG prices remains negative.
On the other hand I believe there is a lag time in situations like the world is in right now before the market sentiment will be impacted. It is going to take a lot of positive news that the actions by global Central banks are actually beginning to work before market participants get to excited about a recovery in equities and a stabilizing of the economy.
As such I come back to oil. The downside trend is also not going to switch on a dime as the fundamentals are becoming more bearish, the weakening economies clearly point to lower demand (we saw it in yesterday’s EIA report and expect more of the same when the IEA releases their report on Friday), the dollar remains poised to move to significantly higher ground and the technicals point lower. Thus it will be in the hands of OPEC as to how quickly they respond with a production cut to support a price level. In my analysis it is not a matter if will they cut rather only when they will get a consensus as to the timing. If prices continue to fall we can expect to see them announce an emergency meeting in the next few weeks. I believe they are waiting for the dust to settle a bit in the financial crisis as an announcement of an oil production cut would be very negative news to the financial sector and global economies right now.
Our recommendations remain the same as they have been: specs should continue to look for selling windows but trade with tremendous caution while the buy side hedgers should continue to stand aside. Currently everything is lower on our price board including the US dollar. Dow futures are modestly higher by about 75 points while the S& P futures are up by 16. Another long and stressful day is just beginning. Stay buckled up and remain aware that energy prices will respond to most any good or bad news snippet related to the financial complex.
Current Expected Trading Range
Expected Trading Range
10/8/08
Change
Low
High End
From
End Support
Resistance
8:00 AM
Yesterday
Nov WTI
$89.85
($0.21)
$86.00
$99.50
Nov HO
$2.4840
($0.0217)
$2.4000
$2.8300
Nov RBOB
$2.0407
($0.0221)
$2.1000
$2.3600
Nov NG
$6.725
($0.043)
$6.900
$7.600
Euro/$
1.374
0.0088
1.3400
1.3800
Yen/$
1.0010
0.0103
0.9500
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
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.
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