“Without the strength to endure the crisis, one will not see the opportunity within. It is within the process of endurance that opportunity reveals itself.”~Chin-Ning Chu
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All of our projections from last week have now been fulfilled. Yesterday’s inventory report was loaded with surprises all of which were bearish. The EIA Short Term Energy Outlook lowered demand growth for 2008 significantly, which is bearish for oil while the financials are still in a state of turmoil with global equity markets being pounded, which is also bearish for oil. OPEC is now trying to assert themselves into the equation very quickly as we have been suggesting would happen since last week.
Almost half of the OPEC membership is now pushing for an emergency meeting to be held on Nov 18 in Vienna in place of the regularly scheduled Dec 17 meeting in Algeria. The more hawkish contingency are the ones pushing for the meeting…Iran, Nigeria, Libya, Venezuela, Ecuador and even Iraq. These countries are the most dependent on the price of oil and are now aggressively trying to convince the remaining OPEC members (in particularly Saudi Arabia) to cut production sooner than later. Many OPEC members are entering into a bit of a panic mode. Not only are prices falling at an accelerated rate but inventories in the US are recovering very quickly as evidenced by the huge build in both crude oil & gasoline in this week’s EIA report. They will get a view of OECD stocks when the IEA releases their monthly report on Friday.
As I have been indicating, it is not a question as to whether OPEC will cut production just when they will cut. We are now getting a feel as to the when and it looks like the momentum is building for a month earlier meeting suggesting that any cut they announce will be relatively immediate rather than deferred (as they have done at times in the past). If the meeting turns out to be Nov 18 cuts will likely become effective Dec 1. I believe OPEC will announce a cut of 1 million bpd versus their current quotas. In addition, they will probably schedule another meeting for January to see if their intervention worked and if they need to cut production further. This is currently the only bullish driver in the oil complex.
An OPEC intervention will work but I am not sure how long it will take OPEC to achieve a relatively stable price environment in a period when demand is likely to continue to decline on a global basis. It will depend on how bad the global economy turns out to be and if they can bring along any non-OPEC countries like Russia into the fold who are watching their revenue stream decline precipitously on a daily basis while they try to stabilize their own banking and equity market system. I believe an OPEC intervention will stabilize prices somewhere between $80 to $90/bbl (basis Nymex WTI) and will stabilize it more quickly if they get several non-OPEC nations to also cut production as they did back in the beginning of this decade. Right now the next move on OPEC’s part is going to be driven by how quickly the hawks in OPEC can get the Saudi’s to come over to their side of the fence.
Staying with the fundamentals yesterday’s EIA report was loaded with bearish surprises just as we forecasted it would be. As shown in the table below:
Crude oil built by 8.1 million barrels versus an expected build of just 1.8 million barrels. The year on year deficit is now down to 17.5 million barrels while the comparison to the 5-year average for the same week shows crude oil stocks at about the normal operating level. Crude oil stocks will continue to build and this is bearish for oil.
Gasoline stocks grew by 7.2 million barrels as compared to an expectation for a build of just 800,000 barrels. The year on year and the 5-year average deficit is continuing to narrow. Supply of gasoline will continue to grow strongly as refinery runs return to more normal levels and as demand for gasoline continues to be on the defensive. This is bearish for oil.
Distillate stocks declined as expected. The distillate market is the only element of the report that was not bearish. I would place it in the neutral category as the year on year deficit will begin to narrow quickly as refinery runs return to more normal operating levels and the industry continues to build over the next 4 to 6 weeks as we approach the winter heating season.
Refinery utilization rates roared back and are now slightly over the 80% level. They are still below last year and the 5-year average level for the same week on a combination of the normal slow process of returning from the hurricanes and on poor refinery economics, especially for the gasoline stream. We expect the utilization rates will get into the mid- 80’s over the next few weeks and as such we rate this portion of the report as bearish.
Implied demand took another hit falling 124,000 bpd. Total implied demand is now 11.8% below last year’s level and 10.9% below the 5-year average for the same week. Distillate was the only product category that did not decline this week increasing marginally. Overall demand is still falling and will likely fall even further as the impact of the financial crisis works its way into the energy demand side of the equation in the US and elsewhere. Declining energy demand is bearish for oil. Actually declining demand is the single most bearish part of the report.
The overall report was bearish and will remain bearish, as I believe inventories will continue to build across the board until well into December even if OPEC announces an emergency meeting and a cut beginning on Dec. 1.
Oil Inventory
10/9/08
Mil of Bbls
Current
Change from
Change from
Change from
Inv.
Last Week
Last Year
5 Year
Crude Oil
302.6
8.1
(17.5)
(0.9)
Gasoline
186.8
7.2
(6.2)
(14.7)
Distillate
122.6
(0.5)
(12.7)
(10.3)
Refinery %
80.9%
8.6%
-6.9%
-5.3%
Demand
Total
18341
(124)
(2451)
(2233)
Gasoline
8691
(39)
(509)
(375)
Distillate
3928
40
(539)
(192)
Jet Fuel
1418
(91)
(103)
(144)
On the demand side, the biggest question will be whether the demand restraint experienced in the US so far is structural or reactionary. As shown in the following chart of Total Implied demand versus the EMI Composite Nymex Price (50% gasoline, 25% distillate & 25% WTI) both demand (blue line) and price (red line) have continued to decline very strongly over the last several weeks. The EMI Composite price is now solidly below the threshold price of $106/bbl. The threshold price is the level where demand restraint is likely to slow when price drops below this level. This is an area we will have to watch closely. As I mentioned above these data are still not reflective of any fallout yet from the financial turmoil spreading around the world.
Today the EIA will release their latest snapshot of NG inventories. As shown in the table below NG stocks are expected to build by 85 bcf this week. This is above the normal average for this time of the year of about 70 bcf. NG stocks are recovering very quickly from the hurricanes and as such, the year on year deficit will be down to just 141 bcf if the actual numbers come in as projected while the comparison to the 5-year average for the same week will show a modest surplus of 65 bcf. Much like oil, the NG market has yet to experience any of the expected fallout from the financial turmoil. NG stocks are very comfortable with another 4 to 6 weeks still left to the building season. NG stocks will be at the upper end of the normal, comfortable inventory range by the start of the winter heating season, a season that NOAA is projecting to be about 2% warmer than normal. The EIA report will be bearish for NG this week.
NG Projections & Comparison
10/9/08
Current
Change from
Change from
Projections
Last Year
5 Year
mmbtu
vs. Proj.
vs Proj.
Total
85.0
(141.0)
65.0
Our recommendations remain the same. The financials will continue to dominate the market sentiment in the energy complex but OPEC is moving up the influence ladder pretty quickly as fear is beginning to enter into the ranks of many in OPEC. Remain extremely cautious in all of your short and medium term activities especially on the spec side.
The leaders of much of the world continue to hammer away at trying to restore confidence in the financial system. So far, the response from market participants has been tepid at best. After a unified interest rate cut yesterday equities declined again in the US. This morning there is talk that the US Treasury is considering taking equity in banks in yet another effort to restore confidence and prime the pump of the lending machine. Finance ministers from G-7 will be meeting in Washington on Friday in a regularly scheduled session with the global crisis likely the only item on the agenda. As we have been saying, it is going to take a long time to stabilize and turn the current dismal market sentiment around. Most all of the things being announced and implemented already are all very positive they just take time to work their way through the system.
The market is very susceptible to a significant short covering rally at any time. The rally will come when the equity markets stage a short covering rally of their own and/or when OPEC signals that they will meet early indicating a cut in production is coming sooner than later. Also remember a short covering rally does not mean that the market will not go lower again it only means that the weak shorts will be heading for the exits. The global crisis is going to be with us for a long time and energy prices are not going to surge back to levels seen during the first half of 2008. The more expected outcome will be a bottoming (somewhere between $80 - $90/bbl) and then a long period of consolidation as the global economic growth slows to a crawl at best.
Currently the market is mixed as the dollar is trading either side of unchanged while Dow futures are showing a small gain.
Current Expected Trading Range
Expected Trading Range
10/9/08
Change
Low
High End
From
End Support
Resistance
7:26 AM
Yesterday
Nov WTI
$89.14
$0.19
$86.00
$99.50
Nov HO
$2.4769
($0.0176)
$2.4000
$2.8300
Nov RBOB
$2.0430
$0.0132
$1.9300
$2.1000
Nov NG
$6.815
$0.073
$6.000
$6.980
Euro/$
1.3723
0.0005
1.3350
1.3800
Yen/$
0.9999
(0.0049)
1.0000
1.0400
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.
