Quote of the Day
“The Times They Are a-Changin”
Bob Dylan
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As we have been indicating as equities go so goes oil prices. Yesterday we saw a modest retracement in equities as the market came back down to reality a bit after the massive equity short covering rally from Monday. It is still way too early to declare that the financial crisis is over. We will continue to see strong recovery days followed by further bouts of selling. The most important signal we need to watch closely is if the recovery days far outpace the bouts of selling days. So far that has been the case this week as the market is still up strongly on the week…but two trading sessions do not make a week. There were no new silver bullets emerging on the financial side over the last 24 hours rather just more elaboration of how some of the newly formulated programs announced over the last day or so were going to work. Please remember nothing has started yet so it will still be a relatively long period of time before all of the massive investment, assistance & financial bailout programs work their way through the complicated international financial system.
Today in the energy sector we turn our focus (at least for awhile) to the EIA release of oil inventories. As shown in the following table the industry is expecting an across the board build of oil stocks and another increase in refinery utilization rates. Inventories have been full of surprises over the last few weeks as a result of the impact of Gustav & Ike. I think most of the surprises are over and the only surprise I see that could occur is a modest decline in distillate stocks instead of the projected build due to the strong demand for diesel in the agricultural sector over the last week or so. Remember those numbers will be release tomorrow instead of today because of the Columbus Day holiday on Monday.
Most importantly I believe we will see another decline in demand as consumers in the U.S. continue to curb their appetite for oil. I do not think the consumer is ready to forge forward and move back into the consumption patterns from last year. Year on year total implied demand for oil is down almost 12%. This is significant and even if a portion of the demand reduction is temporary and only price related some of it is structural in nature and will not return for a significant period of time if ever.
Projections
10/15/08
Current
Change from
Change from
Projections
Last Year
5 Year
mmbls
vs. Proj.
vs Proj.
Crude Oil
2.6
(16.7)
(2.3)
Gasoline
0.8
(8.2)
(11.8)
Distillate
3.0
(10.7)
(8.4)
Ref. Runs%
2.9%
-3.5%
-2.3%
Change Level
83.8%
87.3%
86.1%
If the actual numbers come in as expected I would view the report as overall bearish especially if demand does in fact decline again. Of all of the drivers that can impact the direction of oil prices demand looms the largest. Even as the US & other countries implement actions to solve the credit problem it does not mean it will solve all of the problems causing the slowing of the world’s economies. At a minimum the world is in for a period of slow economic growth and thus reduced energy demand. This will remain bearish for oil prices and pose the biggest challenge for OPEC.
I do not think the market will lose its focus on the financial crisis for too long as it too significant, large, deep and in the news 24/7 to be ignored by participants in the energy complex or any market for that matter. In the end the market will remain very volatile and susceptible to large swings in either direction primarily driven by the direction of equities and the U.S. dollar.
My recommendations remain the same and in their shortened version pretty much are neutral for both specs and hedgers as the market sorts itself out over the next day or so.
Currently prices are lower and the dollar is trading either side of unchanged at the moment.
Current Expected Trading Range
Expected Trading Range
10/15/08
Change
Low
High End
From
End Support
Resistance
8:06 AM
Yesterday
Nov WTI
$75.48
($3.15)
$72.50
$86.00
Nov HO
$2.2083
($0.0514)
$2.2500
$2.4000
Nov RBOB
$1.8037
($0.0811)
$1.7500
$1.9300
Nov NG
$6.666
($0.061)
$6.000
$6.980
Euro/$
1.3648
(0.0007)
1.3350
1.3800
Yen/$
0.9936
0.0054
1.0000
1.0400
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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