Quote of the Day
“History repeats itself; that’s one of the things wrong with history.”
Clarence Darrow
EMI QuickView Short Term Market Overview
Impact on Prices
Price Drivers
Crude
Gasoline
HO/Diesel
Nat Gas
Supply
N
Bu
Br
Br
Demand
Br
N
Br
Br
Inventories
Br
N
Br
Br
US Dollar
Bu
Bu
Bu
Bu
Global Equities
Bu
Bu
Bu
Bu
Geopolitics
N
N
N
N
Technicals
Bu
Bu
N
N
Market Sentiment
Bu
Bu
N
Br
Overall View
Bu
Bu
N
Br
N - Neutral Bu - Bullish Br- Bearish
Tuesday proved to be a non-event in the financial markets as equities gave back about 20% of Monday’s gains and as expected oil followed equities lower. In addition the dollar was able to gain a bit on the day keeping a cap on oil prices. Unless equities and other financial benchmarks continue to move in a direction that suggest the economy is turning energy prices are going to have a difficult time firming on their own accord. The fundamentals of oil and NG clearly remain bearish not only in the U.S. but globally. Inventories are above normal in all areas, demand is still in a decline, countries like China are actually exporting diesel as is India resulting in limited export windows from the US and Europe. The result is the highest level of commercial crude oil and refined products inventories in the U.S. since 1990.
Today the EIA will release their latest snapshot of inventories. As shown in the following table I am expecting another mixed report showing another build in crude and distillates and a modest decline in gasoline with refinery runs only slightly higher. With the crude oil market still in contango we are expecting a build of about 1.2 million barrels resulting in the year on year surplus to be at 42.7 million barrels while the 5 year, same week average surplus is at 39 million barrels. We have not yet seen a major decline in imports coming to the US and thus indicative that the OPEC cuts are not yet impacting the US market in any major way. Yesterday’s API report showed another increase in crude oil imports.
On the refined product side of the barrel I am expecting gasoline stocks to decline only marginally after last week’s huge increase. The year on year deficit is expected to hover around 13.8 million barrels or noticeably less than a few weeks ago. The reason is primarily related to last year’s inventories going through a period of major destocking rather than this year’s stocks declining strongly. The comparison to the so called normal operating (5 year average, same week) level is projected to be only 200,000 barrels lower or fairly balanced. I think part of the euphoria in the gasoline market has been seriously dampened after last week’s big inventory build and the narrowing of the inventory deficit.
Distillate stocks are expected to show a small gain but any gain at all is bearish as the year on year surplus is projected to grow to 34.5 million barrels while the 5 year surplus is at 31.2 million barrels. Nothing much to say about distillate other than the overhang is huge and will only begin to decline when demand perks up. One positive note for diesel is the weakening dollar. As the dollar weakens the economics of exporting diesel becomes more economically viable. If the export window widens this could help to eat into the current overhang assuming there is a market to export to as China is also exporting diesel fuel.
The API released their inventory report late yesterday afternoon and it provided an early insight into what surprises may be in store for the EIA report. Crude oil increased by 4.6 million barrels or about 4 times greater than expected as imports increased. Gasoline declined modestly and within most expectations while distillate stocks showed a strong decline versus expectations for a small build. I would say if the EIA report is more like the API report rather than the expectations I would view the report as mostly neutral with only a mild bias to the bearish side (mostly due to crude oil).
Projections
3/25/09
Current
Change from
Change from
Projections
Last Year
5 Year
mmbls
vs. Proj.
vs Proj.
Crude Oil
1.2
42.7
39.0
Gasoline
(0.3)
(13.8)
(0.2)
Distillate
0.3
34.5
31.2
Ref. Runs%
0.1%
0.0%
-4.5%
Change Level
82.2%
82.2%
86.7%
Despite recent gains in NG prices (financial market driven) the fundamentals remain bearish. Tomorrow the EIA will release their weekly NG inventory report. The estimates are wide ranging with the consensus estimate calling for a withdrawal of about 20 BCF. This would result in a widening of both the year on year and 5 year, same week surplus. With the weather outlook looking rather docile and with the NG market entering the low demand shoulder season prices are going need all of the support they can get from the financial and oil markets to remain above the $4/mmbtu mark in the short term.
Surprisingly the contango narrowed yesterday for WTI, HO & RBOB as shown in the EMI Forward Curve Watch table below. The entire energy complex still remains in a contango with strong economic incentive to store everything except gasoline. The forward curves are still indicative of an oversupplied market and have been in this pattern for months. Until the market becomes more confident that the overhang is beginning to decrease the contango will remain and thus reducing the economic inventive to destock inventories.
EMI Forward Curve Watch
Active
Negative Spread = Contango
Positive Spread = Backwardation
17-Dec
Current
Change
Change
NYM WTI, $/bbl
OPEC Meet
vs 12/17
vs yesterday
May,09/Dec, 10
($22.97)
($14.10)
$8.87
$0.82
US Crude Inv.
321.3
353.3
32.0
NYM HO, $/Gal
Apr,09, Feb,10
($0.2345)
($0.2542)
($0.0197)
$0.0075
US Distillate Inv.
133.5
145.4
11.9
NYM RBOB, $/Gal
Apr,09, Feb,10
($0.0735)
($0.0259)
$0.0476
$0.0029
US Gasoline Inv.
203.9
215.7
11.8
NYM NG, $/mmbtu
Apr,09, Feb,10
($1.740)
($1.938)
($0.198)
($0.059)
US Nat Gas Inv.
3,020
1,793
(1,227)
Weak fundamentals and strong external market drivers (financial, dollar, etc) has resulted in a strong “Recovery Premium (RP)” that has been built into the market as shown in the following table. The RP is narrowing so far this morning as the market reacts to a combination of the bearish API inventories released yesterday afternoon, a slightly firming US dollar and a relatively flat equity market. As we have discussed the RP is ahead of anything the financial markets may be suggesting (by their trading pattern) and is due to a correction that should result in a narrowing of the RP. A bearish inventory report today could be the catalyst to start the correction.
EMI Estimated Recovery Premium
EMI
Current
EMI
Est. Value
Price
Estimated
Based on
7:34 AM
Recovery
Fundamentals
Premium
WTI
$40.00
$52.67
$12.67
HO
$1.1700
$1.4695
$0.2995
RBOB
$1.2700
$1.4774
$0.2074
Nat Gas
$3.600
$4.312
$0.712
My view remains the same as detailed in the table at the beginning of the report. However, if the fundamental situation does not begin to show some solid improvement I will quickly be moving back to a more neutral stance. For today I suggest a cautious stance to see how the inventories are digested by the market as well as how the financial markets react to all of the noise coming from Congress as well as President Obama’s call for his huge $3.6 trillion dollar tax and spend budget. The vast majority of the gains in the RP are a result of the enthusiasm evolving in the financial markets rather than a result of any of the normal internal energy drivers. How long that enthusiasm lasts is still a big question. Caution remains the most important keyword during what appears to be a transition period for all markets.
Currently energies are lower, the dollar is slightly firmer while equities are about unchanged.
Current Expected Trading Range
Expected Trading Range
3/25/09
Change
Low
High End
From
End Support
Resistance
7:34 AM
Yesterday
May WTI
$52.68
($1.30)
$46.80
$60.00
Apr HO
$1.4693
($0.0303)
$1.2160
$1.4070
Apr RBOB
$1.4774
($0.0252)
$1.3000
$1.5980
Apr NG
$4.312
($0.035)
$3.750
$4.400
Dow Futures
7,623
3
6,800
8,000
Euro/$
1.3516
(0.0003)
1.3120
1.3800
Yen/$
1.0262
0.0026
0.9750
1.1500
Dominick A. Chirichella
dchirichella@mailaec.com
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