Quote of the Day
“Mistakes are the portals of discovery.”
James Joyce
THE ENERGY MARKET ANLAYSIS WILL NOT BE PUBLISHED ON FRIDAY IN OBSERVANCE OF GOOD FRIDAY.
EMI QuickView Short Term Market Overview
Impact on Prices
Price Drivers
Crude
Gasoline
HO/Diesel
Nat Gas
Supply
N
N
Br
Br
Demand
Br
N
Br
Br
Inventories
Br
N
Br
Br
US Dollar
N
N
N
N
Global Equities
Bu
Bu
Bu
Bu
Geopolitics
N
N
N
N
Technicals
Bu
Bu
N
Br
Market Sentiment
N
Bu
N
Br
Overall View
N
N
N
Br
N - Neutral Bu - Bullish Br- Bearish
With little support coming from a fading equities market and firming dollar all eyes in the oil world are focused on this morning’s EIA oil inventory report. Prices are starting out the day in the same pattern they have been in all week: down. As discussed all week we did not see much interesting information that would be earth shattering in support of the financial sector. In fact earnings season kicked in last might when Alcoa released their 1st quarter results showing another losing quarter. I do expect the financial sector to add little support to oil and energy prices for the rest of this week and as we have been discussing the fundamentals have been in control most of the week and will likely remain in control for the rest of this shortened trading week.
This morning the EIA will release their weekly oil inventory report. The following table details the projections for this report along with comparisons versus last year and the five-year average assuming the actual data comes in as projected. As shown we and the market are expecting a sizeable build in crude oil, and small decline in refined products. If the actuals come in as projected it will result in crude oil stocks still being at 16-year highs with the overhang well over 40 million barrels when compared to both last year and the five-year, same week, average. Since the OPEC production cuts started on Oct 1, 2008 crude oil stocks in the U.S. have done nothing but increase. Stocks in the U.S. have increased by about 68 million barrels since then and are still growing.
Refined products are not any less bearish than crude oil. Even with projections for a small decline the situation versus last year continues to show the inventory deficit narrowing for gasoline while the surplus versus the five-year average is growing. The surplus for distillate basis both last year and the 5 year average is projected to grow again.
Projections
4/8/09
Current
Change from
Change from
Projections
Last Year
5 Year
mmbls
vs. Proj.
vs Proj.
Crude Oil
2.0
45.4
41.3
Gasoline
(0.5)
(5.0)
6.2
Distillate
(0.3)
37.8
33.2
Ref. Runs%
0.2%
-1.1%
-6.0%
Change Level
81.9%
83.0%
87.9%
Surprises have been the norm of late and if last night’s API inventory report was any indication we can expect another round of surprises this morning. The API report showed a huge build in crude oil stocks of about 6.9 million barrels or more than 3 times what most of the projections for today’s EIA report are showing. Crude oil imports also increased by almost 900,000 barrels per day suggesting that the OPEC cuts are certainly not impacting the largest oil consumer market in the world.
The API report also showed a significant build in gasoline stocks of 2.9 million barrels versus an expectation for a modest decline. If the EIA numbers for gasoline are in line with the API data the surplus of gasoline versus the 5 year average could be approaching 10 million barrels. More and more signs are suggesting that the normal seasonal destocking pattern for gasoline may be over.
The only non-bearish inventory surprise in the API report was a decline of about 2.3 million barrels of distillate. I suspect this has a little to do with some colder than normal Spring weather along with a ramping up of energy use during the Spring planting season which is now underway in parts of the country. We will get a better feel when the details of the EIA data are released later this morning.
Overall the API report was bearish even with a decline in distillate stocks as the overhang will still be well over 35 million barrels if the EIA data is in agreement with the API data. Total combined commercial inventories of crude oil and refined products (excluding SPR inventories) are at the highest level since some time in the 1980’s (my database only goes back to 1990). As shown in the following chart not only are total commercial inventories significantly higher than normal they have continued to grow during a period of time when commercial inventories are normally in a destocking pattern... another bearish divergence when compared to the direction of prices over the last month or so.
The forward curves are mostly following the sentiment put forth by the fundamentals as the contango continues to widen as shown in the EMI Forward Curve Watch table shown below. The crude oil contango widened significantly yesterday as did the HO curve. RBOB was able to remain somewhat steady but if today’s EIA report comes in with similar conclusions as yesterday’s API report the gasoline curve will take a hit today.
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)
($17.83)
$5.14
($1.06)
US Crude Inv.
321.3
356.6
35.3
NYM HO, $/Gal
May,09, Feb,10
($0.2185)
($0.2687)
($0.0502)
($0.0087)
US Distillate Inv.
133.5
143.9
10.4
NYM RBOB, $/Gal
May,09, Feb,10
($0.0470)
($0.0244)
$0.0226
$0.0049
US Gasoline Inv.
203.9
214.6
10.7
NYM NG, $/mmbtu
May,09, Feb,10
($1.900)
($2.125)
($0.225)
($0.055)
US Nat Gas Inv.
3,020
1,651
(1,369)
As shown in the following chart of the Nymex WTI forward curve from yesterday along with the forward curve from two months ago the contango has not only widened it has widened strongly resulting in the slope of today’s curve at about the steepest level in months. Another interesting divergence, contango widening while prices increase. The economics of storing oil are continuing to improve and thus the likelihood that crude oil stocks will enter into a destocking pattern anytime soon is becoming less likely. Not only are crude oil stocks building in the U.S. but they are also still growing internationally especially on depressed priced vessels in floating storage. Just this week I heard of more ships being chartered with two- to four-month storage options at low numbers. I would suspect that the amount of oil in floating storage is now well over 80 million barrels.
Normally crude oil enters a destocking pattern beginning around the end of April and lasting into late summer or early fall. With the economics to store oil so favorable and the OPEC cuts still not ahead of the demand decline curve OPEC may miss a window of opportunity by not cutting production again as the current cuts are not doing the trick for OPEC but are great for the consuming world as it is keeping prices capped.
The Recovery Premium is in the midst of a correction and has narrowed over 40% this week alone. The current levels shown in the following table will likely take another hit today after the EIA report which is likely to be bearish and with the financials looking like they are setting up for the second down day in a row.
EMI Estimated Recovery Premium
EMI
Current
EMI
Est. Value
Price
Estimated
Based on
7:57 AM
Recovery
Fundamentals
Premium
WTI
$40.00
$47.99
$7.99
HO
$1.1700
$1.3769
$0.2069
RBOB
$1.2700
$1.4355
$0.1655
Nat Gas
$3.500
$3.555
$0.055
Natural gas prices dropped down to a six-year low yesterday as demand continues to waver, supplies continue to grow and the hurricane predictors downgraded their projections for this year’s hurricane season to normal from above normal. The early expectations for tomorrow’s NG inventories are mostly calling for a small injection which would be simply bearish. NG prices are hovering near the $3.50/mmbtu support level which I have been projecting as the next downside target. If the supply situation does not clean itself up quickly and/or if demand does not pick up the next downside support area for NG will be around the $3/mmbtu market if it breaks through the $3.50/mmbtu level.
I remain neutral for oil and bearish for NG as detailed in the table at the beginning of the report. Specs should trade accordingly with lots of caution. The buy side hedgers should continue to allow prices to retrace and wait for a lower window of opportunity before adding more hedges.
Currently prices are lower for everything except for the dollar vs. the euro.
Current Expected Trading Range
Expected Trading Range
4/8/09
Change
Low
High End
From
End Support
Resistance
7:57 AM
Yesterday
May WTI
$47.99
($1.16)
$46.80
$60.00
May HO
$1.3769
($0.0134)
$1.2160
$1.4070
May RBOB
$1.4355
($0.0249)
$1.3000
$1.5980
May NG
$3.555
($0.007)
$3.750
$4.400
Dow Futures
7,720
(42)
6,800
8,000
Euro/$
1.3228
(0.0024)
1.3120
1.3800
Yen/$
1.0016
0.0051
0.9750
1.1500
Dominick A. Chirichella
dchirichella@mailaec.com
Energy Market Analysis is published daily by the Energy Management Institute , 1324 Lexington Avenue, #322, New York, NY 10128. Copyright 2008. Reproduction without permission is strictly prohibited. Subscriptions: $129 for annual orders. Editor in Chief: Dominick Chirichella, Publisher: Stephen Gloyd, Editor Sal Umek.
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