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EMI QuickView Short Term Market Overview
Impact on Prices
Price Drivers
Crude
Gasoline
HO/Diesel
Nat Gas
Supply
Br
Bu
Br
Br
Demand
Br
Br
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
Bu
Bu
Market Sentiment
Bu
Bu
Bu
Bu
Overall View
CBu
CBu
N
N
N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish
Although it sounds like a broken record, the financials set the direction of the market on Tuesday and continue to do so in overnight trading irrespective of what the fundamentals are suggesting. However the Geopolitics are beginning to heat up raising concern that supply could be interrupted at some point in the future. The energy complex, in particular oil, is being bombarded by a plethora of mixed signals that for the moment, when all put together, are keeping prices firm. On the fundamental front there remains a huge overhang of oil (estimated at around 750 million barrels in OECD countries and in floating storage) compared to last year at this time. As such any possible supply interruption in the short to medium term should have limited impact on prices as long as reality controls the market sentiment.
On the financial front the global equity markets continue to move higher. As shown in the EMI Global Equity Index table below most markets that are already open are moving higher with the entire index already up about 1% compared to yesterday. On the week the index is already up about 1.5% in spite of all of the evolving Geopolitical events around the world. The Global Equity markets are being driven almost exclusively by the expectation of an economic recovery and as such trader/investors continue to discount many of the normal catalysts that impact the direction of equity markets.
EMI Global Equity Index
5/27/09
Change
Change
2009 YTD
From
From
Change
7:44 AM
Yesterday
Yesterday %
%
US/Dow Jones
8,473
196
2.4%
-3.5%
Can/S&P-TSX
10,286
216
2.1%
14.4%
Lon/FTSE
4,412
46
1.1%
0.4%
Paris/Cac 40
3,283
13
0.1%
2.0%
Germany/Dax
4,991
6
0.1%
3.8%
Japan/Nikkei
9,311
85
0.9%
5.1%
HongKong/HangSeng
16,992
(71)
-0.4%
19.4%
Aussie/SYDI
3,782
26
0.7%
5.3%
China/Shanghai A
2,717
(10)
-0.3%
41.2%
Brazil/Bvspa
51,841
1,272
2.5%
38.1%
EMI Global Equity Index
11,609
178
0.9%
12.6%
For example higher oil and commodity prices generally have a negative impact on the direction of equities, not the case since the economic downturn began to deepen in the early fall of 2008. As shown in the following chart since about September of 2008 equities (as depicted by the S&P 500 index) and oil (basis Nymex WTI) have been trading very much in sync. Oil has been taking its lead form the direction of the equity markets which is one of the main surrogates of the economy. Simply put declining equity markets are associated with a contracting economy and a contracting economy is associated with a decline in energy demand. That scenario has been the one in place until early March of this year when a major bottom occurred in equities and oil prices.
Since then more and more economic data have indicated that the worst is over and a recovery is getting closer. The result has been a major shift in the market sentiment to a new scenario; rising equity markets are suggesting a return to growth in the global economy which would result in an increase in energy demand and thus the ultimate elimination of the huge oversupply of oil & NG. Whether you subscribe to this view or not, it is what is driving prices and if you are in the business of making money one should always put more emphasis on what is driving the market rather than an individual opinion.
The global equity market is also ignoring the growing list of potential Geopolitical problems that are once again surfacing. Normally when the potential for Geopolitical events are on the increase it normally results in selling pressure in equities, not the case at the moment. In just the last few weeks the situation in Nigeria has deteriorated as more oil infrastructure attacks have taken place, ships have been pirated, kidnappings are on the rise and the government is now in military conflict with MEND in the oil rich Niger Delta.
In the Middle East the Israeli’s and the United States do not seem to be completely in sync over what to do about Iran. After a meeting of both Presidents it seemed that the Israelis may be on a different timeline than the United States in reigning in Iran’s nuclear ambitions. To add to the mix Iran has been very aggressive in both their words and actions of late. Their feisty President has clearly stated that they could thwart any Israeli attack in a very short time and insofar as the US is concerned discussion over their nuclear program is not even on the table anymore. They have also sent 6 Naval warships to the Gulf of Aden area under the pretense of protecting their ships from piracy (this is a very unprecedented move). And just when you thought you heard enough an Israeli intelligence report is suggesting that both Venezuela and Bolivia are supply uranium to Iran.
Also when the pressure heats up on Iran it seems that the North Koreans also want to get some attention. Since last week they have supposedly conducted an underground nuclear weapon test and over the last few days have test fired several missiles with the latest occurring last night. They continue to defy all of the calls by the international community as they not only ratchet up their rhetoric but also their activity. Even Russia stated this morning that they fear a Korean conflict could go nuclear. The North Korean nuclear threat is growing and that is bad for everyone.
On top of all of the above the situation in Pakistan and Afghanistan continues to deteriorate. Just this morning another huge blast killed scores of people in Lahore. The Taliban are gaining more and more ground in the region although the reports coming from the Pakistani military indicate they have re-taken about half of the area of the Swat valley back from the Taliban. Instability in this region is equally scary since Pakistan is already a nuclear power.
With all of the above the equity markets are still firming with the perception of an economic recovery trumping everything. I like to call the current market we are in as the “Bill Clinton Market” based on his now famous quote from his 1992 Presidential campaigning days... “It’s the Economy Stupid”.
Tomorrow not only will OPEC most likely rollover their existing production agreement (even the Saudi Minister suggested as such yesterday in his comments to the media) but the EIA will be releasing their latest snapshot of inventories. My projections are shown in the following table. I am expecting a mixed report with both crude oil and gasoline showing modest declines with distillate expected to show a gain of about 1 million barrels. With the exception of gasoline which I would categorize as mostly balanced the rest of the complex is projected to continue to show wide overhangs versus last year as well as compared to the 5 year average for the same week. As has been the case for weeks the market has continued to discount the current situation and focus more on what the fundamentals will be down the road on the back of an economic recovery.
Projections
5/27/09
Current
Change from
Change from
Projections
Last Year
5 Year
mmbls
vs. Proj.
vs. Proj.
Crude Oil
(0.5)
56.5
41.1
Gasoline
(1.2)
(3.4)
(4.1)
Distillate
1.0
39.7
35.3
Ref. Runs%
0.2%
-5.9%
-10.3%
Change Level
82.0%
87.9%
92.3%
What should we expect for the rest of this shortened trading week...high volatility and more surprises. Inventories have surprised almost every week for the last few months and nothing is a given when OPEC meets...although the probability of OPEC doing anything other than a rollover is extremely low. The geopolitical hotspots discussed above will not be going away anytime soon and the risk for an unexpected supply disruption will remain in the minds of the market participants. I also believe we are in a bit of an unsustainable move to the upside in equities and as such these markets remain susceptible to another downside correction that could happen at any time.
My view remains the same as detailed in the table at the beginning of the report. Specs should continue to incorporate the direction of the equity markets into their outright oil trading models. I still like both the short HO/long RBOB spread and the long WTI/short Brent spread. Buy side hedgers should continue to add hedges to their portfolios during downside corrections.
Currently everything on the EMI price board is firmer including the dollar.
Current Expected Trading Range
Expected Trading Range
5/27/09
Change
Low
High End
From
End Support
Resistance
7:45 AM
Yesterday
Jul WTI
$62.84
$0.39
$47.75
$62.50
June HO
$1.5505
$0.0052
$1.3050
$1.5500
June RBOB
$1.8710
$0.0186
$1.4000
$1.9000
June NG
$3.530
($0.007)
$3.000
$4.250
Dow Futures
8,479
18
7,800
8,750
Euro/$
1.3901
(0.0081)
1.3000
1.4000
Yen/$
1.0488
(0.0042)
1.0000
1.0500
Best Regards
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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