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EMI QuickView Short Term Market Overview
Impact on Prices
Price Drivers
Crude
Gasoline
HO/Diesel
Nat Gas
Supply
Br
N
Br
Br
Demand
Br
N
Br
Br
Inventories
Br
N
Br
Br
US Dollar
N
N
N
N
Global Equities
N
N
N
N
Geopolitics
CBu
CBu
CBu
CBu
Technicals
N
N
N
N
Market Sentiment
N
N
N
N
Overall View
N
N
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N
N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish
So much for the deep correction in oil prices! The dollar reversed course on Tuesday pushing oil prices up strongly on the day. The dollar versus the euro is at its lowest level in about two weeks as it breached a key technical support level. If the dollar remains below the breached support level it is likely we will see a retest of the dollar lows made in early June. Much of the dollar selling on Tuesday was a result of stronger than expected consumer confidence data from Germany (EU’s largest economy) and in anticipation that the Fed will leave interest rates unchanged when they announce the outcome of the FOMC meeting this afternoon. A weak dollar will keep the edge on oil prices and if this pattern continues it will most likely limit the downside correction in oil prices (for the time being). With equity markets still in their downside correction mode and with oil fundamentals becoming even more bearish these two downside catalysts may over take the positive price push from the weak dollar and keep oil prices below the $70/bbl mark for the near term.
Late yesterday afternoon the API released their latest snapshot of oil inventories. The report was mostly bearish showing a much smaller than expected decline in crude oil inventories and a much larger than expected build in refined products. Refiners once again raised utilization rates strongly even as inventories remain at above normal levels. Over the last few weeks the EIA data has been mostly in sync with the API data thus increasing the possibility that today’s EIA report may look more like the API report rather than any of the forecasts. The latest projections for this morning’s EIA report are shown in the following table. Today I added a new column to the table which summarizes the API inventory data. The API reported a negligible decline in crude oil stocks of just 72,000 barrels even as imports declined by over 700,000 barrels per day and refinery utilization increased by 1.9%. If the EIA data is in line with the API report the year on year crude oil overhang of will hover near the 56 million barrel level while the 5 year surplus will still be over 30 million barrels.
Projections
6/24/09
API
Current
Change from
Change from
Results
Projections
Last Year
5 Year
mmbls
vs. Proj.
vs Proj.
Crude Oil
(0.01)
(0.5)
55.5
31.1
Gasoline
3.7
1.0
(2.7)
(3.3)
Distillate
2.3
1.0
31.6
32.3
Ref. Runs%
1.9%
0.2%
-2.5%
-5.9%
Change Level
86.1%
88.6%
92.0%
If refinery run rates increase in the EIA snapshot as reported by the API the absolute level will be almost at the same level as last year at this time when refined product demand in the US was significantly higher and inventories were significantly lower. The API showed a build of 3.7 million barrels of gasoline which would essentially wipe out the entire year on year deficit of gasoline if the EIA report shows a similar build. With almost one third of the so called summer driving season already in the history books and with inventories back to around last year’s level (higher demand environment) the best I can say about gasoline is it is bearish and any possibility of a gasoline led price rally in the oil complex this summer is all but over. Recall gasoline was the main leader in the run-up of oil prices over the last several months as it was the only commodity in the complex that was not oversupplied. The supply situation is quickly changing for gasoline and if this pattern continues gasoline may quickly move back into an oversupplied situation in the very near future.
With the economic recovery still in the perception stage we have not seen any bump-up in economy sensitive diesel fuel. This is evident from the API snapshot which reported an above average gain in distillate stocks of 2.3 million barrels. If the EIA data is in sync with the API data the year on year surplus will have widened to about 33 million barrels while the overhang versus the 5 year, same week surplus will have grown to almost 35 million barrels. Recall my comments from yesterday’s report regarding distillate stocks returning to a more normal building pattern…that seems to be happening as the economics of storing HO & diesel still remains economically viable.
If the EIA report is in sync with the API report it may be time to trade the HO/RBOB spread once again. Several weeks ago we suggested closing the spread trade (short HO/long RBOB) until the dust settles. The dust seems to be settling but this time it is settling in the direction of going long HO/short RBOB as shown in the following chart. The spread has clearly broken out of the down trend pattern and seems to be heading into an area of HO trading at a premium to gasoline. In addition with gasoline stocks now building at a greater pace than distillate stocks the fundamentals of both of these markets are also suggesting entering the spread from the long side of HO and short side of RBOB. For the more conservative trader you may want to wait to enter the spread until the EIA data is actually released at 10:30 am EST for fundamental confirmation of the above.
The EMI Forward Curve Watch table shown below updates the situation of the main energy products as compared to the last time OPEC announced a cut in production…Dec 17th, 2008. As shown the contango has widened for both HO & NG since Dec 17th while both WTI and RBOB have seen the contango narrow. In fact RBOB has been in a backwardation for well over a month now. It is currently only economical to store HO/diesel and NG. However, with gasoline inventories possibly moving into a building pattern due to overproduction (rather than due to the economics of storing gasoline) we would expect the gasoline backwardation to continue to narrow and possibly move back into a contango pattern. Similarly if crude oil supply does not continue to move to a more balanced situation we could once again expect to see the crude oil contango widen back to the point where new floating storage trades may once again be economically interesting.
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
Aug,09/Dec, 10
($9.31)
($7.01)
$2.30
$0.45
US Crude Inv.
321.3
357.7
36.4
NYM HO, $/Gal
Jul,09, Feb,10
($0.1720)
($0.2349)
($0.0629)
($0.0049)
US Distillate Inv.
133.5
150.0
16.5
NYM RBOB, $/Gal
Jul,09, Feb,10
($0.0030)
$0.0655
$0.0685
($0.0109)
US Gasoline Inv.
203.9
205.0
1.1
NYM NG, $/mmbtu
Jul 09, Feb,10
($1.854)
($2.059)
($0.205)
$0.001
US Nat Gas Inv.
3,020
2,557
(463)
As far as the OPEC production cuts impacting the largest oil consuming market (US) just look at the comparison of inventory data on the Forward Curve Watch table. As shown inventories for everything in the oil complex is currently higher today than the level on Dec 17th (last OPEC cut announced). In fact total (crude, HO, gasoline) oil stocks are 54.1 million barrels higher today than in Dec! From a forward curve and total inventory perspective we can only say this driver remains bearish.
In spite of yesterday’s move higher in oil prices the global equity markets continue in their downside correction as shown in the EMI Global Equity Index table below. The year to date gains for the EMI Index is now down to 12.4% or 2.5% lower on the week. The absolute level is down to where it was back in the middle of May. Even some of the major leaders (Asia) are starting to show signs that they may be a bit toppy. Reality has set into the equity sector with the Index now down by almost 6% since peaking in mid-June. At the moment equities are more negative to the energy complex than supportive as the downside move is suggesting that the economic recovery may not be as imminent as perceived a few weeks ago and thus energy demand growth may not yet ready to begin.
EMI Global Equity Index
6/24/09
Change
Change
2009 YTD
From
From
Change
7:12 AM
Yesterday
Yesterday %
%
US/Dow Jones
8,323
(16)
-0.2%
-5.2%
Can/S&P-TSX
9,897
63
0.6%
10.1%
Lon/FTSE
4,230
(4)
-0.1%
-3.7%
Paris/Cac 40
3,138
21
0.8%
-2.5%
Germany/Dax
4,743
36
0.8%
-1.4%
Japan/Nikkei
9,550
(277)
-2.8%
7.8%
HongKong/HangSeng
17,538
(521)
-2.9%
23.2%
Aussie/SYDI
3,793
(118)
-3.0%
5.6%
China/Shanghai A
3,037
(4)
-0.1%
57.8%
Brazil/Bvspa
49,814
319
0.6%
32.7%
EMI Global Equity Index
11,406
(50)
-0.6%
12.4%
My views remain as detailed in the table at the beginning of the newsletter. I am keeping my overall rating at neutral although I would consider it a weak neutral with a bias to the downside. In spite of yesterday’s gains in the oil complex I do not think the downside correction is yet over especially after looking at the API inventory report released last night. At the moment the weak dollar pattern is the only major support to the oil (and wider commodity) environment. The minute the dollar firms (which could happen after the Fed meeting this afternoon) and on the assumption that the EIA data will be bearish and equities will languish the downside oil correction should resume.
Specs should cautiously trade with a downside perspective looking for windows of opportunities to sell. Buy side hedgers should remain in the ready mode.
Currently prices are lower for oil and firm for NG while the dollar is hovering near the unchanged level.
Current Expected Trading Range
Expected Trading Range
6/24/09
Change
Low
High End
From
End Support
Resistance
7:13 AM
Yesterday
Aug WTI
$68.74
($0.50)
$64.00
$72.00
Jul HO
$1.7489
($0.0201)
$1.5600
$1.9000
Jul RBOB
$1.8500
($0.0432)
$1.8000
$2.0000
Jul NG
$3.893
$0.014
$3.700
$4.040
Dow Futures
8,295
38
8,000
9,000
Euro/$
1.4087
0.0011
1.3930
1.4350
Yen/$
1.0527
0.0018
1.0000
1.0650
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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