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EMI QuickView Short Term Market Overview
Impact on Prices
Price Drivers
Crude
Gasoline
HO/Diesel
Nat Gas
Supply
Br
Br
Br
Br
Demand
Br
Br
Br
Br
Inventories
Br
Br
Br
Br
US Dollar
Bu
Bu
Bu
Bu
Global Equities
Bu
Bu
Bu
Bu
Geopolitics
CBu
CBu
CBu
CBu
Technicals
N
N
N
N
Market Sentiment
N
N
N
CBr
Overall View
N
N
N
CBr
N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish
CBr - Cautiously Bearish
The externals continue to drive oil prices ever so higher. With the Dow pushing even closer to the 9,000 mark oil prices moved over the $65/bbl level. Further upside support also came from Tuesday’s expiration day trading of the spot August Nymex WTI contract. Second quarter corporate earnings have continued to support the sentiment that the worse is over for the economy and the outlook for an economic recovery is improving. For example yesterday Caterpillar Inc., the world’s largest construction and mining equipment manufacturer, reported much stronger than expected earnings adding more fuel to the recovery fire and as well supporting oil prices.
The EMI Global Equity Index as shown in the following table continued to gain ground over the last 24 hours. The index is now up 2.2% on the week with the year to date gain now at 20.5%. Even the Dow is up 1.6% on the year and within 100 points of it 2009 closing high set on January 6th. The Dow is also about 2,400 points above its closing low of the year set on March 5. I believe most equity markets have now gained ground for seven days in a row and are approaching short term overbought levels thus making them very susceptible to a short term round of profit taking selling. In fact we have seen that already occurring in trading of China’s Shanghai A shares which declined 1.6% today. I expect the next few days in the equity world will be a bit rocky compared to the last seven trading sessions.
EMI Global Equity Index
7/22/09
Change
Change
2009 YTD
From
From
Change
6:50 AM
Yesterday
Yesterday %
%
US/Dow Jones
8,916
68
0.8%
1.6%
Can/S&P-TSX
10,515
(25)
-0.2%
17.0%
Lon/FTSE
4,481
38
0.8%
2.0%
Paris/Cac 40
3,303
32
1.3%
2.6%
Germany/Dax
5,094
64
1.3%
5.9%
Japan/Nikkei
9,652
257
2.7%
8.9%
HongKong/HangSeng
19,502
(1)
0.0%
37.0%
Aussie/SYDI
4,048
4
0.1%
12.7%
China/Shanghai A
3,373
(56)
-1.6%
75.3%
Brazil/Bvspa
53,234
79
0.1%
41.8%
EMI Global Equity Index
12,212
46
0.5%
20.5%
The dollar has been mostly lower over the last week or so and has continued to inch closer to a test of its early June lows (versus the euro) which have also been supportive for oil prices. However, since yesterday dollar trading has been volatile and has recovered some lost ground after starting Tuesday’s session on a week note. The recovery has continued into trading during Asian hours and is currently putting a bit of selling pressure on oil prices.
On the fundamental side of the equation most market participants remain cautious and some skeptical over the recent recovery in oil price as inventories are bulging and demand is tepid at best. Further supporting this sentiment and already pressuring oil prices somewhat this morning is the mostly bearish API inventory report that was released late yesterday afternoon. The following table summarizes the results from the API report along with my projections for the EIA report from yesterday.
The report was laden with surprises starting with the huge build in crude oil stocks of 3.1 million barrels. Most projections were calling for a decline in inventories of upwards of 2 million barrels as crude oil has been in a destocking pattern resulting from the forward curve contango narrowing and refiner demand holding steady. If the EIA data is in line with the API data the year on year surplus will move back to over 50 million barrels while the overhang versus the five-year same week average will widen to over 27 million barrels. This will be a setback to the crude oil bulls as it could be suggesting that the destocking pattern that crude oil has been in since early May could possibly be coming to an end as the API also reported a surprisingly large drop in refinery runs of 2%. It that trend continues demand for crude oil will continue to drop possibly resulting in inventories moving back into a building mode especially if imports rise as they did in this week’s API report by over 500,000 barrels.
With the API reporting a decline of about 2% in refinery utilization rates it was not only a surprise especially since refinery margins increased last week but it helped the bulging distillate market resulting in a lower than expected build. Distillate inventories grew by about 150,000 barrels in the API report or significantly below my forecast for a build of 1.5 million barrels. Distillate demand has been weak and the forward curve contango has widened to the point where is it very economical to store both HO & diesel fuel. Thus the API report is a surprise as refiners seem to be still maximizing production of gasoline versus distillate fuel as gasoline inventories increased by almost twice as much as projected. The API reported a build of 1.3 million barrels of gasoline this week suggesting that supply continues to outstrip demand even though the US is in the heart of the so called summer driving season or normally the highest demand period for gasoline. As I mentioned weeks ago the summer driving season has been a non-event as the bump up in demand this summer has been marginal at best.
Projections
7/22/09
API
Current
Change from
Change from
Results
Projections
Last Year
5 Year
mmbls
vs. Proj.
vs. Proj.
Crude Oil
3.1
(2.0)
47.2
22.2
Gasoline
1.3
0.7
(1.8)
4.9
Distillate
0.1
1.5
32.7
34.3
Ref. Runs%
-2.0%
-0.1%
0.7%
-4.0%
Change Level
87.8%
87.1%
91.7%
Overall the first fundamental report of the week painted a bearish picture and if the EIA report is in sync with the API report we could see a modest round of profit taking selling in the energy complex as early as today especially if the externals (especially equities) also enter into a short term corrective move as previously discussed above. Much like the equity markets oil prices have been on an upward tear ever since establishing the low end of the new trading range just a little over a week ago.
Through yesterday’s close WTI has gained over $7/bbl or about 12% with no downside interruptions. This is an unsustainable short term move and one that is likely to be interrupted this week some time. Most of this week’s good economic news that has been driving equities has already been factored into the equities market. The rest of the week is light on economic reports and as such we could see energy market participants re-focusing their attention back to the bearish oil and Natural gas fundamental picture for a few days. If so, lower prices could result over the next several days.
On the natural gas front the huge inventory overhang is still the single biggest bearish element preventing natural gas from staging any kind of rally to the upside. Although natural gas stocks increased at a slower rate than the previous year and the five-year average over the last three weeks it has not changed the fact that natural gas stocks are still 589 BCF above last year and 454 BCF above the five-year average. The early projections for this week’s inventory report on Thursday range from an injection of around 65 BCF to 75 BCF. Last year the injection level was 87 BCF while the five-year average for the same week was 62 BCF. If the actual data is in sync with the projections it could be the 4th week in a row that stock injections were below normal.
This week’s stage is pretty much set, strong price moves for the first half of the week with the second half of the week uncertain. It does seem that perception and reality are ready for a quick meeting after the EIA report hits the media airwaves this morning. Basis the results of yesterday’s API inventory report that meeting could be modestly unpleasant especially if the externals are not supportive for oil prices today.
I remain neutral with no bias for today’s trading as outlined in the table at the beginning of the report. The caution flag is flying as I do believe we will see some profit taking selling in both the externals and energy complex before the week is out. This is normal after the huge moves experienced over the last week or so. I continue to expect oil prices will remain in the newly formed trading range for at least the rest of the summer with minimal probability of breaching either range limit unless something completely unexpected occurs.
Spec should continue to follow the direction of the external closely while paying close attention to this morning’s EIA report. We have seen over the last few months when equities decline oil participants look toward the fundamentals for quick guidance. If they look today it could be a bearish view. Buy side hedgers may have a window to add some additional hedges to their portfolio sometime during the remainder of the week.
Currently prices are lower across the board in very early, quiet overnight trading.
Current Expected Trading Range
Expected Trading Range
7/22/09
Change
Low
High End
From
End Support
Resistance
6:51 AM
Yesterday
Aug WTI
$64.72
$0.74
$58.00
$72.00
Aug HO
$1.6904
($0.0080)
$1.5000
$1.7100
Aug RBOB
$1.7950
($0.0170)
$1.6250
$1.8400
AugNG
$3.702
($0.003)
$3.150
$3.900
Dow Futures
8,870
(16)
8,000
9,000
Euro/$
1.4192
(0.0003)
1.3750
1.4350
Yen/$
1.0679
(0.0008)
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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