Quote of the Day
“To handle yourself, use your head; to handle others, use your heart.”
Donald Laird
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EMI QuickView Short Term Market Overview | ||||
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Impact on Prices | ||||
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Price Drivers |
Crude |
Gasoline |
HO/Diesel |
Nat Gas |
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Supply |
Br |
Br |
Br |
Br |
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Demand |
Br |
Br |
Br |
Br |
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Inventories |
Br |
Br |
Br |
Br |
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US Dollar |
Bu |
Bu |
Bu |
Bu |
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Global Equities |
Bu |
Bu |
Bu |
Bu |
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Geopolitics |
CBu |
CBu |
CBu |
CBu |
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Technicals |
N |
N |
N |
N |
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Market Sentiment |
N |
N |
N |
CBr |
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Overall View |
N |
N |
N |
CBr |
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N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish | ||||
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CBr - Cautiously Bearish |
Energy prices retraced on Tuesday as equities traded either side of unchanged for most of the trading session (only to close lower) while the dollar strengthened after several days of declining. Currently oil is continuing to drift lower in overnight trading as the dollar is firmer and equity futures are pointing to a slightly weaker opening in New York. Yesterday the Conference Board reported that its Consumer Confidence Index fell more that most expected in July suggesting that the consumer is likely still putting more emphasis on savings rather than spending. As long as the U.S. consumer continues to hold back on spending the economic recovery is going to be slow and painful.
With most of the major earnings reports now in the history books for the second quarter the externals will be looking at several key economic numbers on Friday with the second quarter GDP number leading the way. Most are expecting the trend of a smaller contraction to prevail. Most economists are expecting a GDP of -1.5%, although bad, it would be significantly better than the 1st quarter’s -5.5% contraction suggesting the worse is over. In addition to the GDP number the weekly initial jobless claims will be released along with the Chicago Purchasing Managers Index (PMI). The end of the week will not close out quietly even though trading has been relatively docile so far this week.
With no major moves in either direction coming from the externals so far this week today’s EIA inventory report is likely to have an impact on price direction at least in the short term. Late yesterday afternoon the API released their weekly report which turned out noticeably different from the forecast. The following table highlights the API data along with my forecast numbers for the EIA report as well as what the inventory picture will look like if the actual EIA data is in sync with the forecast. I must say (as I have in the past) the industry places more emphasis on the results of the EIA report as it tends to provide a more complete picture of the industries supply and demand picture due to its wider sample. Companies are required to report their data to the EIA while the API participants are all volunteers resulting in a smaller sample with more volatile data than the EIA data ( for example this week’s API report showed adjustments to last week’s data).
That said the API reported a huge build in crude oil inventories for the second week in a row even though the EIA data has continued to show crude oil to still be in a destocking pattern (through last week’s report). Part of the reason the API showed a build in crude oil is the result of refinery run rates declining by 0.6%. Lower refinery runs translates to lower demand for crude oil. They also reported a modest increase in crude oil imports of about 200,000 barrels per day. The API report unto itself was consistent on the crude oil front but whether the EIA report will show the same result is an unknown. If the EIA crude oil inventories are in line with the API data it would be a big setback to the crude oil bulls as well as OPEC as it could signal an end to the destocking pattern that has been in place for crude oil since early May. If the EIA report were to show a similar size build in crude oil stocks as what was reported by the API the year on year surplus would surge back over the 50 million barrel mark and would be bearish for oil prices.
On the refined product side of the equation the API reported only minor changes in both gasoline and distillate stocks. The API reported a small decline of 47,000 barrels of gasoline and a build of about 115,000 barrels of distillate fuels. Both were lower than the forecasts and much like crude oil are consistent with a 0.6% decline in refinery utilization rates. If the EIA data is in line with the API report it would be mildly positive for refined products as the year on year surplus of gasoline would be down to about 1.8 million barrels while the year on year distillate overhang would be approaching its lowest levels in a long time of about 30 million barrels.
The API report was in the right direction for the refinery sector which has seen their refinery margins stage a strong recovery over the last two weeks or since they have been slowly throttling back run rates. About two weeks ago the widely followed 3-2-1 crack spread was trading around $7.50/bbl while this morning it is currently around $11.50/bbl or $4/bbl higher. I suspect the pattern of lower refinery run rates will continue.
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Projections |
7/29/09 | |||
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API |
Current |
Change from |
Change from | |
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Results |
Projections |
Last Year |
5 Year | |
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mmbls |
vs. Proj. |
vs. Proj. | ||
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Crude Oil |
4.1 |
(1.7) |
45.7 |
22.6 |
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Gasoline |
(0.047) |
1.0 |
2.8 |
7.2 |
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Distillate |
0.116 |
1.3 |
31.3 |
35.4 |
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Ref. Runs% |
-0.6% |
-0.3% |
-1.7% |
-6.9% |
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Change Level |
83.4% |
85.5% |
87.2% |
92.4% |
Nat Gas fundamentals are also expected to break its trend (as crude oil may today) of four weeks in a row of below normal injections into inventory. The early estimate for tomorrow’s EIA Nat Gas report are calling for builds ranging between 60 and 80 BCF with the middle of the range (70 BCF) the most likely outcome. The five-year average for the same week was 51 BCF while the year ago injection level was at 68 BCF. It may be close but this week’s report could be suggestive to a return to the above average builds seen in the Nat Gas sector for most of this year as a result of tepid industrial demand coupled with minimal weather related demand this summer.
Much like oil, Nat Gas is mired in a trading range with the low end around $3/mmbtu and the high end near the $4/mmbtu level. I do not see any reason why Nat Gas will break out of this trading range anytime soon. In fact I expect Nat Gas prices to drift back toward the lower end of the range unless there is a big surprise in tomorrow’s inventory report and/or a major move in the externals that would be supportive for Nat gas prices. Supply is still outstripping demand even though rig counts are down over 50% basis last year at this time. The Nat Gas market desperately needs a change in the direction of industrial demand which is not likely until there is real economic growth in the U.S.
Not only did the U.S. equity market languish yesterday but most markets in the developed world retraced lower while Asian markets held steady as shown in the EMI Global Equity Index table below. The Index lost a bit of ground over the last 24 hours but still remains about 0.7% higher versus last Friday’s close. The index is up 24.3% year to date with China’s Shanghai A shares still clearly the leader of the pack.
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EMI Global Equity Index | ||||
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7/29/09 |
Change |
Change |
2009 YTD | |
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From |
From |
Change | ||
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8:31 AM |
Yesterday |
Yesterday % |
% | |
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US/Dow Jones |
9,097 |
(12) |
-0.1% |
3.6% |
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Can/S&P-TSX |
10,571 |
(187) |
-1.7% |
17.6% |
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Lon/FTSE |
4,529 |
(57) |
-1.2% |
3.1% |
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Paris/Cac 40 |
3,331 |
(41) |
-1.5% |
3.5% |
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Germany/Dax |
5,175 |
(77) |
-1.5% |
7.6% |
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Japan/Nikkei |
10,087 |
(1) |
0.0% |
13.9% |
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HongKong/HangSeng |
20,625 |
373 |
1.8% |
44.9% |
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Aussie/SYDI |
4,174 |
26 |
0.6% |
16.2% |
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China/Shanghai A |
3,610 |
3 |
0.1% |
87.6% |
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Brazil/Bvspa |
54,472 |
(77) |
-0.1% |
45.1% |
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EMI Global Equity Index |
12,567 |
(5) |
-0.4% |
24.3% |
As I mentioned several times this week I have raised the caution flag for most markets we follow as they all seem to be ahead of themselves. We have already seen a modest retracement in energy prices as well as in equities with the dollar bouncing off its lows. I expect this pattern to continue at least for a few more days with Friday’s economic data possibly serving as a catalyst to either further the retracement along or stop it in its tracks if the GDP number comes in much better than expected. So the caution flag continues to fly.
My views remain as detailed in table at the beginning of the report. I am still neutral for oil and cautiously bearish for Nat Gas. I have no bias today but I do expect it will be a volatile session once inventories are released especially if the EIA reports a surprisingly large build in crude oil stocks as reported by the API.
The specs should continue to pay close attention to the externals but watch this morning inventory data closely in entering any flat price positions. Buy side hedgers should add to their hedge portfolio on dips in prices (which may be coming soon).
Currently everything on the price board is lower except for the dollar which is slightly firmer versus the euro.
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Current Expected Trading Range |
Expected Trading Range | |||
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7/29/09 |
Change |
Low |
High End | |
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From |
End Support |
Resistance | ||
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8:31 AM |
Yesterday | |||
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Sep WTI |
$66.14 |
($1.09) |
$58.00 |
$72.00 |
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Aug HO |
$1.7555 |
($0.0092) |
$1.5000 |
$1.7100 |
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Aug RBOB |
$1.8950 |
($0.0156) |
$1.6250 |
$1.8400 |
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AugNG |
$3.494 |
($0.041) |
$3.150 |
$3.900 |
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Dow Futures |
8,975 |
(26) |
8,000 |
9,000 |
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Euro/$ |
1.4127 |
(0.0050) |
1.3750 |
1.4350 |
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Yen/$ |
1.0625 |
0.0043 |
1.0000 |
1.0650 |
Best regards
Dominick A. Chirichella
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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