Weekly energy inventory report preview

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“Everything in the universe goes by indirection. There are no straight lines.”

Ralph Waldo Emerson

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

CBu

CBu

CBu

CBu

Market Sentiment

CBu

CBu

CBu

N

Overall View

N

N

N

N

N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish

CBr - Cautiously Bearish

Tuesday proved to be a relatively quiet, range bound trading session for most markets. Oil and natural gas traded in a relatively tight range and spent most of the session trading either side of unchanged. In the end oil and gas both succumbed to a light round of profit taking selling as the dollar firmed slightly even though equities also firmed at the end of the day. All in all a very uninteresting day even on the economic news front which showed consumer spending increasing by 0.4% but personal income falling by 1.3% or the biggest decline in about four years. The majority of the spending in the economy is coming from government stimulus programs and not from the private sector. This is a troubling pattern for the global economy as history tells us that private sector spending is what expands an economy and creates permanent jobs. Government spending is temporary and generally does not result in permanent job creation but does result in huge deficits and exposure to a strong bout of inflation.

As I said last week the euphoria emanating in the financial markets does not mean prices for everything are going to only increase. Rather every once in a while perception and reality will meet up as a reminder that the problems in the global economy are far from in the history books. Yesterday’s spending statistics were just a reminder that a core part of the economy, the consumer, is still sitting and waiting in the background. Today the Institute for Supply Management will release their survey of the service sector (non-manufacturing). The ISM forecast is expected to show a contraction for the month of July but a smaller contraction than in June. The ISM Service Index is projected to rise to 48 in July from 47 in June. A reading below 50 suggest the sector is still contracting. Recall last week the ISM manufacturing index came in on the positive side. This report will impact the markets this morning but not nearly as much as Friday’s jobs data which will likely be the main economic news item of the week.

Baring any major surprises in this morning’s EIA oil inventory snapshot the market will likely trade more like it did on Tuesday than it did on Monday until the end of the week. My projections for this morning’s EIA report are shown in the table below along with the latest data released by the API late yesterday afternoon. As has been the case for months the impact of the inventory data on oil prices will be mostly dependent on what is happening in the external markets. That said I am expecting a mixed report with my projections shown in the following table along with a comparison versus last year and the five-year average for the same week on the assumption that the actual numbers come in as projected.

My projections are centered around the view that the refining sector has finally recognized that it is much better to have higher margins with lower utilization rates versus lower margins with higher utilization rates. With refinery margins surging over the last several weeks as a result of strong cuts in run rates I expect this trend to continue. There is more than ample supplies of refined products and as such any cut in refinery run rates will have no impact on the industry’s ability to meet demand requirements over the short and medium term. I am expecting refiners to cut at least another 0.5% from last week’s run levels and possibly more. Yesterday’s API data somewhat reflected my aforementioned view.

Projections

8/5/09

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

(1.5)

0.7

51.6

31.2

Gasoline

2.1

(0.5)

3.4

5.6

Distillate

(1.0)

1.0

30.3

34.3

Ref. Runs%

-0.8%

-0.5%

-2.9%

-8.3%

Change Level

84.1%

87.0%

92.4%

The API data was filled with surprises although not all logically interpretive but interesting nonetheless. The API reported a surprise decline of 1.5 million barrels of crude oil even though they reported refinery runs declining by a greater than expected 0.8%. On the other hand they did report a modest decline in import levels. This could prove to be a very interesting piece of information if the EIA crude oil data is in sync with the API as it would suggest that last week’s unexpectedly large build in crude oil stocks was an anomaly and crude oil is still in a destocking trend. Using the API data the year on year surplus would drop to below the 50 million barrel mark while the overhang versus the 5 year average for the same week would be below the 30 million barrel level if the EIA reports a similar decline in crude oil inventories.

On the refined product front the API data was also full of surprises. They reported a significant build in gasoline stocks and a modest decline in distillate stocks. The reason why this is a surprise (beside the fact that it is not what most analysts are projecting) is the way demand for both gasoline and distillate have been behaving this year as shown in the following chart. As shown in the chart since earlier this year gasoline implied demand has been in a mild, slowly evolving uptrend while distillate implied demand has continued to be in a downtrend. The API reported a whopping build of 2 million barrels of gasoline and a non-seasonal decline of 1 million barrels of distillate stocks. From a demand perspective it would be a surprise to see demand drop so precipitously to result in such a huge build in gasoline inventories. Similarly it is a stretch to expect diesel fuel demand to surge when the manufacturing sector is still in a contraction phase (but improving as reported by the ISM manufacturing index last week).

With refinery utilization rates throttled back for yet another week a loss of refined products production is certainly expected and can explain part of the results. I believe the rest of the explanation lies in the fact that the refining sector is maximizing production of distillate at the expense of gasoline (over the last few weeks I have seen announcements of several gasoline producing units like cat crackers being shut down early for maintenance of just simply due to poor economics). If the EIA data is in sync with the API I would begin to think that the refining sector has finally given up on this year’s summer gasoline market and possibly demand for economy sensitive diesel fuel could possibly be turning the corner or at least stabilizing and starting to attract their attention. Recall the Institute for Supply Management’s manufacturing index released last week suggested the manufacturing sector may begin to expand as early as this month or next. If so we could be seeing the beginning of more trucks and rail rolling to move parts and unfinished products which would logically result in a bump-up in diesel demand.

It is a bit too early to call my above explanation as anything more than theory at this point in time, albeit an interesting theory that will likely come to past in the not too distant future. For now we need to see more concrete evidence and that would start with this morning’s EIA report. The API report is interesting but the gold standard for supply and demand data remains the data released by the EIA where reporting by the industry is mandatory rather than voluntary as it is for the API reports. As such the industry places much more credence on the EIA data. Today’s report will certainly be interesting.

The EMI Global Equity Index continues to add value as shown in the following table. Although not in surge mode as it was over the last two weeks the EMI Index has gained 2% so far this week bringing the year to date gains to 27.8% or yet a another new high for the year. The major change in the performance of the Index over the last several weeks has been the contribution coming from the developed world. Most of the gains in the Index earlier in the year were primarily from the emerging market world and commodity based countries. The gains are now more widely distributed around the globe suggesting that the lagging OECD countries may finally be ready to break out of their slump. All of this remains very positive for the energy complex and will continue to provide support to prices as long as it continues to evolve to higher ground.

EMI Global Equity Index

8/5/09

Change

Change

2009 YTD

From

From

Change

7:42 AM

Yesterday

Yesterday %

%

US/Dow Jones

9,320

34

0.4%

6.2%

Can/S&P-TSX

11,018

231

2.1%

22.6%

Lon/FTSE

4,671

(11)

-0.2%

6.3%

Paris/Cac 40

3,501

25

0.1%

8.8%

Germany/Dax

5,422

5

0.1%

12.7%

Japan/Nikkei

10,375

23

0.2%

17.1%

HongKong/HangSeng

20,796

(11)

-0.1%

46.1%

Aussie/SYDI

4,314

43

1.0%

20.1%

China/Shanghai A

3,644

9

0.3%

89.3%

Brazil/Bvspa

56,038

40

0.1%

49.2%

EMI Global Equity Index

12,910

39

0.4%

27.9%

However, I am still flying the caution flag. With about five months yet to go in 2009 the EMI Index is approaching a year to date gain of 30% or a level that is already above normal on an annualized basis. China is approaching a 90% year to date gain. There will be a downside correction in many of these markets, especially the big gainers like China, Hong Kong and Brazil. When it hits if the fundamentals of oil and natural gas markets are not in any better condition that they are currently (still oversupplied on all fronts) than the correction is going to ripple right through the energy complex which is already hovering near its trading range highs and bordering on being overbought.

My views are as detailed in the table at the beginning of the newsletter. The specs should not only focus on the externals for direction today but pay close attention to this morning’s EIA oil report before formulating any new flat price strategies for the short term. Buy side hedgers for both oil & NG should look to add to their hedge portfolios on price pullbacks.

Currently oil is mixed while everything else on the EMI Price Board is hovering either side of unchanged in quiet early morning trading.

Current Expected Trading Range

Expected Trading Range

8/5/09

Change

Low

High End

From

End Support

Resistance

7:42 AM

Yesterday

Sep WTI

$71.52

$0.10

$58.00

$73.50

Sep HO

$1.9045

$0.0031

$1.7200

$1.9120

Sep RBOB

$2.0519

($0.0048)

$1.8800

$2.0800

Sep NG

$3.999

($0.002)

$3.150

$4.450

Dow Futures

9,288

1

8,920

9,640

Euro/$

1.4437

0.0048

1.3750

1.4500

Yen/$

1.0495

(0.0007)

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.

EMA has authorized Futures to publish its report once a week on Wednesday prior to the EIA release. For information on how receive the report everyday look below.

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Information and opinions expressed in this publication are intended to provide general market awareness. The Energy Management Institute and the Energy Market Analysis are not responsible for any business actions, market transactions, or decisions made by its readers based on information published in this report. Readers of the Energy Market Analysis use this market information at their own risk.

This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited.

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About the Author
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.

EMA has authorized Futures to publish its report once a week on Wednesday prior to the EIA release. For information on how to receive the report everyday look below.

PH: (888) 871-1207

Email info@energyinstitution.org

Subscribe here Free Trial Here

Information and opinions expressed in this publication are intended to provide general market awareness. The Energy Management Institute and the Energy Market Analysis are not responsible for any business actions, market transactions, or decisions made by its readers based on information published in this report. Readers of the Energy Market Analysis use this market information at their own risk.

This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited.

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