Weekly energy inventory report preview

Quote of the Day

“Diligence is the mother of good luck.”

Benjamin Franklin

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

With little support coming from the externals the current bearish energy fundamentals had nowhere to hide on Tuesday resulting in oil & Nat gas moving lower. In fact WTI settled below the $70/bbl mark for the first time since the end of July. The entire energy complex remains mired in a trading range that has now been in place for weeks and as we have been suggesting will remain in place for at least another month or so. WTI prices were approaching the upper end of the trading range and attempting a breakout for the last week or so but with the equity markets seemingly near a short term top of their own along with the dollar regaining a bit of upside momentum oil has been unsuccessful in moving to higher ground. With the nearby fundamentals still showing a very robust supply and inventory position it is going to be difficult for oil prices to breach the upper end of the range resistance anytime soon (unless they get a lot of help from the externals).

Yesterday EIA and OPEC released their monthly oil market reports with the IEA report just released this morning. Nothing earth shattering from any of the three reports. In general they all said pretty much the same thing insofar as the global economy approaching a recovery mode. OPEC left their demand projections the same as in their last report while both the EIA and IEA increased their projected outlook for global demand marginally higher. The EIA is expecting world consumption to grow year over year in the 4th quarter of 2009 the first such growth in 5 quarters. All are suggesting demand growth will be led from the developing world first (i.e. China) with OECD countries lagging. They all showed global inventories to be well above normal suggesting that supply cutbacks are still not ahead of the demand decline curve.

The following list the highlights from both the IEA and EIA reports. I would label this round of fundamental reports as neutral with a very slight bullish bias for the medium to longer term. With inventories still growing the short term outlook is still bearish.

HIGHLIGHTS FROM THE EIA REPORT

  • Global Petroleum Overview. The oil market continues to be defined by the tension between optimism over the perceived recovery of the global economy on the one hand and persistently weak global consumption of crude oil and other liquid fuels on the other. There are indications that oil consumption could be recovering outside of the Organization for Economic Cooperation and Development (OECD). However, this has been somewhat offset by an erosion of compliance with production cuts announced by the Organization of the Petroleum Exporting Countries (OPEC). The rising level of global oil inventories when combined with weak current consumption indicates overall weakness in the oil market. For example, U.S. commercial crude oil and petroleum product stocks have increased for 5 straight quarters for the first time since 1979-1980, and they are projected to increase again in the third quarter of this year. As a result, the future level of oil prices will largely depend upon the timing and pace of the global economic recovery and the resultant impact on global oil consumption that would tend to erode surplus stocks.
  • Global Petroleum Consumption. World oil consumption has dropped sharply since the middle of 2008 in response to the global economic downturn and higher prices. Preliminary data indicate that global oil consumption declined by 3.1 million barrels per day (bbl/d) in the first half of 2009 compared with year-earlier levels. OECD countries accounted for 2.8 million bbl/d of the overall decline, while non-OECD consumption recorded a decline of only 300,000 bbl/d. The current macroeconomic outlook assumes that the world economy begins to recover slightly at the end of this year, led by Asia. As a result, EIA expects world oil consumption to grow year-over-year in the fourth quarter of 2009, the first such growth in five quarters. Overall, global oil consumption is projected to decline by 1.7 million bbl/d in 2009, then rise by 940,000 bbl/d in 2010.
  • Non-OPEC Supply. Total non-OPEC crude oil and other liquid fuels supply is expected to rise by 410,000 bbl/d in 2009 and by 160,000 bbl/d in 2010. Over the forecast period, higher output from Brazil, the United States, and the former Soviet Union is expected to offset falling production in Mexico and the North Sea. There is some indication that the chronic delays that have plagued non-OPEC projects have begun to ease. However, many projects are still moving forward at a slower pace to either defer necessary investment decisions or take advantage of further reductions in procurement costs.
  • OPEC Supply. OPEC crude oil production is estimated at 28.7 million bbl/d in the second quarter of 2009, mostly unchanged from first quarter levels, but down 3 million bbl/d from the peak in the third quarter of 2008. The combination of higher prices and OPEC's historical tendency for weaker compliance with production targets over time suggests that OPEC crude oil production could rise over the remainder of the year, unless prices fall sharply from current levels. Rising global oil inventories and increasing tanker activity would seem to indicate that this past trend is continuing. OPEC is scheduled to meet on September 9 to review market conditions and to consider its production policy.
  • Global Petroleum Inventories. Based on preliminary data, OECD commercial oil inventories stood at 2.75 billion barrels at the end of the second quarter of 2009. At 61 days of forward cover, OECD commercial inventories were well above average levels for that time of year. EIA expects OECD oil inventories to remain above average levels throughout the forecast period. Industry reports indicate that crude oil and refined products held in floating storage, which are not included in the OECD stock totals, have recently increased to 140 million barrels in response to weakness in global oil consumption and higher levels of contango in the market (i.e., relatively high future prices compared with current prices).
  • CO2 Emissions. This Outlook begins reporting projected carbon dioxide (CO2) emissions from fossil fuels, which fell by 3.2 percent in 2008. We project CO2 emissions will decline by 5 percent this year with lower CO2 emissions from coal accounting for more than one-half of this decline. Economic recovery next year and modest growth in energy consumption are expected to lead to a 0.7-percent increase in CO2 emissions

HIGHLIGHTS OF THE IEA REPORT

  • Global oil supply in July rose by 570 kb/d to 85.1 mb/d, two-thirds of which stemmed from non-OPEC. Total non-OPEC supply for 2009 is revised up 160 kb/d to 51.0 mb/d, largely due to stronger-than-expected Russian output, as in recent months. Total non-OPEC supply is now seen rising 440 kb/d to an upward-revised 51.4 mb/d in 2010.
  • OPEC crude oil supply edged lower by around 100 kb/d in July, to 28.64 mb/d, in part due to record-low output by Nigeria. Production by OPEC-11, which excludes Iraq, was down by 120 kb/d, to 26.12 mb/d. The call on OPEC remains at 27.7 mb/d in 2009 and is trimmed to 27.8 mb/d in 2010.
  • Demand forecasts for 2009 and 2010 are revised up by 190 kb/d and 70 kb/d, respectively, given a stronger outlook for Asia for both years. This barely dents the sharp demand contraction to 83.94 mb/d expected this year, while growth in 2010 is slightly lower than previously estimated, at +1.6% or +1.3 mb/d to 85.25 mb/d.
  • 3Q09 global refinery crude runs are revised down 0.4 mb/d to 72.0 mb/d on further weakness in European runs, rising floating distillate storage and continued refining margin weakness. Expected annual growth slips to -2.0 mb/d for 3Q09, while growth from 2Q09 is just 0.4 mb/d, far below the normal seasonal increase of 1.0 mb/d.
  • OECD industry stocks rose counter-seasonally by 8.5 mb in June to 2,749 mb, 5.5% above last year’s level. The biggest gains came in European crude and North American light distillates, while North American crude posted the largest drop. End-June forward demand cover was unchanged versus May at 61.7 days.

On the short end of the curve the weekly round of inventory reports started late yesterday afternoon with the release of the API data. As shown in the following table the API data was modestly different than the forecasts. API reported a surprise decline in crude oil stocks of 1.4 million barrels even though refinery runs were decreased by 0.3%. Gasoline stocks declined by 2.3 million barrels in the API or much more than forecast while distillate stocks built significantly more than anticipated.

Projections

8/12/09

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

(1.4)

1.0

54.0

34.9

Gasoline

(2.3)

(0.9)

9.1

6.6

Distillate

1.6

0.5

30.4

32.5

Ref. Runs%

-0.3%

-0.2%

-1.6%

-7.4%

Change Level

82.3%

84.3%

85.9%

91.8%

This could be a sort of adjustment week for the EIA report due out this morning or possibly an indication that last week’s crude oil data was a bit of an anomaly. If the EIA actual data for crude oil is in sync with the API data and shows a modest inventory decline it would suggest that crude oil may still be in a destocking pattern. With refiner demand declining and with the economics of storing crude once again economical (a ships broker report is indicating that the number of tankers in floating storage has increased by 4 or 5 over the last week or so validating the analysis I presented a few weeks ago about storing crude oil) I still lean toward a forecast for a build in crude oil stocks this week.

The direction of refined product inventories came in as expected in the API report. However, the magnitude of the decline in gasoline and the build in distillate stocks were both greater than expected. If the EIA data is in sync with API it will help keep the gasoline overhang down to a more manageable level but at a level that will still be greater than what the surplus was after last week’s report. On the distillate side all one can say is it remains in glut territory.

Today the US Federal Reserve’s two day FOMC meeting will come to a close with all expecting them to keep their interest rate policy as it has been (low). The market will also be looking for any guidance on the economic recovery they may offer in their comments when the outcome of the meeting is released this afternoon.

What appears to be in play at the moment is what I would call corrective trading in all of the major markets. The equity markets have lost some of their upside momentum as some players begin to take money off of the table in a round of profit taking selling. US equities have been lower for two days in a row and the EMI Global Equity Index (shown below) is now down by 0.4% on the week. By no means has the overall upward trend ended in equities as we are simply in a normal adjustment pattern at the moment. Since the middle of the first quarter these down periods have been relatively shallow and short-lived and have all proved to be decent entry points to moving money into the equity sector. I expect this correction will likely be the same. The currency market is in the same pattern with the dollar recovering some lost growing but by no means changing the medium term trend of further dollar weakness down the road.

EMI Global Equity Index

8/12/09

Change

Change

2009 YTD

From

From

Change

6:59 AM

Yesterday

Yesterday %

%

US/Dow Jones

9,241

(97)

-1.0%

5.3%

Can/S&P-TSX

10,629

(164)

-1.5%

18.3%

Lon/FTSE

4,671

(51)

-1.1%

6.3%

Paris/Cac 40

3,475

21

0.7%

8.0%

Germany/Dax

5,325

39

0.7%

10.7%

Japan/Nikkei

10,585

61

0.6%

19.5%

HongKong/HangSeng

21,074

145

0.7%

48.0%

Aussie/SYDI

4,334

25

0.6%

20.7%

China/Shanghai A

3,427

16

0.5%

78.1%

Brazil/Bvspa

55,761

(1,069)

-1.9%

48.5%

Indiv Avg

Indiv Avg

Indiv Avg

Indiv Avg

EMI Global Equity Index

12,852

(107)

-0.2%

26.3%

Index Avg

33.4%

With the externals in a corrective mode so are the energies. With little support coming from the fundamentals and the externals out of the picture for the moment oil & NG are likely to also trend lower in a modest round for profit taking selling that began late last week.

My market views remain as detailed in the table at the beginning of the newsletter. My recommendations are also the same. Buy side hedgers should watch the market closely and be in a ready mode if oil & NG prices drift much lower.

Currently energies are slightly weaker while the externals are trading either side of unchanged.

Current Expected Trading Range

Expected Trading Range

8/12/09

Change

Low

High End

From

End Support

Resistance

7:00 AM

Yesterday

Sep WTI

$69.65

$0.20

$58.00

$73.50

Sep HO

$1.8950

($0.0167)

$1.7200

$1.9120

Sep RBOB

$2.0380

($0.0042)

$1.8800

$2.0800

Sep NG

$3.528

($0.013)

$3.150

$4.450

Dow Futures

9,237

21

8,920

9,640

Euro/$

1.4166

0.0018

1.3750

1.4500

Yen/$

1.0434

0.0016

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.

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.

Check out the EMI’s 2009 Energy Training Calendar Energy Management Institute offers a full range of advanced learning courses for energy professionals. Visit for our current course listing. EMI courses are available nationwide.

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.

Comments
comments powered by Disqus