Weekly energy inventory report preview

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“Whatever advice you give be brief.”

Horace

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

N

N

N

N

Global Equities

N

N

N

N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

N

N

N

Br

Market Sentiment

N

N

N

Br

Overall View

N

N

N

Br

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

CBr - Cautiously Bearish

As I suggested in yesterday’s newsletter, the oil complex was susceptible to a round of profit taking selling that mostly describes the outcome of yesterday’s trading in the oil complex. Oil and Nat Gas prices worked their way down with oil leading the broader energy complex lower. Oil actually made a new 2009 high hitting $75/bbl intraday before succumbing to a market led by sellers. There was no new fundamental news hitting the airwaves until late in the day (API report) or well after the complex settled for the day. The externals put in a mixed day with most equity markets quietly ending the day modestly higher with the U.S. Dow closing at the highest level for 2009. On the other hand the dollar regained some lost ground versus the euro as the dollar/euro switch continues to trade and hover near a key technical support level for the third day in a row.

The economic news was mostly good on Tuesday with the latest U.S. Consumer Confidence number coming in at a higher than expected/forecasted level for August. The confidence index hit 54.1 in August versus a forecast of around 47. Both the external and commodity markets quickly interpreted the number as positive and suggestive that a boost in consumer spending is right around the corner. The enthusiasm did not last very long in the oil pits as oil prices were already trading at year to date record highs as the dollar switched into positive territory throwing a cold towel on Tuesday’s oil rally. As I have been indicating for about a week liquidity is below normal for all of the markets (financials and commodities) and as such volatility is high and price exaggerations are normal during these types of market environments.

I expect this to be the trading environment until after the US Labor Day holiday on September 7th.

Late yesterday afternoon the weekly round of fundamental reports began with the release of the API report. The following table summarizes the API data along with my existing forecast for today’s EIA inventory report. The API report was mixed with a bearish backdrop for crude oil and a mildly bullish result for refined products and refinery runs. The API reported a surprise crude oil build of 4.3 million barrels versus an expectation for a decline of about 1 million barrels. Part of the API report can be explained by the larger than expected decline in refinery utilization rates of 0.9% (and thus a reduction in demand for crude oil) and part of the reason could be nothing other than last week’s huge decline reported by both the API and the EIA was overstated.

Whatever the exact reason this is a setback for the crude oil bulls especially if the EIA report is in the same direction as the API data. If so it raises a concern that crude oil may not be back into a destocking pattern and thus suggesting that it will take even longer for the crude oil inventory overhang to dissipate and return to more normal levels. If the EIA report is in sync with the API report the year over year surplus would be back over the 40 million barrel mark at 41.2 million barrels while the five-year overhang for the same week would stand at 30.6 million barrels. This could be a wakeup call for OPEC and one suggesting that last week’s big inventory decline after several weeks of inventory builds may have been more an anomaly rather than a return to the destocking pattern that crude oil was in since early May. The market will be watching the EIA crude oil number more than any other part of today’s report.

On the other hand the refined product sector looked more positive than crude oil as refiner’s put the brakes on refinery utilization rates which declined by 0.9% after a huge almost 40% decline in potential refinery margins last week (as measured by the 3-2-1 crack spread). This translated into a larger than expected decline in gasoline inventories and a surprise decline in distillate stocks. The API reported a decline in gasoline inventories of 1.8 million barrels versus an expectation for a decline of 1 million barrels. If this morning’s EIA report is in sync with the API gasoline number the year over year surplus will decline to about 12.5 million barrels while the overhang versus the five-year average for the same week will be around 9 million barrels. With less than two weeks left to the so called U.S. summer driving season larger than expected declines in gasoline supply are a welcome sight to the refining sector.

Distillate stocks declined for the second week in a row with the API reporting a decline of about 150,000 barrels versus an expectation for a build of about 500,000 barrels. With the economics to store HO/diesel still very attractive declines in distillate stocks are a surprise. However, with total HO/Diesel inventories at record high levels with months yet to go before the start of the higher demand, winter heating season I have to believe the industry is simply running out of places to store product on land.

Projections

8/26/09

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

4.3

(1.0)

36.9

25.3

Gasoline

(1.8)

(1.0)

13.3

9.8

Distillate

(0.1)

0.5

30.0

30.3

Ref. Runs%

-0.9%

0.1%

-1.6%

-7.8%

Change Level

82.3%

84.1%

85.7%

91.9%

All in all the API report was neutral. Since the market has more confidence in the EIA report the major market reaction will come in a few hours especially if crude oil shows a huge build as in the API report. The oil complex will be primarily impacted by the outcome of the EIA report as nothing major is expected to emerge from the externals today.

Tomorrow the EIA will release their latest view of the natural gas supply when they present the latest injection levels for the week. First of all NG prices are still trading below the $3/mmbtu level and still on a path to test key technical support levels from 2002, unless a big surprise in supply occurs in the short term. The market could get a bit of a positive sign if this week’s inventory report comes in within the current range of expectations which are calling for a build of about 45 to 65 BCF. If the injection level is within the range it would be slightly below the five-year average build for the same week of 67 BCF and well below last year’s level of 100 BCF. However, as I have been forecasting and discussing for weeks Nat Gas inventories will be at record high levels well before the start of the upcoming heating season. The only solution to preventing NG storage facilities from spilling over the top will be for the producing sector to cut production quickly and deeply-- when that occurs I will begin to change my bias from being bearish. Finally there is a weather pattern that the National Hurricane Center is monitoring off the coast of Puerto Rico that has about a 50% chance of developing into a tropical storm over the next few days. However there is not indication at this point in time that is will even head toward the Gulf Coast.

Today the U.S. will get a snapshot of durable goods orders and some additional housing data. I do not expect either to result in any major move in the externals one way or the other. As shown in the EMI Global Equity Index table below the index has lost some of its gains over the last 24 hours with China leading the way down. In fact China’s Shanghai A shares year to date gains have once again dropped below the 60% level. On the other hand the developed world seems to be taking over the anchor position of contributing to the solid gains in the Index so far this week. On the week the EMI index is up about 0.5% bringing the year to date gain to 35.3%.

EMI Global Equity Index

8/26/09

Change

Change

2009 YTD

From

From

Change

7:49 AM

Yesterday

Yesterday %

%

US/Dow Jones

9,539

30

0.3%

8.7%

Can/S&P-TSX

10,921

131

1.2%

21.5%

Lon/FTSE

4,917

21

0.4%

11.9%

Paris/Cac 40

3,669

(6)

-0.6%

14.0%

Germany/Dax

5,524

(33)

-0.6%

14.8%

Japan/Nikkei

10,497

(85)

-0.8%

18.5%

HongKong/HangSeng

20,435

(101)

-0.5%

43.6%

Aussie/SYDI

4,418

(17)

-0.4%

23.0%

China/Shanghai A

3,060

(82)

-2.6%

59.0%

Brazil/Bvspa

57,421

(354)

-0.6%

52.9%

EMI Global Equity Index

13,040

(50)

-0.4%

35.3%

My market views remain as detailed in the table at the beginning of the newsletter. I expect today to be mostly about oil fundamentals and if the EIA report is in sync with the API report we could see another day of modest profit taking selling in the oil pits. I do not think there will be anything emerging in the financial sector that will result in energy market participants ignoring this morning’s EIA report.

As such specs should put a lot of emphasis on the fundamentals today while the buy side hedging sector should be in the ready position to add additional hedges to their hedge portfolios if the EIA report is bearish and oil prices retrace lower.

Currently prices are lower across the board except for the dollar which is modestly firmer versus the euro.

Current Expected Trading Range

Expected Trading Range

8/26/09

Change

Low

High End

From

End Support

Resistance

7:49 AM

Yesterday

Oct WTI

$71.80

($0.25)

$69.25

$74.50

Sep HO

$1.8515

($0.0044)

$1.7500

$1.9690

Sep RBOB

$2.0064

($0.0006)

$1.8800

$2.0800

Sep NG

$2.847

($0.035)

$2.650

$3.150

Dow Futures

9,502

(21)

8,920

9,640

Euro/$

1.4265

(0.0043)

1.3750

1.4500

Yen/$

1.0618

(0.0002)

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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