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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 |
N |
N |
N |
N |
|
Global Equities |
N |
N |
N |
N |
|
Geopolitics |
CBu |
CBu |
CBu |
CBu |
|
Technicals |
CBr |
CBr |
CBr |
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 |
Most major markets were hit with a strong round of selling that can best be explained as a good old fashioned rout. All of the economic news on the day was positive and mostly better than expected leading one to conclude that the market was in one of those buy the rumor sell the fact type of trading session. Everything declined almost back to the lows hit around mid-August during the last mini-correction. After all of the good economic news hit the market prices for equities and commodities immediately bounced higher while the dollar declined. The markets reacted very normally to the data…however the short term sentiment changed very quickly and everything reversed direction led by a firming dollar and lower equities…energies headed to lower ground. As I have been cautioning the market is trading in a reduced liquidity environment and as such I would categorize Tuesday’s moves as exaggerated price moves suggesting that one should not take away too much from yesterday’s price activity.
Late Tuesday afternoon the API released their latest weekly oil inventory snapshot. As shown in the following table which summarizes the API data along with my projections the API data was mostly bullish. Crude oil declined about 3.2 million barrels…well more than projected. If the EIA data is in line with the API numbers the year over year surplus would be at 36.7 million barrels while the overhang versus the 5 year, same week average would be about 26 million barrels. The main reason for the larger than expected decline in crude oil stocks was due to the significant increase in refinery utilization rates of 2.2%. Most projections were calling for only a slight increase. This resulted in a larger than expected increase in refiner demand for crude oil which more than offset the modest increase in imports reported by the API. The most important implication from the API crude oil decline is it suggests that crude oil is still in a destocking pattern. If the EIA data confirms this result it will be good news for OPEC who is scheduled to meet in Vienna next week to lay out their production strategy for the next several months. OPEC should pay close attention to the price reaction from this week and not be too complacent when it comes to their compliance rates (which have been declining over the last few months).
On the refined product side the 2.2% increase in refinery run rates reported by the API did not seem to negatively impact gasoline and distillate inventories suggesting that implied demand must have increased. Gasoline stocks declined by 2.8 million barrels or almost three times more than the expectations. It appears that the gasoline wholesalers are in the process of filling gasoline stations around the country in anticipation of a strong demand holiday weekend in the US. If the EIA is in sync with the API results the year on year surplus of gasoline stocks will drop to just a tad below the 10 million barrel mark while the overhang versus the 5 year, same week average will be just 6.5 million barrels. With gasoline clearly in its normal seasonal destocking pattern this week’s API results are a pleasant outcome for the refining industry especially if the EIA data confirms the API numbers.
Distillate stocks increased by about 900,000 barrels which was well within the expectations. The year on year surplus will be at about 31.8 million barrels while the 5 year, same week overhang will come in at 29.4 million barrels if the EIA report is in sync with the API numbers. With an increase in refinery runs it suggests that implied demand was likely strong on the week. With the heating season still months away any increase in demand was likely from the economy sensitive diesel fuel sector suggesting that the trucks and rails are starting to roll again. Yesterday’s increase in the ISM manufacturing index suggested that manufacturing in the US is back to an expansion mode also suggesting that truck and rail demand should be increasing.
|
Projections |
9/2/09 | |||
|
API |
Current |
Change from |
Change from | |
|
Results |
Projections |
Last Year |
5 Year | |
|
mmbls |
vs. Proj. |
vs Proj. | ||
|
Crude Oil |
(3.2) |
(2.5) |
37.4 |
26.7 |
|
Gasoline |
(2.8) |
(0.9) |
12.8 |
8.5 |
|
Distillate |
0.9 |
1.0 |
31.7 |
29.3 |
|
Ref. Runs% |
2.2% |
0.2% |
-4.4% |
-9.2% |
|
Change Level |
85.8% |
84.3% |
88.7% |
93.4% |
Overall I would call the API report as biased to the bullish side. However as I elaborated in yesterday’s report one has to view the API numbers with a bit of caution as most weeks the API data is not in sync with the EIA data. The immediate reaction in after hours trading in the oil complex was mildly bullish based on small increases in all of the oil products. However, after the huge decline in prices on Tuesday it is difficult to know if the increase in prices was a result of the API report or just a result of some light short covering. The final answer will come today after the more widely followed EIA report hits the airwaves at 10:30 am EST.
The EMI Global Equity Index lost additional ground on Tuesday led by a downturn in all of the developed world markets as well as Brazil which lost 1.2% on the day. Yesterday I cautioned that Brazil was on the cusp of a correction after its year to date gains hit the 50% mark and took over the leading spot from China…the correction has started now but we will have to wait and see how deep and how long the correction turn out to be. It will be dependent on how deep the correction in commodities (like oil turns out to be) is since the Brazilian economy is very much commodity price driven. So far on the week the EMI Index is down by 3.4% after only 2 trading sessions. Most of the Asian markets closed higher on Tuesday following China’s lead. However most markets are down this morning adjusting for yesterday’s decline in the western markets except for china which is showing a gain of another 1.2%.
|
EMI Global Equity Index | ||||
|
9/2/09 |
Change |
Change |
2009 YTD | |
|
From |
From |
Change | ||
|
5:29 AM |
Yesterday |
Yesterday % |
% | |
|
US/Dow Jones |
9,311 |
(186) |
-2.0% |
6.1% |
|
Can/S&P-TSX |
10,690 |
(178) |
-1.6% |
18.9% |
|
Lon/FTSE |
4,820 |
(89) |
-1.8% |
9.7% |
|
Paris/Cac 40 |
3,561 |
(70) |
-0.6% |
10.6% |
|
Germany/Dax |
5,293 |
(35) |
-0.6% |
10.0% |
|
Japan/Nikkei |
10,530 |
38 |
0.4% |
18.9% |
|
HongKong/HangSeng |
19,872 |
148 |
0.8% |
39.6% |
|
Aussie/SYDI |
4,511 |
27 |
0.6% |
25.6% |
|
China/Shanghai A |
2,816 |
17 |
0.6% |
46.3% |
|
Brazil/Bvspa |
55,815 |
(674) |
-1.2% |
48.6% |
|
EMI Global Equity Index |
12,722 |
(100) |
-0.6% |
32.0% |
As shown in the following chart our three main markets still remain very much in sync and also well within the medium term uptrend pattern that began earlier this year (downtrend pattern for the dollar/euro switch). As mentioned above we are in a low liquidity market and as such the price moves so far this week are exaggerated and not entirely conclusive. The next several days will likely have even less liquidity and wide ranges can be expected especially if Friday’s nonfarm payroll number is outside the range of expectations.
The oil complex is still well within the trading range that has been in place since early June and as I predicted months ago we will remain in this range until the end of the summer and likely a bit beyond. The current move lower still has prices trading within the upper third of the trading range with lots of room for additional corrective moves while still maintaining the uptrend pattern.
Thursday the EIA will release the latest snapshot of Nat Gas inventories. Prices traded significantly lower on Tuesday closing within earshot of the key technical support level of around $2.50 to $2.60/mmbtu set in 2002. With no support from the externals, oil complex or the weather (temperatures or tropical patterns) all eyes will be focused on the EIA report to see if there is any relief in the ever growing US inventories. The early forecasts are calling for a build or around 63 BCF which would be below both last year’s injection level of 92 BCF as well as the 5 year average injection level of 66 BCF. Even if the actual number is in agreement with the projections the deviation from normal (5 year average) is not significant enough to derail the path of inventories hitting all time highs well before the start of the winter heating season. I am projecting that NG stocks will exceed the all time EIA reported high of 3,585 from October of 2007 within the next three weeks. In addition my projections are calling for Nat Gas stocks to hit maximum capacity by early to mid November. I still remain bearish for Nat Gas and will remain so until I see some signs that producers are quickly and deeply reducing production and or industrial demand picks up strongly in the short term (highly unlikely).
My market views are as detailed in the table at the beginning of the newsletter. Specs should continue to follow the externals closely but incorporate today’s oil inventory report into any flat price trading decisions. If the EIA report is in sync with the API report we could see a bit of a short covering rally after the numbers are released. But don’t fall asleep at the wheel today as sudden shifts in market direction can happen at any time on very little information due to the low liquidity market environment. Oil buy side hedgers should add hedges to their portfolios. Nat Gas buy side hedgers should set a target to add if spot NG prices trade down to the $2.50 to $2.60/mmbtu level as I do not think there is much downside beyond that level.
Currently prices are higher across the energy complex while the externals are trading either side of unchanged.
|
Current Expected Trading Range |
Expected Trading Range | |||
|
9/2/09 |
Change |
Low |
High End | |
|
From |
End Support |
Resistance | ||
|
5:30 AM |
Yesterday | |||
|
Oct WTI |
$68.65 |
$0.60 |
$70.50 |
$74.50 |
|
Oct Brent |
$68.30 |
$0.57 |
$71.30 |
$74.60 |
|
Oct HO |
$1.7759 |
$0.0170 |
$1.7500 |
$1.9690 |
|
Oct RBOB |
$1.8001 |
$0.0179 |
$1.7500 |
$2.0800 |
|
Oct NG |
$2.835 |
$0.014 |
$2.900 |
$3.300 |
|
Dow Futures |
9,304 |
1 |
8,920 |
9,640 |
|
US Dollar Index |
78.73 |
(0.075) |
77.100 |
79.250 |
|
Euro/$ |
1.4223 |
0.0009 |
1.3750 |
1.4500 |
|
Yen/$ |
1.0788 |
0.0027 |
1.0600 |
1.0730 |
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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