Weekly energy inventory report preview for Sept. 16

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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

Bu

Bu

Bu

Bu

Global Equities

Bu

Bu

Bu

Bu

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

The energy market got a boost of enthusiasm on the back of a U.S. Commerce Department report that showed a much larger than expected increase in retail sales for the month of August along with Fed Chairman Bernanke saying the recession in the U.S. is very likely over. The economic data and the Fed’s comments helped to send the US Dow Jones Index to the highest level since early October, 2008. Energy prices were also assisted by yet another strong move to the downside for the U.S. dollar which seems clearly on a path to retest the record lows (versus the euro) from back in the second half of July, 2008. So for another day all of the stars were aligned and crude oil surged ahead by about 3% on the day while refined products lagged only increasing by a little over 2%. Even Nat Gas inched a bit higher gaining about 0.7% for the session. The big loser on the day in the oil complex was the refining sector as potential refinery margins as measured by the widely followed 3-2-1 Nymex crack spread compressed close to 4% on the day closing at the lowest level since late last year and about $11/bbl lower than where it was trading at in mid-August of this year.

As we suggested late last week the first part of this trading week has been dominated by the externals with little focus on the fundamentals. However we are at that point in the week where the recurring fundamental snapshots begin to emerge and possibly impact prices in the very short term. How much the market reacts to this week’s round of reports will be a direct function as to how positive the external support remains.

Yesterday afternoon the API released the first oil report. As always the inventory reports have tended to surprise. The API was mostly bearish with builds in everything. The distillate complex was exceptionally bearish showing a build of 5.2 million barrels even as refinery utilization rates declined by 1%. The distillate overhang is quickly becoming an even bigger problem than it has been as the glut seems to be getting deeper as each week goes by. If the EIA report is in sync with the API report total distillates in inventory will exceed 170 million barrels and the year over year overhang will be approaching 42 million barrels. I do not even now if there is 170 million barrels of capacity available to store distillate stocks in primary storage locations. The projections are calling for a build of 900,000 barrels and even if the EIA number shows a build equal to the projections I would say distillate inventories are bearish. I have to work on a word to use in tomorrow’s report if the build is in the 5 million barrels range, maybe super glut or glut on steroids, not sure yet.

Projections

9/16/09

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

0.6

(2.0)

43.8

30.4

Gasoline

1.3

0.1

22.6

11.9

Distillate

5.2

0.9

36.8

31.3

Ref. Runs%

-1.0%

0.1%

9.9%

-1.3%

Change Level

84.6%

87.3%

77.4%

88.6%

With run rates down by 1% crude oil stocks built by about 600,000 barrels in the API report. The build was minimized as the API also reported a decline of a little over 600,000 in crude oil imports. If the EIA crude oil data agrees with the API report it would not only increase the year over year surplus but once again it would suggest that the destocking pattern that crude oil has mostly been in since May could be in jeopardy. This would be a big problem for OPEC as refined products are extremely oversupplied and the last thing they need at this point in time is for crude stocks to go back toward the glut level.

Gasoline is not looking all that much better than distillate as the glut is definitely beginning to form. The API showed a much larger than expected build in gasoline stocks even as refinery runs declined suggesting that implied demand is taking a hit this week. The year on year surplus is projected to be well over the 20 million barrel mark at a time when gasoline normally enters a seasonal building pattern for inventories. If the EIA build is equal to the 1.3 million barrel build reported by the API the yearly surplus will grow to almost 24 million barrels.

I view today’s EIA report as mostly biased to the bearish side if the actual numbers were in agreement with the projections. If the EIA is in line with the API than I would have to say the report will be viewed as simply bearish and be a significant setback for the market bulls as well as for OPEC and non-OPEC producers.

With crude oil inventories susceptible to an above normal stock build basis the outcome of the API report the trade that could be very susceptible to a surprise build in crude oil is the WTI/Brent spread. As shown in the following chart the November WTI/Brent spread has widened consistently since bottoming out in early August of this year. A major contributor sending the spread to higher ground has been the modest destocking pattern that US crude oil stocks have been in for several months or more in the US. Interestingly as shown on the chart below the spread is now approaching or trading near the upper end of the trading range that the spread has been in since March of this year. The big question at this value level for the spread is will it or will it not breach the upper range support level? If I were certain that the EIA inventory data would be in line with the API data (which I am not) I would be looking to reverse the trade— sell WTI/buy Brent. Unfortunately the API data has not been a good forecast of what the EIA data will turn out to be on Wednesdays. In fact there has been consistent difference between the two inventory reporting areas. As such those interested in the next story line regarding this spread will have to wait until today’s EIA report is released at 10:30 am EST.

The next spread I have been watching closely is the Nymex HO/RBOB spread. As shown in the following chart this spread has recently broken out of the trading range it has been in since March. However, today’s inventory report is going to impact the direction of this spread, possibly very strongly. Again if the EIA data turns out to be in sync with the API report this spread (long HO/short RBOB) has the potential of absolutely collapsing as a 5 plus million barrel build in distillate stocks would bring the total distillate inventory level to over 170 million barrels or near the top of capacity. With just hours to go before the EIA report is released it is worth waiting to trade off of the latest information that is available.

As shown in the EMI Global Equity Index table below the index is now up almost 1% on the week with the US Dow Jones Index joining the ranks of the other International markets that are showing double digit returns for the first time this year… the Dow is up 10.3% year to date. As long as the dollar remains firm and continues on its path to the record lows from last July, oil will be supportive even if the fundamentals are bearish this week.

EMI Global Equity Index

9/16/09

Change

Change

2009 YTD

From

From

Change

5:59 PM

Yesterday

Yesterday %

%

US/Dow Jones

9,683

57

0.6%

10.3%

Can/S&P-TSX

11,496

164

1.4%

27.9%

Lon/FTSE

5,042

23

0.5%

14.8%

Paris/Cac 40

3,800

41

0.8%

18.1%

Germany/Dax

5,674

45

0.8%

18.0%

Japan/Nikkei

10,218

16

0.2%

15.3%

HongKong/HangSeng

20,866

(66)

-0.3%

46.6%

Aussie/SYDI

4,547

11

0.2%

26.6%

China/Shanghai A

3,184

7

0.2%

65.4%

Brazil/Bvspa

59,264

396

0.7%

57.8%

EMI Global Equity Index

13,377

69

0.5%

38.8%

My views are as detailed in the table at the beginning of the newsletter. My recommendations remain the same. Currently prices are lower for oil and the dollar with equities looking at a firm open in the US.

Current Expected Trading Range

Expected Trading Range

9/16/09

Change

Low

High End

From

End Support

Resistance

6:00 PM

Yesterday

Oct WTI

$70.78

($0.15)

$67.00

$72.30

Oct Brent

$69.59

($0.27)

$66.00

$72.00

Oct HO

$1.7657

($0.0144)

$1.6900

$1.9690

Oct RBOB

$1.7720

($0.0172)

$1.7200

$1.9600

Oct NG

$3.483

$0.163

$2.500

$3.000

Dow Futures

9,500

51

8,920

9,640

US Dollar Index

76.545

(0.240)

77.100

79.250

Euro/$

1.4685

0.0027

1.3750

1.4680

Yen/$

1.1082

0.0099

1.0600

1.1030

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.

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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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