Weekly energy inventory report preview for Sept. 23

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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

So much for the downside correction, at least for now. Oil regained almost all of its lost ground from Monday based solely on support coming from another push higher in equities and yet another slip in the U.S. dollar. The fading dollar has been a big story ever since the whole perception of an economic recovery trade gained momentum months back. The dollar (vs. the euro) has given back all of its 2009 gains and then some. The U.S. dollar is trading around end 2008 levels and clearly on a path to test the July 2008 all time record lows vs. the euro. The whole concept of money flowing into the U.S. dollar as a safe haven has pretty much gone out the window as investor/traders search the globe for riskier asset classes. In addition many participants view the pace of the economic recovery in the U.S. to be slower than many other countries around the world and as such they are expecting the U.S. Fed to maintain its current easy money policy and low interest rate environment for the foreseeable future. The consensus is expecting that theme to emerge from this week’s FOMC meeting which ends this afternoon with an official announcement at 2:15 PM EST. All of this suggest further dollar weakness and thus further underlying support for oil and other commodities.

Late yesterday afternoon the API released their latest snapshot of oil inventories. As usual I will caution all readers to the fact that the API data has not been in sync with the more widely followed EIA data so be careful when making execution decisions solely based on the API report. The following table summarizes the API data along with my projections for this week’s EIA report. The API report was mixed with crude oil stocks building by almost 300,000 barrels vs. a consensus forecast for another decline in crude inventories. I am forecasting a decline of 1.7 million barrels. The build in crude oil inventories in the API report is a direct result of an almost 1% cut in refinery utilization rates, which results in a decline in refiner demand for crude oil as well as a modest increase in imports of about 220,000 barrels. If the EIA report is in sync with the API report it would jeopardize the destocking pattern that crude oil has been in since early May. Also the year on year surplus would grow to almost 43 million barrels if the EIA number is in line with the API number.

Projections

9/23/09

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

0.3

(1.7)

40.9

28.4

Gasoline

3.8

0.5

29.5

13.7

Distillate

(1.9)

1.5

43.8

33.4

Ref. Runs%

-0.9%

-0.6%

19.6%

1.2%

Change Level

83.7%

86.3%

66.7%

85.2%

I cautioned in yesterday’s newsletter that refinery utilization rates could be the big surprise this week. The API reported a cut in utilization rates of 0.9% or a bit more than forecast. I actually think the EIA report could possibly surprise the forecasters and the market with an even larger cut. Refinery run levels remain well above where they should be at in an environment of a glut of diesel fuel and a glut in progress for gasoline. Refinery margins appear to be in a free fall as measured by the widely followed 3-2-1 crack spread shown in the following chart. The crack spread is trading at 4th quarter 2008 levels which by all measures were totally unacceptable to the refining sector. With the refining sector entering the time of the year when refinery margins are historically at their lowest level the currently evolving scenario does not bode well for the refining industry. As an outside observer it seems very simple to me, cut runs and cut them strongly. Although this is my view the obvious has not always been what refiners have done. So yes this week’s number could be a surprise but more likely it will only show a modest cut as presented in the forecasts.

The API report showed a huge build in gasoline stocks of about 3.8 million barrels even as refinery runs were cut. I could only imagine that implied gasoline demand took another big hit this week. If the EIA gasoline number is in line with the API number the year over year overhang would be at almost 33 million barrels while the five-year, same week surplus would come in at over 17 million barrels. If that is not the description of a glut then I am not sure what it depicts. The gasoline supply situation is not likely to get much better as this is the time of the year that gasoline inventories are historically in a building pattern that generally lasts until the middle of the 1st quarter. Again the refining sector is going to have to get very aggressive, very quickly if they expect to have any kind of a gasoline season next year.

Distillate stocks surprisingly declined in the API report by about 1.9 million barrels. This should be a welcome sign for refiners as distillate stocks have been approaching tank tops for months. If the EIA data is in line with the API data the year over year surplus would narrow to about 40 million barrels while the five-year overhang would come in at about 30 million barrels. By no means does this result in the glut going away but it certainly would be in the right direction and possibly an indication that commercial sector demand for diesel fuel could be slowly coming back. Overall if the EIA data is in line with the API data I would still rate the report as neutral to bearish, especially for gasoline.

The EMI Global Equity Index (table shown below) is holding its own so far this week. On the week the EMI Index is up by about 1% brining the year to date gain level to 42.6%. The big story inside of the Index is the strong performance we have seen of late for the developed world bourses vs. the emerging markets. For example the U.S. Dow is now showing a year to date gain of 12% while China Shanghai A Shares have dropped below the 60% year to date gain level year yet again and is hovering around 58%. I also suspect that there is much more sidelined cash in the developed world looking for a new home than exists in the emerging markets as they markets have been rewarding investors for months and have been in the lead throughout the whole equity bull run of 2009. This pattern should prevail for a bit more and could likely result in prolonging any sustained downside correction for the time being.

EMI Global Equity Index

9/23/09

Change

Change

2009 YTD

From

From

Change

2:53 PM

Yesterday

Yesterday %

%

US/Dow Jones

9,830

51

0.5%

12.0%

Can/S&P-TSX

11,586

161

1.4%

28.9%

Lon/FTSE

5,143

8

0.2%

17.1%

Paris/Cac 40

3,824

2

0.7%

18.8%

Germany/Dax

5,709

41

0.7%

18.7%

Japan/Nikkei

10,371

(73)

-0.7%

17.1%

HongKong/HangSeng

21,701

228

1.1%

52.4%

Aussie/SYDI

4,671

(13)

-0.3%

30.1%

China/Shanghai A

3,041

(73)

-2.3%

58.0%

Brazil/Bvspa

61,493

565

0.9%

63.8%

EMI Global Equity Index

13,737

90

0.2%

42.6%

Today the Fed will issue their official statement and if as expected they do not change their current monetary policy it should result in additional pressure on the dollar and a potential upside boost to the equity complex both of which would be supportive for oil prices. G20 snippets should begin flying today as that meeting is being held in Pittsburgh on Thursday and Friday. For sure financial and energy regulations will be on the agenda along with climate change. Any of which could result in statements that could impact the direction of oil prices in the short term.

My views remain as detailed in the table at the beginning of the newsletter. Specs should be extra careful as today the market will be filled with both fundamental guidance as well as factors that will influence the externals. Currently prices are mixed.

Current Expected Trading Range

Expected Trading Range

9/23/09

Change

Low

High End

From

End Support

Resistance

2:53 PM

Yesterday

Nov WTI

$71.32

($0.44)

$67.00

$72.30

Nov Brent

$70.03

($0.50)

$66.00

$72.00

Oct HO

$1.8051

($0.0070)

$1.6900

$1.9690

Oct RBOB

$1.7683

($0.0133)

$1.7200

$1.9600

Oct NG

$3.629

$0.020

$3.000

$4.000

Dow Futures

9,500

(15)

8,920

9,640

US Dollar Index

76.275

(0.075)

74.500

79.250

Euro/$

1.479

0.0000

1.3750

1.5250

Yen/$

1.1015

0.0050

1.0600

1.1200

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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