Weekly energy inventory report preview for Oct. 7

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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

CBu

CBu

CBu

CBu

Global Equities

CBu

CBu

CBu

CBu

Geopolitics

CBu

CBu

CBu

CBu

Technicals

N

N

N

N

Market Sentiment

CBu

CBu

CBu

CBu

Overall View

N

N

N

N

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

CBr - Cautiously Bearish

The main drivers were all in play for Tuesday’s trading session: higher equities and a weaker dollar that led to another day of firming oil prices. In fact most global equity markets gained ground for the first time in almost a week. The EMI Global Equity Index shown below is higher by 3% so far this week with the leaders of the week coming from the developed country bourses. The U.S. is now back into double digit gains for the year leaving only the Japan Nikkei as the only bourse in the EMI Index that is still yielding single digit gains. The EMI Index is now showing a year to date gain of 41.4% or just 0.2% below the record high for this year (set a few weeks ago). After a week of mediocre economic data the market sentiment is still positive and clearly making a statement (via the equity markets) that the recovery is still on tract. Equities remain bullish for energy prices at the moment.

EMI Global Equity Index

10/7/09

Change

Change

2009 YTD

From

From

Change

8:08 AM

Yesterday

Yesterday %

%

US/Dow Jones

9,731

132

1.4%

10.9%

Can/S&P-TSX

11,248

145

1.3%

25.1%

Lon/FTSE

5,138

114

2.3%

17.0%

Paris/Cac 40

3,761

(9)

-0.2%

16.9%

Germany/Dax

5,646

(12)

-0.2%

17.4%

Japan/Nikkei

9,692

17

0.2%

9.4%

HongKong/HangSeng

20,812

382

1.9%

46.2%

Aussie/SYDI

4,597

18

0.4%

28.0%

China/Shanghai A

2,942

25

0.8%

52.9%

Brazil/Bvspa

62,671

301

0.5%

66.9%

EMI Global Equity Index

13,624

111

0.8%

41.4%

The EIA released their Short term Energy Outlook which also included their annual Winter Fuels Outlook. The report was mixed, on one hand they increased their projection of global oil consumption (primarily based around Asia) but also projected that winter heating fuel demand will be lower this year versus last year as NOAA is projecting a marginally warmer than normal (as well as last year) winter season. Following are the main highlights of the report:

  • According to the National Oceanic and Atmospheric Administration’s (NOAA) most recent projection of heating degree-days, the Lower-48 States are forecast to be 1% warmer this winter compared with last winter and 1% milder than the 30-year average (1971-2000). However, heating degree-day projections vary widely between regions. For example, the Midwest, a major market for propane and natural gas, is projected to be about 4% warmer than last winter, while the West is projected to be about 4% colder.
  • Natural gas inventories are expected to set a new record high at the end of this year’s injection season (October 31), reaching more than 3.8 trillion cubic feet (Tcf). The projected Henry Hub annual average spot price increases from $3.85 per thousand cubic feet (Mcf) in 2009 to $5.02 in 2010.
  • Sustained economic growth in China and signs of a turnaround in other Asian countries continue to fuel expectations of a global recovery in world oil consumption. EIA has revised its expectations for world oil consumption upwards by 0.2 million barrels per day (bbl/d) for the remainder of 2009 and for 2010, in large part because of the revision to Asian growth. However, EIA has not revised its WTI oil price projections upward because ample oil supplies remain on the market. Oil inventories remain high and EIA expects oil production by the Organization of the Petroleum Exporting Countries (OPEC) to increase as well.
  • Global oil consumption declined by 3.2 million bbl/d in the first half of 2009 compared with year-earlier levels. Members of the Organization for Economic Cooperation and Development (OECD) accounted for most of the decline, as non-OECD oil consumption was down by about 0.4 million bbl/d during that period. Preliminary data indicate that oil consumption in the third quarter of 2009 was 1.2 million bbl/d below year-earlier levels. EIA’s current macroeconomic outlook assumes that the world economy begins to recover at the end of 2009, led by non-OECD Asia. As a result, EIA expects world oil consumption to grow in the fourth quarter of 2009 compared with year-earlier levels, which would be the first such growth in five quarters. EIA projects world oil consumption growth of 1.1 million bbl/d in 2010, with almost all of the growth occurring in the non-OECD countries.
  • Based on revised data, OECD commercial oil inventories stood at 2.76 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 higher than average historical levels throughout the forecast period.
  • OPEC crude oil production was 28.7 million bbl/d in the first half of 2009, down 2.6 million bbl/d from year-earlier levels. EIA expects OPEC production to rise gradually over the second half of the year in response to an anticipated rebound in demand, unless prices fall sharply from current levels. OPEC is scheduled to meet in Angola on Dec. 22 to reassess the market situation. EIA projects OPEC crude oil production to climb to 29.3 million bbl/d in the second half of 2009, and then average 29.2 million bbl/d in 2010.
  • Projected carbon dioxide (CO2) emissions from fossil fuels fell by 5.9% in 2009. Coal leads the drop in 2009 CO2 emissions, falling by 10.1%. Changes in energy consumption in the industrial sector, a result of the weak economy, and changes in electricity generation sources are the primary factors for the decline in CO2 emissions. The projected recovery in the economy contributes to an expected 1.1% increase in CO2 emissions in 2010.

Although the report is projecting lower winter fuels demand than last year the market did not react negatively at all as the externals were once again strong enough to completely shift the main focus of the day away from the fundamentals. The International Energy Agency (IEA) will release their monthly oil market report on Friday morning. I expect that it will be in line with the EIA report summarized above.

This morning the EIA will release their latest snapshot of oil fundamentals at 10:30 AM EST. The following table summarizes my projections for this morning’s report along with the latest numbers released by the API on Tuesday afternoon. The API report was mixed but biased to the bullish side. They showed a surprise decline of almost 300,000 barrels of crude oil inventories primarily driven by the surprise increase of 0.7% in refinery runs. At least basis the API report the increase in demand from the refining sector coupled with only a small increase in imports (less than 100,000 barrels per day) was enough to push inventories a bit lower on the week. If the EIA data is in sync with the API data the year over year surplus of crude oil will narrow to 35.5 million barrels while the 5-year average overhang for the same week will be at 31.6 million barrels.

On the refined product front gasoline stocks built by about 500,000 barrels versus a projection calling for a build of 1 million barrels. But the big surprise in the API report was the significant decline in distillate stocks of 2.9 million barrels versus an expectation for a build of about 500,000 barrels. With distillate stocks well entrenched in a glut if the EIA data is in line with the API projections it would be a very welcome turnout for the refining sector. The API distillate data is not only a surprise but it is a bit illogical as refinery runs increased strongly and winter weather is still a future event. In addition according to the economic indicators released last week it seems that the manufacturing sector is still lagging the recovery at best and thus any significant increase in commercial diesel consumption would be a surprise.

Projections

10/7/09

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

(0.3)

1.2

37.0

33.1

Gasoline

0.5

1.0

25.6

14.7

Distillate

(2.9)

0.5

49.0

38.9

Ref. Runs%

0.7%

-0.5%

3.2%

0.6%

Change Level

84.3%

84.1%

80.9%

83.5%

As mentioned I would view the API report as biased to the bullish side but I also view this report with a big question mark (as usual) as some of the data were inconsistent (as discussed above) thus raising a question mark as to the appropriate market action. As I have always cautioned the more widely followed EIA report is the one to absorb and to use to base any market decisions on. The majority of time the API report is not consistent with the EIA report. There is no way of knowing ahead of time if both reports will be in sync and as such it is always more prudent to wait for the release of the EIA report before taking market action.

I have been suggesting for weeks that the refining sector needs to cut runs deeply and quickly if they expect to stabilize refinery margins. Obviously this week’s API report would suggest that the refining sector is not yet ready to embark on that strategy. However, yesterday Sunoco announced the indefinite closing of their Eagle Point, New Jersey refinery due to poor economics. This is a significant event in that they are completely shutting down the facility and downsizing staffing which means this facility is not restarting anytime soon (if ever). In addition it falls into the category of a drastic and significant action by the refining sector and one that is likely being discussed at many refining companies in the U.S. and elsewhere. It also suggests to me that it is time to raise the caution flag for those that have been trading the crack spreads from the short side over the last month or so. If Sunoco’s action gains traction amongst other refiners we can quickly see that deep and quick cut in run rates thus setting the stage for a recovery in the crack spreads.

The Nat Gas forecast by the EIA in yesterday’s report was not one that would make one want to run to buy even if you fall into the category of a perception trader as they expect any increase in industrial demand to be offset by a reduction of NG based electricity demand in 2010. This coupled with NOAA’s projection for a slightly warmer than normal winter strongly suggest to me that the current overhang is not going away anytime soon. Tomorrow the industry is expecting an injection rate of about 60 BCF which would be at a lower rate than last year and the 5-year average. However, it is just another week that brings the total level of Nat Gas in storage closer to maximum capacity while setting a new all time high.

My views are detailed in the table at the beginning of the newsletter. My recommendations remain the same for today. I also continue to expect another session with wide trading ranges and susceptibility to sudden price direction changes.

Currently mostly everything on the EMI Price Board is higher.

Current Expected Trading Range

Expected Trading Range

10/7/09

Change

Low

High End

From

End Support

Resistance

8:08 AM

Yesterday

Nov WTI

$71.07

$0.19

$67.00

$72.30

Nov Brent

$68.85

$0.29

$62.50

$72.00

Nov HO

$1.8223

$0.0081

$1.6250

$1.9690

Nov RBOB

$1.7820

$0.0093

$1.6000

$1.9600

Nov NG

$4.937

$0.057

$4.750

$5.500

Dow Futures

9,500

16

8,920

9,640

US Dollar Index

76.67

0.175

74.500

79.250

Euro/$

1.4682

(0.0027)

1.3750

1.5250

Yen/$

1.1238

(0.0027)

1.0600

1.1400

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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Geopolitics and its implications on the world of oil

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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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