Weekly energy inventory report preview for Nov. 4

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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

CBu

CBu

CBu

CBu

Market Sentiment

N

N

N

N

Overall View

N

N

N

N

Bias

N

N

N

N

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

CBr - Cautiously Bearish

The last week or so has seen some of the more reliable inter-market relationships breaking down for short periods of time. On Tuesday the dollar continued to recover, equities were lower most of the day in the US yet WTI surged almost 2% and is once again within shouting distance of the 2009 record high of $81.37/bbl hit on 10/21. WTI is now trading very near the upper end of the new trading range that has been in place for only about two weeks and has almost recovered all of it’s the losses from the downside correction which began a little over a week ago. The economic data this week continues to come in better than expected. On Tuesday construction spending was just one of those indicators that impressed the market along with US factory orders showing the fifth monthly increase in a row and coming in stronger than forecast. The positive round of economic data was enough to drag oil out of the negative hole it dug itself into early in the session ending the day strongly in positive territory. Remember my warning that price reversals can come at any time after the release of any of the data this week. Tuesday was certainly one of those reversal days.

Both the energy and financial markets have not only been in a correction but have been trading in a bit of an erratic pattern over the last two or three trading sessions suggesting that directional conviction in either direction is giving way to uncertainty resulting in both short and long side specs having minimal confidence in their position decisions. Volatility continues to be at an above normal level and will likely remain this way at least through the rest of the week. Today should be an exceptionally volatile session especially after the results of the FOMC meeting are released. The meeting started on Tuesday and culminates with their official announcement at 2:15am EST on Wednesday. The overwhelming consensus is the US Central Bank will hold interest rates steady at around 0% (which has been the target rate since December of 2008). However, the wording of the meeting will be widely viewed and dissected for any signals the Fed may chose to put in the market as to when they will begin to change their monetary policy bias to a less accommodating program. With unemployment still very high, along with no signs of inflation just yet and private sector jobs’ still declining it is hard to believe the Fed will do anything but confirm to the marketplace that they will continue their easy money policy for an extended period of time.

On Thursday the European Central Bank will announce the results of their monthly meeting which most expect to be another rollover of their existing policy of low interest rates of around 1%. Overall with few exceptions (Australia yesterday) the majority of the world’s central bankers will continue to remain in the accommodative stages at least through the rest of this year and most likely into next year. This environment should remain conducive for investor/traders to remain mostly invested in higher risk asset classes like global equities and not parked in low yielding safe haven dollars. This environment should generally be conducive to oil prices having limited downside for the short to medium term. I am not suggesting that oil prices will continue unabated to the upside rather what I am suggesting is that oil prices will likely remain entrenched in the current trading range (possibly extending the upper end of the range if all the stars are pointed in the right direction) for the foreseeable future.

Part of the stars will be the fundamentals. Today we get the EIA’s weekly snapshot of US inventories (API data was released late yesterday afternoon) and next week the EIA and IEA will release their global monthly oil market assessments. The following table summarizes the results of Tuesday’s API report along with my projections for this week and comparisons to last year and the 5 year average for the same week on the premise that the actual results will be in line with the projections. As shown the API results were mixed and somewhat inconsistent as usual. The API reported a huge decline in crude oil inventories of 3.3 million barrels even though refinery utilization rates dropped significantly by 1.3%. They also reported only a small decline in crude oil imports of about 150,000 barrels per day which certainly does not explain off the big decline in stocks. On the surface the API crude oil number would be bullish except for its inconsistency. As of late Tuesday (well after the API report was released) WTI was trading slightly lower suggesting participants have begun to discount the API report.

Further inconsistency in the API report is evident in the refined products area as refinery utilization rates declined strongly yet both gasoline and distillate stocks built on the week with distillate fuel inventories growing by a much larger than forecast amount of 1.8 million barrels. If it were not for the fact that refinery runs declined so much the weekly refined product stock builds would not be such a big surprise.

If the EIA report were in sync with the API data (if it is… hopefully it will be much more obvious as to explaining the apparent inconsistencies in the API report) the year over year surplus for crude oil will have declined to a little over 25 million barrels while the overhang versus the 5 year average for the same week would narrow to about 22.2 million barrels. On the refined product front if the EIA data is line with the API numbers the comparison versus last year and the 5 year average would be as shown in the table for gasoline. However, the distillate overhang would be approaching 42 million barrels versus both last year and the 5 year average for the same week.

Tomorrow’s EIA report is setting up to be a market mover especially if there are any significant deviations from the projections. However, the weekly inventory data can quickly move to the background by early afternoon when the results of the FOMC meeting hit the media airwaves. Tomorrow should also be a significant day for the three main spreads we follow…WTI/Brent, HO/RBOB and the 3-2-1 crack spread.

Projections

11/4/09

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(3.3)

2.0

29.9

27.5

Gasoline

0.5

0.5

13.0

9.6

Distillate

1.8

0.5

40.4

40.1

Ref. Runs%

-1.3%

0.2%

-3.3%

-4.6%

Change Level

80.5%

82.0%

85.3%

86.6%

Prior to the release of the EIA report WTI has continued to deteriorate versus Brent and will most likely continue to do so if the EIA report is more in line with the projections rather than the API report. However, with the potential for a surprise (basis the outcome of the API data) I would strongly suggest utilization of tight stops for those trading this spread from the short side. HO has been appreciating versus RBOB gasoline over the last several trading sessions. However, if the EIA data is in line with the API report this spread will likely reverse its bias and HO may once again begin to depreciate versus RBOB. Finally the 3-2-1 crack has been slowly declining after hitting our upside objective. If runs do in fact decline strongly we may want to be ready to reenter this spread from the long side as it will likely result in another test to our upside objective of about $7/bbl (trading at about $5.38/bbl as of this writing) for this spread.

My views are detailed in the table at the beginning of the newsletter. Today should be a very volatile trading session with oil inventories in the morning and FOMC in the afternoon. The market is exposed to another day of potential price reversals.

Currently prices are higher across the board except for the dollar which is on the defensive.

Current Expected Trading Range

Expected Trading Range

11/4/09

Change

Low

High End

From

End Support

Resistance

4:58 AM

Yesterday

Dec WTI

$80.36

$0.76

$75.50

$80.00

Dec Brent

$78.69

$0.58

$72.00

$80.00

Dec HO

$2.0839

$0.0106

$1.9300

$2.1200

Dec RBOB

$2.0134

$0.0130

$1.9300

$2.0800

Dec NG

$4.953

$0.031

$4.000

$5.500

Dow Futures

9,777

60

9,870

10,100

US Dollar Index

76.31

(0.260)

74.500

79.250

Euro/$

1.476

0.0059

1.3750

1.5250

Yen/$

1.0996

(0.0077)

1.0600

1.1400

Best regards

Dominick A. Chirichella

dchirichella@mailaec.com

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Energy Market Analysis is published daily by the Energy Management Institute, 1324 Lexington Avenue, #322, New York, NY 10128. Copyright 2009. Reproduction without permission is strictly prohibited.

Subscription are $150 for annual orders. Editor in Chief: Dominick A. Chirichella, Publisher: Stephen Gloyd, Editor: Sal Umek.

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.

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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.

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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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