Weekly energy inventory report preview for Nov. 18

Quote of the Day

“Try to learn something about everything and everything about something.”

Thomas Henry Huxley

EMI QuickView Short Term Market Overview

Impact on Energy 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

CBu

CBu

CBu

CBu

Market Sentiment

N

N

N

N

Overall View

N

N

N

N

Bias

CBu

CBu

CBu

N

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

CBr - Cautiously Bearish

A mixed day in the markets and a day that saw oil decoupling from the strong bond it has for the U.S. dollar. The currency markets were a bit volatile on the day with the U.S. dollar increasing for the first time in three session’s against most major currencies. The U.S. dollar was partially driven by Tuesday’s release of U.S. industrial production which came in with a gain that was less than most of the forecasts raising a warning flag and thus slowing the movement of cash to higher yielding but riskier asset classes at least for the day. Industrial production increased by just 0.1% after rising by 0.6% in September. In addition several central bankers followed the lead of the U.S. Fed in talking up the dollar. The ECB Central Bank President Trichet said that a strong dollar is in the world’s best interest and Bernanke’s comment (from Monday) was very important. As we have been suggesting for weeks there will be bouts of dollar short covering within a broader medium-term downtrend. Today was one of those days. The currency market is not going to reverse its existing trend simply on talk that the United States and many nations around the world would like to see a strong dollar, it is going take a structural change in the fundamentals of the U.S. economy, in particular in the area of interest rates. At the moment that does not seem to be in the cards as the interest rate environment is likely to remain at near zero levels for an extended period of time.

On the other hand the U.S. equity market was able to hold onto to Monday’s strong gains and add a little bit more on Tuesday. U.S. equities gained for the third day in row even as many global markets retraced lower on the day. Equity gains in the United States were not broad based as in Monday’s trading with most of the gains centered on commodity based stocks. US equity investor/traders continue to take comfort in the fact that about 80% of all of the S&P 500 listed companies that have reported third quarter earnings beat analyst expectations as compared to about 70 for the second quarter. That is very positive on a macro basis but the fact remains that most of the gains in corporate earning so far this year have been a result of cost cutting and not due to gains in revenue.

The U.S. consumer is still not spending at anywhere near their normal pace. With the official holiday shopping season getting underway in a little over a week (Black Friday or the day after the Thanksgiving Holiday) all eyes will be focused on the early returns to determine if the U.S. consumer performs normally or very cautiously, whatever the case it will likely impact the direction of the financial markets and thus the oil and broader energy complex.

The broader EMI Global Equity Index (table shown below) gained a bit of ground over the last 24 hours. The Index remain above the 50% year to date mark and is now 3.2% higher on the week. In spite of a supportive and better than expected third quarter GDP number for Japan the Japanese bourse has once again dropped back to only single digit gains for the year. The Japanese equity market has been strongly trailing the rest of the world with even the United States now showing gains for the year about twice as much as for Japan. The stronger Yen (versus the dollar) is likely a concern for Japanese investors as their exports are becoming more expensive. Since the first half of August the Yen has appreciated almost 10% vs. the U.S. dollar, pattern that certainly is not supportive for the export sector of Japan.

EMI Global Equity Index

11/18/09

Change

Change

2009 YTD

From

From

Change

7:41 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,437

30

0.29%

18.9%

Can/S&P-TSX

11,630

118

1.02%

29.4%

Lon/FTSE

5,346

(37)

-0.68%

21.7%

Paris/Cac 40

3,829

(34)

-0.88%

19.0%

Germany/Dax

5,778

(26)

-0.45%

20.1%

Japan/Nikkei

9,730

(61)

-0.63%

9.8%

HongKong/HangSeng

22,914

(30)

-0.13%

61.0%

Aussie/SYDI

4,750

(24)

-0.49%

32.3%

China/Shanghai A

3,443

8

0.23%

78.9%

Brazil/Bvspa

67,406

779

1.17%

79.5%

EMI Global Equity Index

14,526

72

-0.1%

50.8%

On the day the oil complex chose to follow the lead of the equity markets and pretty much ignored the U.S. dollar short covering rally which should have been bearish for oil prices. Oil market participates also began to focus on the projections for Wednesdays release of oil inventories by the EIA. On Tuesday afternoon the API released their data which came in relatively bullish. The API data is summarized in the table below along with my forecast for the EIA data as well as comparisons to both last year and the five year average. Many in the oil patch have been anticipating the preemptive action by producers in the US Gulf of Mexico ahead of Hurricane Ida might impact the oil balances this week. The API data indicates suggests that was the case for crude oil as inventories declined by about 4.4 million barrels even though they showed a small increase of about 165,000 barrels per day in crude oil imports. If the API crude oil inventory decline turns out to be in sync with the EIA data the year over year surplus will drop below the 20 million barrel mark (to about 19.7 million barrels) for the first time in a very long time. Similarly the overhang versus the five-year average for the same week would come in at 17.7 million barrels… a level that would bring comfort to the oil bulls (as well as OPEC) if only for a week.

The biggest surprise in the API data was the much larger than expected reduction in refinery utilization rates of 1%. It is a surprise because refiners have not been overly aggressive in cutting run rates but it seems they may have bit the bullet and recognized that they have to be very aggressive in pushing refined product inventories into a sustained destocking pattern sooner than later or else their margins are going to remain under pressure well into next year. Oil demand is still not accelerating in the US and continues to languish even as the economic recovery evolves.

Projections

11/18/09

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

(4.4)

(1.2)

22.9

20.9

Gasoline

(1.0)

(0.3)

11.9

11.5

Distillate

0.1

0.5

41.3

41.1

Ref. Runs%

-1.0%

-0.2%

-5.2%

-8.2%

Change Level

79.6%

79.7%

84.9%

87.9%

As a result of the cut in refinery runs the API showed a much larger than expected decline in gasoline inventories of a little over 1 million barrels. If the EIA data is in line with the API number the gasoline surplus would narrow to about 11.2 million barrels versus last year and about 10.8 million barrels versus the five-year average for the same week. On the distillate front the API reported a minor build of about 100,000 barrels or modestly less than the forecasts. In the whole scheme of things whether the EIA data is in sync with this week’s API result or the projections it is not going to materially change the fact that distillate stocks are still in a glut. Overall I would categorize this week’s API report as biased to the bullish side. So far the market has viewed it that way as oil prices have increased a bit since the release of the data. However, as has been the case more often than not the API report is generally not in sync with EIA data. As usual view Tuesday’s API report with caution. Furthermore recognize that even if the EIA data is in line with what the API showed the big decline in crude oil inventories is likely to be a temporary situation as a result of Ida rather than a structural change in the inventory trend.

As of this writing (late Tuesday afternoon) there has been no impact to the WTI/Brent spread as a result of the large crude oil inventory decline reported by the API. I still like trading the WTI/Brent spread from the short side but strongly warn and suggest continuing to employ a tight, trailing stop. I continue to remain neutral for both the HO/RBOB spread and the 3-2-1 crack spread. However, that said my bias is to the long side for the crack spread if the refining sector continues to cut run rates. I do not have a strong bias either way for the HO/RBOB spread at the moment.

Natural gas put in an uninteresting trading day on Tuesday trading either side of unchanged for most of the session only to end the day lower. Nat gas has been under pressure since the December contract became the spot month on the Nymex. The weather is turning a bit more supportive with colder than normal temperatures forecast for the eastern half of the United States for the end of November into early December, which should provide some much needed weather related demand support since industrial based demand still seems to be languishing (irrespective of the evolving economic recovery). On the other side of the equation there is still a glut of natural gas as inventories continue to not only grow on a weekly basis but set new all time record highs each week. The early projections for Thursday’s data release are calling for an injection level of about 20 BCF or within a few BCF of last year’s injection level but about twice as much as the injection level for the five-year average for the same week. If the EIA data is in sync with the projections total stocks in working storage will increase to 3,823 Bcf or less than 70 BCF from maximum capacity for the entire US storage system. I am still of the view that Nat gas prices will re-test the key technical support level of about $4.30/mmbtu and if the inventory situation does not improve it is likely to breach this level and head toward the high $3’s.

My individual market views remain the same and are detailed at the beginning of the newsletter. The oil complex remains solidly within the trading range that it has been in since last October. From the flat price spec side I do not have a strong conviction directionally as long as crude oil trades within the existing trading range. However there are some strong technical signals brewing if WTI breaks out of the range to the upside (at around $81.70/bbl). However I would not jump into the market in a big way until there are clearer signs that crude oil prices move out of the current trading range pattern. Not much to do for the hedge side readers as prices are at levels where it is not yet a good time to add to existing hedge portfolios. If you have been following my recommendations over the months you should have a fairly decent amount of your portfolio hedged.

Prices as of the end of the day on Tuesday are shown below.

Current Expected Trading Range

Expected Trading Range

11/18/09

Change

Low

High End

From

End Support

Resistance

7:42 AM

Yesterday

Dec WTI

$79.47

$0.33

$75.50

$80.00

Dec Brent

$79.24

$0.48

$72.00

$80.00

Dec HO

$2.0650

$0.0065

$1.9300

$2.1200

Dec RBOB

$2.0154

$0.0105

$1.9300

$2.0800

Dec NG

$4.539

$0.009

$4.000

$5.500

Dow Futures

10,358

(10)

9,870

10,400

US Dollar Index

75.405

0.485

74.500

79.250

Euro/$

1.4875

0.0022

1.3750

1.5250

Yen/$

1.1208

0.0007

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.

EMA has authorized Futures to publish its report once a week on Wednesday prior to the EIA release. For information on how 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.

Check out the EMI’s 2009 Energy Training Calendar Energy Management Institute offers a full range of advanced learning courses for energy professionals. Visit for our current course listing. EMI courses are available nationwide.

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.

Comments
comments powered by Disqus