Quote of the Day
“All our dreams can come true...if we have the courage to pursue them.”
Walt Disney
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EMI QuickView Short Term Market Overview | ||||
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Impact on Energy Prices | ||||
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Price Drivers |
Crude |
Gasoline |
HO/Diesel |
Nat Gas |
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Supply |
Br |
Br |
Br |
Br |
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Demand |
Br |
Br |
Br |
Br |
|
Inventories |
Br |
Br |
Br |
Br |
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US Dollar |
N |
N |
N |
N |
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Global Equities |
N |
N |
N |
N |
|
Geopolitics |
CBu |
CBu |
CBu |
CBu |
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Technicals |
N |
N |
N |
N |
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Market Sentiment |
N |
N |
N |
N |
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Overall View |
N |
N |
N |
N |
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Bias |
Cbr |
Cbr |
Cbr |
N |
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N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish | ||||
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CBr - Cautiously Bearish |
Tuesday was a day of short covering in the oil pits. After declining for nine days in a row oil prices staged a modest rally on a combination of short covering and the beginning stages of year end book squaring. Yesterday was also another data point suggesting that oil prices were in the early stages of possibly decoupling from the externals. The dollar was firm while equities were lower on the day. Both the direction of the dollar and the equity market on Tuesday were negative for oil prices and yet oil put in a strong upside session. Even more interesting was the fact that not only were the externals negative but the fundamentals remain bearish for oil. With no support from any of the normal price directional catalysts the Tuesday move to the upside was clearly just a short covering rally and not yet a change in the downward direction that has engulfed oil prices over the last two weeks.
Today the oil markets will get a one two punch of information. First at 10:30 am the EIA will release their latest weekly fundamental snapshot followed by the results of the last U.S. Federal Reserve FOMC meeting of the year at about 2:15 PM. Today will likely be a day of high volatility with a greater than normal susceptibility to price reversals. As discussed in detail in yesterday’s report most are expecting the Fed to conclude the meeting with a statement that suggests the economic recovery is well underway and even strengthening but the recovery is still fragile and as such the interest rates will remain at near zero levels for an extended period of time. The Fed may also sight tight credit, weak income growth and a double digit employment rate as still major risks to the economic recovery and thus the need for an accommodative monetary policy for the foreseeable future.
I truly believe the jobs picture will take much longer to solve than many are optimistically believing after the better than expected November jobs number which was laden with increases in government jobs and temporary jobs and not good old fashioned growth in private industry which are sustainable jobs. Over 7 million people have lost their jobs since the start of the recession in December of 2007 and with more people coming into the job market it is going to be a considerable length of time before the U.S. gets back to a full employment pattern that existed prior to the recession. With inflation still in check I do not see the Fed starting to raise interest rates until the end of 2010 at the earliest unless of course the economic recovery begins to advance at a stealth speed (highly unlikely in my view). This all suggests to me that the US dollar will continue to struggle going forward (even though we are in the midst of a strong short covering rally versus most major currencies) and energy demand growth will be slow, especially in the category of transportation fuels.
On the equity front the EMI Global Equity Index (table shown below) has been drifting lower over the last 24 hours erasing about half of this week’s gains so far. As of now the Index is sitting with a year to date gain of 51.9% or a gain of 0.3% for the week. The majority (seven out of ten) of the bourses declined over the last 24 hours as a result of very little new supporting information circulating around the media airwaves. Many of the markets around the world are entering the year end book squaring mode as more and more participants begin to head to the sidelines for the long Christmas and New Year’s holiday period. During this period some of the normal pricing interrelationships among equities, currencies, commodities, etc. normally get a bit out of sync and as such I raise the caution flag as to drawing any major long term conclusions during the next few weeks of the year.
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EMI Global Equity Index | ||||
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12/16/09 |
Change |
Change |
2009 YTD | |
|
From |
From |
Change | ||
|
8:09 AM |
Yesterday |
Yesterday % |
% | |
|
US/Dow Jones |
10,452 |
(49) |
-0.47% |
19.1% |
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Can/S&P-TSX |
11,541 |
(5) |
-0.04% |
28.4% |
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Lon/FTSE |
5,286 |
(30) |
-0.56% |
20.3% |
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Paris/Cac 40 |
3,861 |
27 |
0.70% |
20.0% |
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Germany/Dax |
5,874 |
63 |
1.08% |
22.1% |
|
Japan/Nikkei |
10,083 |
(22) |
-0.22% |
13.8% |
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HongKong/HangSeng |
21,814 |
(272) |
-1.23% |
53.2% |
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Aussie/SYDI |
4,688 |
20 |
0.42% |
30.5% |
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China/Shanghai A |
3,434 |
(30) |
-0.86% |
78.5% |
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Brazil/Bvspa |
69,311 |
(39) |
-0.06% |
84.6% |
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EMI Global Equity Index |
14,634 |
(34) |
-0.1% |
51.9% |
This morning the oil complex will be primarily impacted (at least for a few hours) by the latest release of the EIA inventory report. The API released their inventory snapshot late yesterday afternoon with a few surprises. The following table summarizes my projections along with the API results and a comparison to last year and the five year average for the same week (assuming the actual EIA data is in line with the projections). As shown in the table the API data was bearish on two fronts and bullish on two.
The API reported a build of about 900,000 barrels of crude oil versus an expectation for a decline of upwards of about 1.8 million barrels. The API data showed builds in both PADD’s 1 (East Coast) and 2 (mid-continent or WTI territory). The big decline was in the US Gulf Coast (PADD 3) which is likely the result of year inventory management as well as a delay of some imports after last week’s 27-hour closure of the Houston Ship Channel (due to fog). The most interesting aspect of the API crude oil number is yet another strong build in PADD 2. If the EIA data is in sync with the API crude oil data it would be the ninth week in a row of crude oil builds in this region of the country with total stocks approaching maximum capacity.
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Projections |
12/16/09 | |||
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API |
Current |
Change from |
Change from | |
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Results |
Projections |
Last Year |
5 Year | |
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mmbls |
vs. Proj. |
vs. Proj. | ||
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Crude Oil |
0.9 |
(1.8) |
13.0 |
20.6 |
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Gasoline |
2.1 |
1.0 |
13.3 |
12.7 |
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Distillate |
(2.6) |
(0.7) |
33.1 |
38.4 |
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Ref. Runs% |
-2.8% |
0.2% |
-2.8% |
-7.6% |
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Change Level |
78.6% |
81.3% |
84.1% |
88.9% |
It also raises a bit of a question mark as to why the WTI/Bent spread has moved in favor of WTI over the last two trading sessions. Part of the reason is related to the expiration of the Jan Brent contract today and the Jan WTI contract this coming Monday. The other reason seems to be related to a bit of technical support for the spread coming from what appears to be an inverted head and shoulders pattern that is normally a trend reversal pattern. As shown in the following chart of the Feb WTI/Brent spread the spread broke out on Monday and has been trading above the breakout point since then. This type of pattern normally results in a movement equal to the distance from the neckline to the head added to the breakout point. In this case it suggests that the spread should narrow to about positive $0.60/bbl (premium to WTI from the current level of negative $0.23/bbl). If you trade this pattern place your stops a bit below the neckline (on a settlement basis). Also be aware that another big crude oil build in PADD 2 in the EIA report can quickly reverse the direction of the spread.
Much to my surprise the API reported a big decline in refinery utilization rates of 2.8%. If the EIA data is in line with the API this result will be just what the refinery doctor ordered for this sector of the industry. As discussed yesterday the refining sector can run for an extended period of time at levels well below normal (for this time of the year) and still have a very comfortable supply situation throughout the upcoming winter heating season.
In spite of the big decline in refinery run rates the API still reported a significant increase in gasoline stocks of 2.1 million barrels or about twice as much as the forecasts. If the EIA data is in line with the API results the year over year overhang will be approaching 15 million barrels with several months left in the normal seasonal inventory building mode for gasoline. On the other hand distillate fuel stocks declined by more than twice as much as the projections on colder than normal weather and most likely a bit of a bump up in diesel fuel demand related to the holiday shopping season.
Overall the report was very interesting and it raises the attention bar to this morning’s EIA data release. If the EIA report is in line with the API report I believe the market will interpret it as overall mildly bullish since the oil complex is already in a short covering mode. It would also be supportive for the long HO/short RBOB spread which has been under a bit of pressure over the last few days.
My individual market views are summarized in the table at the beginning of the newsletter. We are entering what I like to call the twilight zone for trading. A zone that will last for the rest of the year as more and more participants around the globe balance their books, adjust their positions both financially and physically for yearend tax planning and simply head to the sidelines resulting in liquidly at below normal levels for just about every market in the world. If you continue to trade actively during this period keep you views short term, work with tight, trailing stops and be aware that often times the market experiences wide intraday trading ranges only to end the day with below normal day to day changes based on settlement prices.
Currently oil is firm, Nat Gas is weaker while equities are higher and the dollar is on the defensive.
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Current Expected Trading Range |
Expected Trading Range | |||
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12/16/09 |
Change |
Low |
High End | |
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From |
End Support |
Resistance | ||
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8:10 AM |
Yesterday | |||
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Jan WTI |
$71.22 |
$0.53 |
$65.00 |
$80.00 |
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Jan Brent |
$72.90 |
$0.85 |
$68.00 |
$80.00 |
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Jan HO |
$1.9265 |
$0.0232 |
$1.8800 |
$2.1200 |
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Jan RBOB |
$1.8608 |
$0.0157 |
$1.7500 |
$2.0800 |
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Jan NG |
$5.485 |
($0.038) |
$4.000 |
$5.500 |
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Dow Futures |
10,512 |
53 |
9,870 |
10,600 |
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US Dollar Index |
77.12 |
(0.180) |
74.500 |
79.250 |
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Euro/$ |
1.455 |
0.0027 |
1.3750 |
1.5250 |
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Yen/$ |
1.1153 |
0.0004 |
1.0600 |
1.1600 |
Best regards
Dominick A. Chirichella
Energy Market Analysis is published daily by the Energy Management Institute1324 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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