Weekly energy inventory report preview for Jan. 6

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EMI QuickView Short Term Market Overview

Impact on Energy Prices

Price Drivers

Crude

Gasoline

HO/Diesel

Nat Gas

Supply

N

N

N

N

Demand

N

N

N

N

Inventories

N

N

N

N

US Dollar

N

N

N

N

Global Equities

CBu

CBu

CBu

CBu

Geopolitics

CBu

CBu

CBu

CBu

Technicals

CBu

CBu

CBu

CBu

Market Sentiment

CBu

CBu

CBu

CBu

Overall View

CBu

CBu

CBu

CBu

Bias

CBu

CBu

CBu

CBu

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

CBr - Cautiously Bearish

Most markets were relatively directionless or better described as range bound on Tuesday. On the energy side there is only so many times the market can talk about and react to the colder than normal weather while on the financial front very little if any market moving news was floating around the media airwaves. Thus a day of indecision while the energy complex awaits the start of this week’s round of weekly inventory reports and the financial markets await Friday morning’s release of the latest employment situation in the United States.

On the financial front the dollar was a bit stronger yesterday and the strength has carried into this morning so far, albeit not by very much. The currency markets are relatively quiet and are thus providing very little support for the energy and greater commodity complex. I do not expect any major moves in the dollar until Friday at the earliest after the monthly U.S. employment number is released. The latest market expectations are calling for no change in the nonfarm payroll number from last month and a 0.1% increase in the unemployment rate to 10.1%.

You may recall it was last month’s release (basis November data) that really got the U.S. dollar moving higher and into a recovery rally that has been pretty much in place since then. The market viewed the positive jobs data as a sign that the U.S. economy may be recovering faster than expected and as such the Fed may raise interest rates and tighten money supply more quickly than anticipated. Higher interest rates (in this case the anticipation of higher interest rates) is bullish for the dollar. If Friday’s data comes in as projected I believe the market will interpret it as neutral at best and not overly supportive for an early move by the Fed to raise interest rates. I also believe the energy complex will view the data as neutral at best for a quick push up in energy demand (non-heating fuel) if the jobs number does not show any major improvement over last month’s number. The fact that the unemployment rate remains over 10% in the US suggests that the economic recovery is going to be slow at best.

Equities are starting the year out on a strong positive note as shown in the EMI Global Equity Index table below. In just two days of trading the EMI Index is now higher by 1.9% for the year to date with Brazil solidly in the lead. Surprisingly China is barely positive for the year so far. However, the Hong Kong market is up strongly. It is way too early to draw any major conclusions from activity from the equity side as a lot of buying is likely coming from the investment funds as they position their portfolios for 2010. This time of the year there is not only a lot of buying but also a lot of sector rotation. I expect this pattern to continue for the next few weeks. As discussed in detail above Friday’s jobs number may also impact the direction of the equities markets. The better the number turns out to be the more negative it will be for the equity markets. Good news on the jobs front suggests an earlier change in the monetary policy and thus a negative signal for equities. Basis the latest projections the jobs number should not impact equities negatively if the actual data is in sync with the forecast. Thus it would be supportive for energy prices.

EMI Global Equity Index

1/6/10

Change

Change

2010 YTD

2010

From

From

Change

8:05 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,572

(12)

-0.11%

1.4%

Can/S&P-TSX

11,888

21

0.18%

1.2%

Lon/FTSE

5,523

22

0.40%

2.0%

Paris/Cac 40

4,008

(5)

-0.12%

1.8%

Germany/Dax

6,034

2

0.04%

1.3%

Japan/Nikkei

10,682

27

0.25%

1.3%

HongKong/HangSeng

22,280

456

2.09%

1.9%

Aussie/SYDI

4,940

50

1.02%

1.2%

China/Shanghai A

3,443

40

1.18%

0.1%

Brazil/Bvspa

70,240

195

0.28%

2.4%

EMI Global Equity Index

14,961

80

0.5%

1.9%

Back to energy fundamentals. Best way to describe the current uptrend in oil and Nat Gas prices is one word...weather. This has been a traditional weather driven market for the last several weeks. Not only have temperatures been colder than normal in the US but cold weather has blanketed parts of Europe as well as China. Heating oil demand in the US Northeast (which consumes about 80% of the heating oil) over the last few weeks is estimated by some forecasters to be higher by about 10%. However, for all of the heating oil bulls the January thaw may be approaching in the US as the latest NWS forecast is projecting a return to normal winter temperatures for a major portion of the US Northeast starting as early as the middle of next week. Whether this is the beginning of a major change in the cold weather pattern for the US or just a little quiet before the next batch of cold air arrives...it is too early to tell. However, at least for the moment the cold weather rally may begin to lose some of its momentum.

Further to the weather forecast, yesterday afternoon’s API inventory report was not overly supportive of the cold weather rally either. As usual I want to point out that the EIA report is much more widely followed by the market and will be released at 10:30 am this morning. There are times that the API report is completely out of sync with the EIA report. In fact in a Bloomberg article this morning they reported (basis their analysis) that oil supply total from the API and EIA reports were out of sync 24% of the time over the last four years. Moral of the story be cautions when reacting solely on the API data.

That said the API report was not only full of surprises but also biased to the bearish side. The following table summarizes the API data along with my projections and a comparison to last year and the five year average for the same week on the basis that the actual data is in line with the projections. I want to repeat my warning from yesterday regarding conclusions you may draw from the comparison to last year. The comparisons to the same week from last year are now showing a very small overhang. It is not that the overhang has disappeared over the last few weeks it is simply a result of comparing the current data to a period of time when oil inventories were already above normal. For the time being it is better to put a bit more emphasis on the comparison to the five year average for the same week as it is reflective of periods of time when inventory levels were within the normal operating range.

As shown in the table the API reported a surprise draw in crude oil along with an equally surprise build in refined products as refinery utilization rates increased strongly on the week. The 2.3 million barrel decline in crude oil stocks in the API report was predominately on the West Coast with builds in the US Gulf Coast as well as WTI/Brent spread sensitive PADD 2. Although a total crude oil decline was reported it certainly is not overly bullish basis the location of the decline and the fact that refinery demand for crude oil increased as a result of a modest increase in refinery run rates and yet the main refining centers in the US (PADD’s 2 & 3) showed builds in crude oil.

Projections

1/6/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

(2.3)

0.5

1.1

20.4

Gasoline

5.6

0.5

5.0

4.1

Distillate

1.0

(1.8)

19.7

26.4

Ref. Runs%

1.3%

0.2%

-4.1%

-9.7%

Change Level

79.5%

80.5%

84.6%

90.2%

The more surprising part of the report as well as the more bearish part of the report was the build in refined products as a result of increased runs and most likely lower implied product demand. Heating oil stocks built by almost 1 million barrels during a time when the weather in the eastern one-third of the US was colder than it has been in years. This is not very supportive of the current weather rally that has been in place for heating fuels as well as the rest of the complex. Gasoline stocks surged in the API report pretty much regaining all it lost from inventories over the last several weeks and if the EIA data is in sync with the API data the gasoline overhang versus last year and the five year average will be hovering around the 10 million barrel mark with about two months left to the normal historical building season for gasoline stocks.

Overall the API report was bearish and as a result the market will be looking even closer at this morning’s EIA report. If the EIA report is in line with the API report it could spell the end of the nine day rally in oil prices especially coupled with the latest weather forecast in the US calling for a bit of a thaw next week. For the moment (until we can analyze the EIA report) we are raising the caution flag for any heating fuel related spreads.

My individual views remain the same for today and are shown in detail in the table at the beginning of the newsletter. Although I am still showing a cautiously bullish bias I express concern that we may be nearing the end of the current upward move in oil prices and possibly getting closer to a downside correction mode. Be careful and work with tight, trailing stops for any flat price positions. Buy side hedgers may get an opportunity to add to their hedge portfolios over the next several weeks.

Currently oil prices are lower, Nat gas is firm, equities are lower and the dollar is a bit stronger.

Current Expected Trading Range

Expected Trading Range

1/6/10

Change

Low

High End

From

End Support

Resistance

8:05 AM

Yesterday

Feb WTI

$81.58

($0.19)

$70.00

$83.00

Feb Brent

$80.33

($0.26)

$70.00

$81.50

Feb HO

$2.1767

($0.0174)

$2.0800

$2.2000

Feb RBOB

$2.1058

($0.0192)

$1.9500

$2.1500

Feb NG

$5.752

$0.115

$5.300

$6.200

Dow Futures

10,481

(34)

9,870

10,600

US Dollar Index

77.965

0.115

74.500

79.250

Euro/$

1.4352

(0.0015)

1.3750

1.5250

Yen/$

1.0832

(0.0071)

1.0600

1.1600

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.

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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