Weekly energy inventory report preview for Feb. 3

Quote of the Day

“We are what we do...not what we did. Now if we continue doing what we used to do, we can’t be upset that we are still what we were, simply because we are still doing what we did!

Damon Lofton

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

CBr

CBr

CBr

N

US Dollar

N

N

N

N

Global Equities

N

N

N

N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

N

N

N

N

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

So far this week asset selling has subsided as more investor/traders move money back into a variety of riskier and potentially higher yielding asset classes and out of the U.S. dollar. However, most markets (oil and Nat Gas are the exceptions) are still trading in the lower half of their respective trading ranges and are still off of the highs made during the first week of January of this year. The upside recovery has been modest at best again except for the oil complex which has moved strongly to the upside. So far WTI is up over $5 per barrel even though yesterday afternoon’s API report showed a much larger inventory build than any of the expectations (more below). The main oil and commodity price drivers this week are once again the externals, stronger equities and a weaker dollar.

In spite of period where oil prices decoupled themselves from the externals the financial markets still remain the main directional catalyst. As shown in the following chart WTI continues to be inversely related to the direction of the U.S. dollar while moving in the same direction as equities. Yes the fundamentals have become more relevant over the last several months as well as the evolving geopolitical hotspots of Nigeria and Iran but in the end the externals remain the number one directional price driver.

The EMI Global Equity Index (table shown below) continued its recovery or short covering rally over the last 24 hours. The Index has now gained 2% on the week narrowing the year to date loss to 3.2%. Over the last 24 hours the only bourse that has not gained ground was China. China still remains at the bottom of the list with a double digit year to date loss while the United States is on top of the list with a loss of just 1.3% for 2010. The economic data has been mostly positive this week in the three main regions: China, US and Europe. However, the big potentially market moving piece of economic data will be released on Friday morning (8:30 am EST), the U.S. nonfarm payrolls number and the U.S. unemployment rate. The market is looking for a turnaround from the 85,000 job losses in last month’s report to a modest gain of about 13,000 jobs with the unemployment rate expected to remain at 10%. Any deviation from the expectations will likely have a quick and strong impact on both the direction of the U.S. dollar as well as how equity markets finishing trading out the week. Oil and other commodity prices will follow the lead of the externals.

EMI Global Equity Index

2/3/10

Change

Change

2010 YTD

2010

From

From

Change

7:41 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,297

111

1.09%

-1.3%

Can/S&P-TSX

11,408

91

0.80%

-2.9%

Lon/FTSE

5,283

36

0.68%

-2.4%

Paris/Cac 40

3,822

10

0.25%

-2.9%

Germany/Dax

5,715

5

0.09%

-4.1%

Japan/Nikkei

10,371

166

1.63%

-1.7%

HongKong/HangSeng

20,272

28

0.14%

-7.3%

Aussie/SYDI

4,629

84

1.85%

-5.2%

China/Shanghai A

3,078

(7)

-0.23%

-10.5%

Brazil/Bvspa

67,163

591

0.89%

-2.1%

EMI Global Equity Index

14,204

112

0.7%

-3.2%

The first oil fundamental report was released by the API late yesterday afternoon. The results are summarized in the following table along with my projections and comparisons to last year and the five-year average for the same week assuming the actual EIA data is in sync with the projections. I would categorize the API report as neutral to biased to the bearish side. Crude oil built significantly more than expected, distillate stocks declined within the expectations while gasoline showed a surprise decline versus most market analyst looking for another seasonal draw in inventories. Refinery runs increased by 0.4%.

Projections

2/3/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

4.7

0.5

(18.9)

10.1

Gasoline

(1.2)

0.9

10.1

7.3

Distillate

(1.0)

(0.8)

14.1

26.0

Ref. Runs%

0.4%

-0.1%

-5.1%

-7.8%

Change Level

78.0%

78.4%

83.5%

86.2%

The API showed a crude oil build of close to 5 million barrels. If the EIA data is in line with the API data the year over year deficit will have narrowed to 13.7 million barrels while the overhang versus the five-year average would be around 15.3 million barrels. The biggest build occurred in the main U.S. refining center, the US Gulf Coast (PADD 3). Both PADD 2 and Cushing, Ok stocks built which will result in a negative impact on the WTI/Brent spread.

This spread has been trading in a relatively tight range for the last month or so. It has failed on several occasions to break out of the upper end of the trading range (meaning WTI appreciating relative to Brent) and is now sitting at the lower, technical support level of the trading range of about $1/bbl (March WTI/Brent spread). If the EIA data confirms the results shown in the API report the spread could break down further today suggesting a short WTI/long Brent trade. It is now on my radar. The March intermonth spread that I have been trading is going nowhere quickly and if the EIA data also shows a big build in crude oil stocks this spread will likely move closer to my stop loss. I am losing interest in this spread but will wait until after the EIA data is released.

Refined products both showed a decline in inventories in the API report. One was expected, distillate, and the other, gasoline, was a surprise. If the EIA report is in line with the API data the overhang of distillate stocks versus last year and the five-year average for the same week will come in around the levels projected in the table. The distillate result was neutral in the API report. On the other hand gasoline was modestly bullish as the API reported a decline of about 1.2 million barrels versus most expectations for a build of anywhere from 1 to 1.5 million barrels. If the EIA report is in sync with the API data the year over year surplus will come in at around 8 million barrels while the overhang versus the five-year average will be in the vicinity of about 5 million barrels.

With the overhang versus the five-year average certainly not overwhelming at the moment and with refinery utilization rates still below the 80% level the industry may be on a path of possibly avoiding a pre-season glut if runs remain low and imports are manageable as demand remains tepid at best. I have been trading a long HO/Short RBOB spread and was stopped out of the trade yesterday at a small profit. I am now rethinking the future direction of this spread and will wait until after the EIA data is released to determine my next move if any.

Tomorrow the EIA will release the latest snapshot of Nat Gas inventories. The market is looking for a net withdrawal from inventory of about 140 BCF. Even if the actual number is within the expectations it would be much greater than last week’s 86 BCF decline but it will come up short versus last year’s draw of 194 Bcf as well as the five year average decline for the same week of 178 BCF. Net result the inventory surplus will widen for the second week in a row with the projected level continuing above both last year and the five year average. How Nat Gas prices hold up from here will be based on a combination of what this week’s inventory report turns out to be along with how the market views the current NWS forecasts for below normal temperatures for most of the eastern half of the US that is expected to last for the next several weeks.

My individual market views remain the same for today and are detailed in the table at the beginning of the newsletter. The next two days of trading are going to be impacted by the externals (see above) as well as the EIA fundamental snapshots. However, beyond that the market will begin to position itself for Friday morning’s jobs report. The market still remains susceptible to sudden changes in the direction of price ...thus caution remains the key.

Currently everything in the EMI Price Board is firm except for the US dollar.

Current Expected Trading Range

Expected Trading Range

2/3/10

Change

Low

High End

From

End Support

Resistance

7:41 AM

Yesterday

Mar WTI

$77.38

$0.15

$72.40

$78.00

Mar Brent

$76.38

$0.32

$67.00

$76.00

Mar HO

$2.0386

$0.0069

$1.9225

$2.0300

Mar RBOB

$2.0355

$0.0176

$1.8600

$2.0000

Mar NG

$5.514

$0.060

$4.900

$5.850

Dow Futures

10,224

0

10,000

10,800

US Dollar Index

79.12

(0.060)

74.500

79.250

Euro/$

1.3991

0.0028

1.3750

1.5250

Yen/$

1.1032

(0.0036)

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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