Weekly energy inventory report preview

Quote of the Day

“It is hard to beat a person who never gives up.”

Babe Ruth

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

CBr

US Dollar

CBr

CBr

CBr

CBr

Global Equities

CBr

CBr

CBr

CBr

Geopolitics

CBu

CBu

CBu

CBu

Technicals

N

N

N

N

Market Sentiment

CBr

CBr

CBr

N

Overall View

CBr

CBr

CBr

N

Bias

N

N

N

N

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

CBr - Cautiously Bearish

As we indicated in yesterday’s report we thought the market was susceptible to a short covering rally, which is exactly what happened. The catalyst that got the market moving all started with news that there would be a meeting of EU leaders on Thursday focused on assisting Greece and possibly other problem countries in the EU. In addition Germany indicated that they are considering assistance to Greece and possibly other EU members. This news quickly pushed the euro off of its seven-month low gaining about 0.7% for the session. The cycle continued as the positive news coming out of Europe started an equities rally as well. So for the first time in a while the externals then became a supportive driver of oil prices as well as the broader commodities complex. It is still too early to declare the downside correction in asset classes (that has been in place for over three weeks) to be over. A lot of technical damage has been done to the markets as well as to the overall market sentiment. Participants will need to see some follow through buying coming into the market over the next several days to negate all of the negative sentiment that has built up so far this year.

Another major snowstorm is wrecking havoc along the east coast of the United States. Many U.S. Federal government offices remain closed in Washington DC and several energy reports as well as economic reports have been delayed. The EIA has delayed the release of their Short Term Energy Outlook to today while both the oil and Nat Gas inventory reports will be delayed until Friday. However, the API did release their weekly inventory report on schedule late yesterday afternoon. The following table summarizes the results of the API report along with my projections and a comparison to last year and the five-year average. The API report was bearish showing a huge build in crude oil and gasoline along with a decline in distillate that was within the projections. Refinery utilization rates declined another 1% on the week to 77%. The market has not reacted much in either direction since the report has been released.

The API reported a crude oil inventory build of about 7.2 million barrels even with imports declining about 100,000 bpd. Refinery demand for crude oil declined strongly as a result of a 1% decline in refinery run rates. If the EIA data is in sync with the API data the year over year deficit will narrow to about 13 million barrels while the surplus versus the five-year average for the same week will widen to almost 17 million barrels. Crude oil built in the main refining center of the United States—PADD 3/US Gulf Coast and the West Coast. Both PADD 2 and Cushing, OK crude oil levels declined on the week. This should provide support to the WTI/Brent spread which is now trading at the upper end of its trading range and looking like it could continue to appreciate (WTI premium over Brent) over the next week or so, especially if the EIA data also shows a similar distribution of inventories in their report.

Projections

2/10/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

7.2

1.0

(20.8)

10.5

Gasoline

1.6

0.4

11.0

4.7

Distillate

(1.5)

(1.5)

13.5

26.3

Ref. Runs%

-1.0%

0.2%

-3.7%

-8.3%

Change Level

77.0%

77.9%

81.6%

86.2%

Refined products were mixed with gasoline once again surprising the market but this time it was a bearish surprise. Gasoline stocks increased by about 1.6 million barrels versus projections for a much smaller build of about 400,000 barrels. Even though refinery run rates declined strongly this week gasoline production actually increased on the week thus contributing to the larger than expected build shown in the API report. If the EIA data is in line with the API data the gasoline overhang versus last year will be approaching 12 million barrels while the surplus versus the five-year average for the same week would be over the 5 million barrel mark. There is not yet a glut in gasoline but if this is the pattern that continues for the next month or so it certainly could turn into an oversupply problem heading into the upcoming driving season.

Distillate stocks declined about 1.5 million barrels and within the market expectations. The colder than normal weather from last week seems to be impacting inventories along with the fact that the API showed a decline in distillate production last week. If the EIA data is in sync with API data the overhang versus both last year and the five-year average will be as shown in the table. Yesterday’s API results are supportive of the long HO/short RBOB spread. This spread has been range bound for the last week or so but has seen HO appreciating versus RBOB over the last few trading sessions. I am watching this spread once again but I am still not ready to jump in as I would rather wait until the EIA results are available on Friday.

Nat gas did not participate in the strong rally in oil over the last few days as participants struggle with the fact that supply remains robust while the weather has been inconsistent. Although the current forecast are calling for colder than normal temps for the next few weeks the majority of the winter heating season is already in the history books. Inventories remain strongly above both last year and the five-year average and the weather is going to have to remain exceptionally cold for an extended period of time for the overhang to dissipate prior to the end of this heating season. The market is expecting a net withdrawal from inventory of 165 to 170 BCF in this week’s report. If the actuals are in line with the projections it would be marginally higher than last year’s draw of 164 BCF as well as the decline shown for the five-year average for the same week of 155 BCF. Nat Gas prices are primarily going to be driven by the daily weather forecasts for the next several weeks. As I mentioned last week I do not see Nat Gas prices emerging out of its current trading range anytime soon.

Equities staged a decent short covering rally in most markets over the last 24 hours as shown in the EMI Global Equity Index table below. In fact the Index is now up about 0.9% for the week (so far) resulting in a narrowing of the year to date loss to 6.2%. The Dow remains on the top of the Index while China is still solidly in last place. Interestingly throughout most of 2009 China was mostly on the top of the list while the Dow was at the bottom of the Index. The European bourses recouped some of their losses over the last 24 hours as the market continues to be more confident that the rest of the EU nations will bailout the problem countries in the EU.

EMI Global Equity Index

2/10/10

Change

Change

2010 YTD

2010

From

From

Change

7:09 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,059

150

1.52%

-3.5%

Can/S&P-TSX

11,274

159

1.43%

-4.0%

Lon/FTSE

5,112

20

0.38%

-5.6%

Paris/Cac 40

3,662

49

1.36%

-7.0%

Germany/Dax

5,578

80

1.45%

-6.4%

Japan/Nikkei

9,933

(19)

-0.19%

-5.8%

HongKong/HangSeng

19,790

239

1.22%

-9.5%

Aussie/SYDI

4,521

(18)

-0.40%

-7.4%

China/Shanghai A

3,092

14

0.46%

-10.0%

Brazil/Bvspa

64,718

1,565

2.48%

-5.6%

EMI Global Equity Index

13,774

224

1.0%

-6.2%

The market will continue to be volatile for the rest of the week with price reversals at any time. Data releases will be delayed as mentioned above and it is possible participation in the markets could be below normal also due to the inclement weather engulfing the US East Coast. Today the Short Term Energy Outlook will be released and as I mentioned yesterday I am expecting the EIA to reduce their oil demand projections as a result of China working to intentionally slow their surging economy. Tomorrow morning the IEA will release their monthly oil report which I expect will come to the same conclusions as the EIA. Also tomorrow the EU meeting on Greece and other EU problem countries will definitely impact prices as 30 second news snippets from the meeting hit the media airwaves. As you can see lots of things going on that could result in an above normal level of volatility.

I have maintained all of my individual market recommendations for today (shown in the table at the beginning of the newsletter) but I also caution that the risk/reward ratio of trading any asset class from a flat price perspective is biased to the risk side this week.

Currently prices are mixed.

Current Expected Trading Range

Expected Trading Range

2/10/10

Change

Low

High End

From

End Support

Resistance

7:10 AM

Yesterday

Mar WTI

$73.84

$0.09

$72.40

$78.00

Mar Brent

$72.01

($0.12)

$67.00

$76.00

Mar HO

$1.9353

($0.0020)

$1.9225

$2.0300

Mar RBOB

$1.9330

$0.0040

$1.8600

$2.0000

Mar NG

$5.327

$0.037

$4.900

$5.850

Dow Futures

10,026

22

10,000

10,800

US Dollar Index

79.93

(0.060)

74.500

79.250

Euro/$

1.3778

0.0005

1.3750

1.5250

Yen/$

1.1154

(0.0003)

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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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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