Weekly energy inventory report preview

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"The important thing is never to stop questioning."

Albert Einstein

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

CBu

CBu

CBu

CBu

Global Equities

CBu

CBu

CBu

CBu

Geopolitics

CBu

CBu

CBu

CBu

Technicals

CBu

CBu

CBu

CBu

Market Sentiment

CBu

CBu

CBu

N

Overall View

CBu

CBu

CBu

N

Bias

CBu

CBu

CBu

N

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

CBr - Cautiously Bearish

The oil complex was all about the externals on Tuesday as the U.S. dollar was pounded, equities surged and oil and other commodities followed equities to tack on significant gains. The financials turned optimistic as more and more investor/traders are becoming convinced the EU will not let Greece default. In addition corporate earnings and economic data from many places around the world including the US have been positive and suggestive that the economic recovery will continue in the short to medium term. The dollar declined over 1% on Tuesday while U.S. equities increased almost 2% resulting in about a 4% increase in WTI. As I said in yesterday’s report oil (and the broader commodity markets) were poised to follow the direction of the financials and that has been the trading pattern over the last 24 hours. The commodity markets continue to be tightly coupled to the externals as investor/traders once again increase their appetite for riskier but potentially higher yielding asset classes.

Yesterday’s trading activity confirmed the bottoming pattern for equities and commodities and the topping pattern for the U.S. dollar from a technical perspective. The short term technical trend has more momentum to the upside for most markets (except the dollar which has more downside momentum). The worst of the downside correction that began early in January is now showing signs that it may be over and the next directional moves for equities and commodities are likely to be to the upside. The key will remain the direction of the U.S. dollar.

The dollar Index (which tracks six major currencies) is currently hovering just below a key technical support level and if it closes below the support level I could see another 1 to 2% decline in the value of the dollar which will correspondingly lead to higher equity and commodity values. The flight to the safety of the US dollar over the last several weeks as a result of the evolving situation in Greece has subsided as most participants believe the EU will assist Greece if needed (even though specific details of a plan have not been released). In addition comments by the Greek Finance Minister who said yesterday that there is no actual need for a bailout has also eased concern. So for the moment the market sentiment of the dollar has shifted to negative versus most major currency pairs. The flight to safety is over for the time being and asset classes are back in the forefront.

On the equity front the EMI Global equity Index (table shown below) continues to recover. Over the last 24 hours the Index has improved by about 0.4% for the week so far. The US and Canada remain at the top of the Index showing the smallest year to date losses. China is still hovering near the bottom of the list but China has been mostly closed down this week as a result of the Chinese New Year. I would expect to see a rebound in China equities as investors play a bit of catch up to the gains (assuming they hold) in the West. Equities are supportive for oil and commodity prices.

EMI Global Equity Index

2/17/10

Change

Change

2010 YTD

2010

From

From

Change

8:07 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,269

170

1.68%

-1.5%

Can/S&P-TSX

11,586

117

1.02%

-1.4%

Lon/FTSE

5,167

25

0.49%

-4.5%

Paris/Cac 40

3,738

69

1.87%

-5.0%

Germany/Dax

5,661

69

1.23%

-5.0%

Japan/Nikkei

10,034

21

0.21%

-4.9%

HongKong/HangSeng

20,269

(22)

-0.11%

-7.3%

Aussie/SYDI

4,591

20

0.45%

-6.0%

China/Shanghai A

3,165

84

2.73%

-7.9%

Brazil/Bvspa

65,855

(274)

-0.41%

-4.0%

EMI Global Equity Index

14,033

28

0.9%

-4.4%

Today the energy complex begins its weekly fundamental reality check with the release of the API oil inventory report late this afternoon followed by the EIA release of both the oil & Nat Gas inventory reports tomorrow morning. The following table summarizes my projections for this week’s oil reports along with comparisons to last year and the five year average for the same week assuming the actual EIA results are in line with the projections. I am expecting a neutral to bearish oil inventory report as crude and gasoline stocks likely built while distillate stocks declined modestly on the week. Refinery utilization will show a small increase of about 0.2%.

Projections

2/17/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

1.5

(17.7)

13.4

Gasoline

1.1

12.8

7.5

Distillate

(1.5)

13.9

26.1

Ref. Runs%

0.2%

-2.0%

-7.1%

Change Level

79.3%

81.3%

86.4%

I am projecting a build of about 1.5 million barrels of crude oil as a result of extra cargoes that likely arrived after the Houston Ship Channel was reopened (shut by an accident) and as a result of tepid US refiner demand for crude oil. The crude oil balance has improved significantly since the peak of the oversupply situation during 2009. However, if crude oil stocks do build again it will slow the time when stocks will get back to more normal, historical operating levels. Also keep in mind there is still a substantial amount of crude oil that is slowly moving out of floating storage and back into the mainstream supply chain. With OPEC compliance levels still at their lows any additional crude oil coming back into the market at a time when refinery utilization rates in most of the OECD remain around the 80% level is simply just too much supply.

Gasoline stocks are expected to increase about 1.1 million barrels resulting in the projected overhang versus last year rising to 12.8 million barrels while the surplus versus the five year average for the same week will be around 7.5 million barrels. Gasoline remains in its seasonal building pattern that is likely to continue for at least another month or so. Distillate stocks are expected to decline by about 1.5 million barrels as heating oil stocks should have declined on the week as the weather was once again colder than normal in the main heating oil consuming region of the US last week. Recall that heating oil stocks actually built in last week’s report even though the weather was unseasonably cold.

The gasoline inventory level could provide a surprise versus the expectations this week. The gasoline import arb window remains economically wide open and imports of gasoline have been at the upper end of normal. As such any major increase in imports can only result in the overhang of gasoline building even faster.

That all said I do not think the fundamentals will play a major role in the direction of oil prices in the short term as the momentum of the equity and dollar markets are likely to continue to dominate the markets at least through the rest of this week. If the actual EIA data is significantly different from the expectations there will be a short term reaction. However, I believe we are in the mode of the market overly embracing a bullish inventory report and discounting a bearish report as the short term momentum of the commodity markets is currently biased to the upside.

Nat Gas diverged from the oil and the rest of the commodity markets on Tuesday as prices spent the entire day in negative territory. Prices remain in the trading range (as I have been projecting) and are likely to continue trading in the $5 to $6/mmbtu range for the near future. The current and projected weather remains supportive as it should result in a continuation of larger than normal withdrawals from inventory which should in turn contribute to narrowing the overhang versus last year and the five year average. However, the positive support coming from colder than normal temperatures is being offset by amply levels of production and rising rig counts. The projections for this week’s EIA inventory report are for a net withdrawal of about 185 BCF. If the actual data is in sync with the projections is would significantly exceed last year’s below average withdrawal of just 44 BCF as well as the 129 BCF draw for the five year average. The surplus will narrow but with winter mostly over and supply relatively robust for this time of the year any weather bullishness is going to be tempered. The result trading will remain range bound.

I have upgraded my views for the oil complex to cautiously bullish while leaving Nat Gas in neutral (for the reasons discussed above). Oil is in the midst of a combination of short covering and new cash flowing back into asset investing. I expect this to continue through the week as the economic reports due out this week are mostly all projected to be positive. Barring any relapse in the EU/Greece situation the dollar should continue to move lower thus providing support for oil prices. That all said the market still remains susceptible to high levels of volatility and price direction swings at any time. caution is still the keyword. Yesterday was a huge, above normal move in oil prices...do not expect further upside moves to be as robust as we are now approaching resistance levels that will have to be breached to continue the upside recovery. For the moment the wall of worry has been scaled but there will still be more worry walls to climb over the next several weeks.

Currently prices are higher for everything in the EMI Price Board...including the US dollar... a bit of a divergence to watch as to how it plays out today in relationship to equities and commodities.

Current Expected Trading Range

Expected Trading Range

2/17/10

Change

Low

High End

From

End Support

Resistance

8:07 AM

Yesterday

Mar WTI

$77.62

$0.61

$76.00

$79.34

Apr Brent

$76.34

$0.66

$75.00

$78.00

Mar HO

$2.0115

$0.0152

$1.9700

$2.0600

Mar RBOB

$2.0046

$0.0164

$1.9900

$2.0300

Mar NG

$5.346

$0.036

$4.900

$5.850

Dow Futures

10,281

40

10,000

10,800

US Dollar Index

79.88

0.125

78.850

80.360

Euro/$

1.3735

(0.0021)

1.3590

1.3775

Yen/$

1.1010

(0.0085)

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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