Weekly energy inventory report preview

Quote of the Day

“Winning breads confidence and confidence breeds winning.”

Hubert Green

EMI QuickView Short Term Market Overview

Impact on Energy Prices

Price Drivers

Crude

Gasoline

HO/Diesel

Nat Gas

Supply

N

N

N

CBr

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

CBu

CBu

CBu

CBr

Market Sentiment

CBr

CBr

CBr

CBr

Overall View

CBr

CBr

CBr

CBr

Bias

CBr

CBr

CBr

CBr

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

CBr - Cautiously Bearish

Tuesday’s trading activity was all about confidence or should I say the lack of confidence. US Consumer Confidence fell to the lowest level since April of 2009 over concerns about jobs. The Conference Board’s consumer confidence Index declined to 46, well below all of the forecasts as well as the 56.5 level in January. This was a huge drop in consumer confidence and one that immediately sent equities, oil, most commodities, interest rates (rising Treasury bond prices) lower while the US dollar gained versus most major currencies. The disappointing number was in addition to the unexpected drop in business consumer confidence in Germany released earlier in the day. Markets watch the U.S. consumer confidence level very closely as it is indicative of future consumer spending patterns, which represent 70% of US GDP.

Market sentiment in all markets depends so much on confidence, especially in an economic recovery period and any slippage leads immediately to a rush to the sidelines from most asset classes. Yesterday’s data was one of those unexpected market movers and one that continues to point to one of the biggest problems with the US economic recovery and that is the high level of unemployment. Until the market gains confidence and positive progress is actually happening with jobs being created the economic recovery is going to remain on a knives edge for the time being. Correspondingly if the economic recovery losses any momentum energy demand will continue to suffer and the current high price environment for oil will be in jeopardy.

The main recipient of the economic uncertainty over the last several months has been the U.S. dollar. The dollar has been rising but surprisingly WTI has also been rising over the same timeframe as shown in the following chart. I would categorize this as a divergence or a decoupling. In the world of markets divergences are nature’s way of shooting a warning shot over the bow. The warning is oil prices may not very sustainable at the current levels especially if the dollar remains firm and the fundamentals do not become a lot more supportive in the short term. With more potential market moving data due out this week (especially fourth quarter GDP on Friday) any additional bearish data will further shore up the U.S. dollar and exert additional pressure on oil and other commodity and equity prices. The correction in equities and the dollar that began in the second week of January may not yet be in the history books. When the dust settled on Tuesday WTI declined about 2%, US equities fell about 1% while the US Dollar Index gained 0.5% (the euro fell about 0.7%).

Late Tuesday afternoon the API released their latest snapshot of oil inventories. The results are summarized in the table below 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 line with the projections. The EIA will be releasing their report at 10:30 am EST this morning. The API report certainly added a little more confusion to an already uncertain oil market. The API reported a huge surprise build in crude oil, a decline in gasoline stocks within the expectations and a draw in distillate stocks of about half as much as what was forecast. Refinery runs surged higher for the third week in a row.

Projections

2/24/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

(3.1)

2.0

(14.8)

14.9

Gasoline

1.7

1.8

18.5

10.5

Distillate

(0.8)

(1.5)

10.1

25.3

Ref. Runs%

0.9%

0.1%

-1.6%

-5.5%

Change Level

80.8%

79.9%

81.4%

85.4%

The API reported a decline of about 3.1 million barrels with declines spread out through most of the PADD districts. Both PADD 2 and Cushing, Ok stocks fell providing a bit of fundamental support for the WTI/Brent spread although there was not much of a reaction in the spread in either direction after the API data was released. If the EIA data is in line with the API data the crude oil deficit will widen to almost 20 million barrels while the overhang versus the five year average for the same week will drop to about 9.8 million barrels or the lowest overhang in well over a year. The API crude oil inventory number was bullish with the market picking up about $0.20/bbl shortly after the data was released. However overnight oil has once again resumed its downward move and is in negative territory as of this writing.

On the other hand refined products were definitely not bullish… rather they were biased to the bearish side. Starting with a 0.9% surge in refinery utilization rates leading to another large build in gasoline stocks and a smaller than expected decline in distillate fuel. Gasoline stocks fell by 1.7 million barrels and within the expectations. However, if the EIA and the API data are in sync the surplus versus both last year and the five year average will widen for yet another week. As I have been saying for over a week I see nothing bullish about gasoline and no reason why prices have appreciated relative to everything else in the oil complex. We may see this change if the EIA data confirms the API report. Actually the transition has not started as a result of the API data as gasoline is continuing to appreciate versus both crude oil and HO so far this morning.

Distillate fuel stocks declined only about 800,000 barrels versus expectations for a decline of about 1.5 million barrels against a backdrop of another week of winter weather. If the EIA data is in line with the API report the distillate surplus will have narrowed only modestly versus last year while the overhang versus the five year average will be hovering around the 26 million barrel mark. There is certainly nothing bullish about distillates and in fact with winter mostly over the situation is likely to become more bearish over the next several weeks.

Overall the API report was constructive for crude oil but bearish for everything else. With the API reporting a huge increase in crude oil imports but a significant decline in inventories it raises a question as to the consistency of the data. The reaction in the market after the API data was released was positive for crude oil (did not last very long into the night) and bearish for refined products. However, the reaction was muted with market participants waiting on this morning’s EIA inventory report before spending too much money on any trades that could be reversed if the EIA data is different from the API data. I will note that recent studies by Bloomberg suggested that the API and EIA data are out of sync about 25% of the time.

Nat Gas continued its march to lower levels as the March contract hit new lows one day prior to contract expiration. The market sentiment for Nat Gas is now decidedly bearish with most bulls searching for any reason to enter the market and arrest the selling. So far they have been unsuccessful in finding any reason to begin a buying spree. In fact just about every signal suggests lower prices to come. The technicals, the firming dollar, the improving weather forecast and the fact that winter is just about over all lead one to the seller’s corner. About the only semi positive driver is the fact that the Nat Gas inventory surplus is likely to dissipate prior to the end of the official winter heating season. The market is forecasting a net withdrawal from inventory this week of about 165 BCF versus a 132 BCF draw in the five year average for the same week. If the actual data is in line with the forecast the overhang versus the five year average will narrow to a little over 20 BCF. The fact that the surplus has been narrowing has provided no support to prices. I remain biased to the bearish side.

Global equity markets lost value across all bourses with the EMI Global Equity Index (table below) now in negative territory for the week resulting in a widening of the year to date losses for 2010. The US remains in the top spot although it is now 1.4% lower for the year. The Index is down 0.7% for the week and 3.7% year to date. Equities remain a drag on oil and the broader commodity markets as does the firming US dollar.

EMI Global Equity Index

2/24/10

Change

Change

2010 YTD

2010

From

From

Change

5:57 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,282

(101)

-0.97%

-1.4%

Can/S&P-TSX

11,527

(108)

-0.93%

-1.9%

Lon/FTSE

5,315

(37)

-0.69%

-1.8%

Paris/Cac 40

3,705

(2)

-0.05%

-5.9%

Germany/Dax

5,595

(9)

-0.16%

-6.1%

Japan/Nikkei

10,352

(48)

-0.47%

-1.8%

HongKong/HangSeng

20,623

246

1.21%

-5.7%

Aussie/SYDI

4,731

(2)

-0.03%

-3.1%

China/Shanghai A

3,127

(22)

-0.70%

-9.0%

Brazil/Bvspa

66,108

(1,076)

-1.60%

-3.6%

EMI Global Equity Index

14,137

(116)

-0.4%

-3.7%

My individual market views are summarized in the table at the beginning of the newsletter. I now view everything as cautiously bearish although the direction of the market is almost solely in the hands of what path the US dollar will take over the next several sessions. The evolving situation in the EU (Greece in particular) are dragging the euro down (and thus increasing the value of the dollar) while yesterday’s bearish consumer confidence number opened the door to another flight to quality into the US dollar and the Yen. All of the above are bearish signs for oil with Nat Gas creating its own bearish atmosphere and not needing any assistance from the externals. The market remains susceptible to sudden price reversals at any time as new data hits the media airwaves.

Currently everything in the EMI Price Board is lower including the dollar.

Current Expected Trading Range

Expected Trading Range

2/24/10

Change

Low

High End

From

End Support

Resistance

5:57 AM

Yesterday

Apr WTI

$78.40

($0.46)

$76.00

$79.34

Apr Brent

$76.75

($0.50)

$75.00

$78.00

Mar HO

$2.0210

($0.0113)

$1.9700

$2.0600

Mar RBOB

$2.0553

($0.0103)

$1.9900

$2.1000

Mar NG

$4.751

($0.027)

$4.560

$5.000

Dow Futures

10,293

(6)

10,000

10,800

US Dollar Index

80.77

(0.140)

78.850

81.000

Euro/$

1.3554

0.0032

1.3450

1.3775

Yen/$

1.1099

0.0010

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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