Weekly energy inventory report preview

Quote of the Day

“An ambitious horse will never return to its own stable.”

Chinese Proverb

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

CBu

CBu

CBu

CBr

Global Equities

CBu

CBu

CBu

CBu

Geopolitics

CBu

CBu

CBu

CBu

Technicals

CBu

CBu

CBu

CBr

Market Sentiment

CBu

CBu

CBu

CBr

Overall View

CBu

CBu

CBu

CBr

Bias

N

N

N

CBr

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

CBr - Cautiously Bearish

The combination of positive economic data and a weakening dollar played a large role in yesterday’s strong increase in oil and many other commodity prices. The latest round of auto sales in the United States came in better than expected, suggesting that the consumer is not only spending but also starting to spend on big ticket items. The outcome of the U.S. economic recovery is very dependent on consumer spending as it represents about 70% of U.S. GDP. Furthermore as spending and consumption increases in the United States it also has a positive impact on export nations like China. Today the market will get the latest estimates of jobs from ADP (a prelude to the Friday’s important nonfarm payroll number) along with the Fed’s Beige book analysis. Tomorrow and Friday factory orders and employment numbers will dominate financial and most likely oil trading.

As I have been discussing for weeks the direction of oil prices is and will continue to be directly related to the direction of the U.S. dollar with added help from equities and the outcome of the never ending amount of economic data hitting the airwaves. Fundamentals are only playing a minor and inconsistent role in the daily ups and downs of oil prices. In addition the reaction to the externals is becoming more and more exaggerated. For example in early trading on Tuesday the dollar was marginally firm and the oil complex quickly discounted it and started trading to the upside. By mid day the dollar lost its momentum and moved into negative territory pushing oil prices strongly to the upside. Equities were relatively neutral during the session so it was mostly about the dollar. When the dust settled oil ended the day up about 1.2% while the dollar declined less than 0.3%.

The investment community is back in the mode of focusing on commodity (in particular oil) investments as other asset classes like equities and bonds may struggle going forward. In addition if the situation in Greece and the greater EU begin to stabilize the euro is likely to move into a strong period of short covering which would result in the euro rising and the dollar falling, a positive outcome for both oil and the broader commodity complex. There is nothing new with Greece as of this morning as the EU looks like it is slowly moving toward some sort of a bailout. Whether it will happen as early as the end of this week when Germany’s Angela Merkel meets with Papandreou on Friday or it stretches further into the future it seems that the odds favor some sort of support from the EU. In my view the EU will do something to reduce the risk of default as a default will have a huge psychological impact on the rest of the EU as well as its young currency, the euro. That said I am not so positive that a EU resolution package for Greece will be enough to stop the bleeding in the euro as the market may look at that action as nothing more than a patch on the tip of the iceberg. The momentum is still in the direction of a firming dollar and declining euro at the moment as the financial trading world continues to maintain a huge bet on the short side of the euro. This has gotten the attention of the regulators over the last week or so which could result in distortions — more to come on this topic. Uncertainly still reigns.

Equities provided a bit of support for the oil complex as the EMI Global Equity Index (table shown below) continued to gain ground over the last twenty four hours. So far the Index has gained about 1.7% for the week narrowing the year to date loss to 1.8%. Both the Canadian and London bourses as now in positive territory for 2010 with the U.S. Dow very close to moving into the gain column. China remains at the bottom of the Index but well off of its lows set about a month ago. Most of the global equity markets now appear to be out of the downside correction pattern that was in place from the second week of January until late February.

EMI Global Equity Index

3/3/10

Change

Change

2010 YTD

2010

From

From

Change

8:08 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,406

2

0.02%

-0.2%

Can/S&P-TSX

11,828

100

0.85%

0.7%

Lon/FTSE

5,484

78

1.45%

1.3%

Paris/Cac 40

3,801

(11)

-0.30%

-3.4%

Germany/Dax

5,769

(8)

-0.14%

-3.2%

Japan/Nikkei

10,222

50

0.49%

-3.1%

HongKong/HangSeng

20,906

(151)

-0.72%

-4.4%

Aussie/SYDI

4,710

15

0.32%

-3.5%

China/Shanghai A

3,223

(15)

-0.47%

-6.3%

Brazil/Bvspa

67,779

501

0.75%

-1.2%

EMI Global Equity Index

14,413

56

0.2%

-1.8%

Much like in the currency markets uncertainty has been the main driver of these markets. The uncertainty is twofold. In the advanced country markets investors are primarily concerned about the pace of the economic recovery, when Central Banks will begin to tighten the screws on easy money and interest rates as well as the high levels of unemployment. In the developing world the markets are concerned more about how aggressive the Central Banks are already and will be in the coming months as many have embarked on a program of slowing the expansion so as to mitigate the impact of a potential inflation cycle coming down the road. With equity markets currently moving higher (albeit at a modest pace at best) they are providing support to the oil and commodity complex as equity markets still remain one of the main leading indicators of the economy. Rising equity markets translate to a recovering and expanding economy which further translates to potential increases in consumption of oil and other commodities. For the short term equity markets are supportive for oil.

I know I have been spending a lot of time discussing the external markets over the fundamentals of oil or Nat Gas but as mentioned the externals are what’s moving prices and likely to continue to move prices for the foreseeable future. Although we are in the reality stages of the economic recovery investor/traders are still moving their money based on the perception that oil demand will continue its recovery throughout 2010. As discussed in detail in yesterday’s newsletter that is far from a slam dunk at this point in time.

The fundamentals did get a bit more interesting after last night’s release of the latest API oil inventory data (refer to the following table). The data was mixed with a few surprises. The API reported a build in crude oil that was almost three times as large as what was expected even though they reported a strong increase in refinery utilization rates (which reflects an increase in refiner demand for crude oil). The API showed a build of 2.7 million barrels of crude oil. If the EIA data is in sync with the API results the year on year deficit will narrow to a tad over 10 million barrels while the overhang versus the five year average will widen to over 17 million barrels. Crude oil was bearish in the API report.

Projections

3/3/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

2.7

1.1

(12.0)

15.5

Gasoline

0.9

0.7

16.4

8.2

Distillate

(4.1)

(0.5)

8.9

26.3

Ref. Runs%

0.8%

-0.1%

-2.0%

-4.0%

Change Level

81.6%

81.1%

83.1%

85.1%

Refined products were also interesting but a bit confusing. Gasoline came in within the expectations even though refinery runs increased strongly. The surplus of gasoline heading into the upcoming driving season is still continuing to build vs. last year and the five-year average as shown in the table. Gasoline was neutral. The biggest surprise in the report was the huge decline in distillate stocks of about 4.1 million barrels during a week when the winter weather was normal at best. The distillate data is confusing as inventories declined strongly when heating fuel demand was likely not spectacular and refinery production increased. Yes this is a bullish piece of data and one that could support the entire oil complex if in fact the EIA data reports similar results. However, for the moment the market is approaching the data with a bit of caution and a little skepticism as most await this morning’s EIA report for confirmation or not. I will point out again that a recent Bloomberg study has showed that the API data is out of sync with the EIA data about 25% of the time. Be careful before diving into the pool.

Nat Gas stocks will be released tomorrow morning by the EIA. The latest projections are calling for a net withdrawal of 125 to about 165 BCF. I am leaning toward the lower end of the range as I do not think last week was a big winter consumption week. Even if the decline in Nat Gas stocks come in at the lower end of the range it would push the five-year average for the same week into a deficit position while the year over year shortfall will widen. With only weeks left to the current winter heating season market participants have been discounting bullish inventory data and are focusing more and more on the perception of the economic recovery and how it will impact industrial demand along with how much additional supply will hit the market down the road as drilling rig counts continue to rise. The latest 6- to 10-day and 8- to 14-day forecast by the NWS are mostly neutral for Nat Gas with pockets of above normal temperatures projected in the North East and some below normal temperatures projected for parts of the mid-west and south. All in all a forecast that is not going to result in huge levels of Nat Gas consumption as normal and below normal temperatures for this time of the year are not nearly as severe as the same conditions during January and February. I still view Nat Gas as fairly valued but expect prices to remain below $5/mmbtu for the short term.

Although I still view oil as being overvalued at the current trading levels as well as prices unlikely to be sustainable over $80 per barrel, I have adjusted the individual market views based on what each of the drivers are currently saying. The drivers are saying there is a potential for oil prices to move higher before embarking on an overdue downside correction. In the world of trading one should never fight the market and as such we will worry about a correction when it begins. For now be cautious in any long oil trades as price reversals can happen at any time as there is a slew of potential market moving data due out during the rest of the week as well as today’s fundamental snapshot and evolving situation in the EU. One final note the oil spreads we normally follow may become more interesting once again if the EIA data is in line with the API data. In particular the HO/RBOB spread could get a bounce in the direction of HO. Time to put some of these spreads back on the radar but I will wait on the data before laying out any targets.

Currently oil & Nat Gas are higher while equities are lower even as the dollar is weakening.

Current Expected Trading Range

Expected Trading Range

3/3/10

Change

Low

High End

From

End Support

Resistance

8:08 AM

Yesterday

Apr WTI

$80.05

$0.37

$79.15

$80.76

Apr Brent

$78.49

$0.31

$76.00

$79.00

Apr HO

$2.0704

$0.0143

$2.0200

$2.0800

Apr RBOB

$2.1987

$0.0021

$2.1400

$2.2280

Apr NG

$4.697

($0.011)

$4.560

$5.000

Dow Futures

10,388

(11)

10,000

10,800

US Dollar Index

80.35

(0.225)

78.850

81.000

Euro/$

1.3637

0.0037

1.3450

1.3775

Yen/$

1.1270

(0.0010)

1.0600

1.1600

Best regards

Dominick A. Chirichella

dchirichella@mailaec.com

Energy Market Analysis is published daily by the Energy Management Institute1324 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.

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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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