Weekly energy inventory report preview

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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

N

N

N

N

Global Equities

CBu

CBu

CBu

CBu

Geopolitics

CBu

CBu

CBu

CBu

Technicals

CBu

CBu

CBu

CBr

Market Sentiment

N

N

N

CBr

Overall View

N

N

N

CBr

Bias

CBu

CBu

CBu

CBr

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

CBr - Cautiously Bearish

Just when you thought nobody in the oil complex was focusing on the direction of the dollar, the current oil rally came to an abrupt halt on Tuesday as everybody was once again looking at a strong dollar resulting in oil and other commodity prices moving into a defensive mode throughout the session. That said oil prices are still solidly above the $80 per barrel mark and very near the upside resistance or breakout area of close to $84/bbl. With equity markets quickly approaching the highs made in the first week of January oil prices are doing exactly the same. WTI last hit its range highs during the first half of January and with a little help from the externals is likely to test that level before making any significant downside correction. Oil has mostly been driven by rising equity market values and the perception that the economic recovery will continue to evolve and thus oil demand will finally pick up. In addition most investor/traders have been becoming more optimistic that the summer gasoline driving season is just around the corner and U.S. gasoline demand may start to return to more normal levels. This has resulted in gasoline prices leading the oil complex higher for the last several weeks. As I discussed in yesterday’s report the market is exposed to being a bit disappointed with this scenario as the jobs picture in the U.S. still looks dismal at best.

Yesterday the EIA released their Short Term Energy Outlook and as expected they increased their projection for demand growth for the rest of this year. The report was biased to the bullish side but the rising US dollar trumped the first of several fundamental reports due out this week and next. Following are the main highlights of the latest EIA Short Term Energy Outlook.

  • EIA expects WTI prices to average above $80 per barrel this spring, rising to an average of about $82 per barrel by the end of the year and to $85 per barrel by the end of 2011.
  • Projected economic growth this year is higher in this forecast, with U.S. real gross domestic product (GDP) growing by 2.8% and world oil-consumption-weighted real GDP growing by 3.4%, compared with 2.3% and 2.7% growth, respectively, in last month’s Outlook.
  • EIA expects this year’s annual average natural gas Henry Hub spot price to be $5.17 per million Btu (Mmbtu), a $1.22-per-MMBtu increase over the 2009 average.
  • EIA’s more optimistic updated expectation for global economic growth during 2010 drives the 2010 forecast for oil consumption growth upwards to 1.5 million barrels per day (bbl/d) from 1.2 million bbl/d in last month’s Outlook.
  • While EIA has also reduced its projections for surplus production capacity in the Organization of the Petroleum Exporting Countries (OPEC), surplus capacity remains ample, dampening the likelihood of a large upward swing in prices.
  • As noted above, the upward adjustment of 0.3 million bbl/d in the 2010 forecast for global liquid fuels consumption growth in this Outlook is largely due to expectations for greater economic growth. Most of the increased economic growth in 2010 is expected in the Asia-Pacific and Middle East regions, thus largely outside of the countries in the Organization for Economic Cooperation and Development (OECD).
  • EIA has revised its estimate of OECD commercial oil inventories at the end of 2009 downwards to 2.67 billion barrels, equivalent to about 57 days of forward cover and about 63 million barrels more than the 5-year average for the corresponding time of year. OECD oil inventories are still projected to remain at the upper end of the historical range over the forecast period.
  • EIA expects total natural gas consumption to increase by 0.7% to 62.9 billion cubic feet per day (Bcf/d) in 2010 and decline by 0.4% in 2011. Cold weather drives this year’s natural gas consumption increases.
  • EIA now expects working natural gas inventories to finish the first quarter of 2010 at around 1,549 Bcf, or about 3.5% above the previous five-year average. In addition, resilient domestic production and higher U.S. LNG imports contribute to a projected end-of-October 2010 inventory that remains above the previous five-year average.

Round one of the fundamental reports was mostly supportive for oil prices and less bearish than previous reports for Nat Gas. In fact I view Nat Gas as faring well in the latest EIA analysis. OPEC’s monthly report is due out today and the IEA monthly oil report will hit the media airwaves early Friday morning. On Tuesday the weekly inventory report cycle began with the release of the API snapshot of stocks. The API report was once again full of surprises with crude oil decidedly bearish and refined products mostly bullish as refinery utilization rates declined strongly. The API results are summarized in the following table along with my projections for this week’s EIA report along with a comparison to last year and the five year average for the same week assuming the EIA actual data will be in sync with the projections.

Projections

3/10/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

6.5

1.7

(8.1)

19.5

Gasoline

(3.2)

0.5

19.9

10.2

Distillate

(2.8)

1.2

7.6

27.5

Ref. Runs%

-0.7%

-0.1%

-0.9%

-3.6%

Change Level

80.9%

81.8%

82.7%

85.4%

The API reported a huge build in crude oil stocks of about 6.5 million barrels. The builds were across all PADD districts including PADD 2 and Cushing, Ok. If the EIA data is in line with the API crude oil builds the year over year deficit will narrow to only about 3.3 million barrels while the overhang versus the five year average for the same week will grow to 24.3 million barrels. With WTI prices approaching the range highs Tuesday’s API crude oil stock build did not help build a case for an upside breakout. Also if the EIA data is in line with the API numbers it should result in downside pressure on the WTI/Brent spread, This spread has been trading in a wide, slightly upward trading range for most of this year but now seems poised to break down a bit. This spread is on my radar and at the moment I will be looking for a possible window to sell the spread if the EIA data supports the API results.

Refined products came in on the bullish side as the API reported a larger than expected decline in utilization rates of 0.7% but absolute run levels still remain above the 80% mark. Both gasoline and distillate fuel stocks declined in the API report versus projected builds for both of these commodities. Gasoline was the biggest surprise declining by 3.2 million barrels. If the EIA data is in line it would go a long way toward starting to narrow the overhang versus both last year and the five year average for the same week. Distillate fuel stocks declined much more strongly than I anticipated after a week that saw mostly mild weather in the main heating fuel consuming region of the U.S. Today’s EIA report just became a lot more important as the market will react very strongly if the EIA also reports a strong decline in refined product stocks this week, especially on top of the bullish Short Term Energy Outlook Report (see above).

As I have been pointing out for a few weeks the equity markets have acted as a very supporting catalyst for oil prices. As shown in the EMI Global Equity Index table below five of the 10 bourses in the Index is now showing positive gains for 2010. In fact the EMI Index is now positive for the year by 0.3% or only the second time the Index has been trading in positive territory this year (last time was during the first week of January). In spite of the uncertainty over the upcoming election in the UK the London bourse is solidly in first place with a year to date gain of 3.5% with the United States coming in at 1.3% for the year. With the Chinese government still moving to slow down the economic expansion as well as the evolving housing bubble in China both China’s Shanghai A shares and Hong Kong have continued to struggle for most of 2010 with both of these bourses holding the bottom ranking all year (so far). Equity markets continue to support oil and the boarder commodity markets on the perception that equities are a leading indicator for the global economic recovery.

EMI Global Equity Index

3/10/10

Change

Change

2010 YTD

2010

From

From

Change

11:05 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,564

12

0.11%

1.3%

Can/S&P-TSX

11,919

(45)

-0.38%

1.5%

Lon/FTSE

5,602

(4)

-0.08%

3.5%

Paris/Cac 40

3,910

6

0.17%

-0.7%

Germany/Dax

5,886

10

0.17%

-1.2%

Japan/Nikkei

10,568

(18)

-0.17%

0.2%

HongKong/HangSeng

21,208

11

0.05%

-3.0%

Aussie/SYDI

4,829

10

0.20%

-1.1%

China/Shanghai A

3,218

17

0.52%

-6.4%

Brazil/Bvspa

69,576

1,001

1.46%

1.4%

EMI Global Equity Index

14,728

100

0.2%

0.3%

Today should be very interesting with a high level of volatility expected especially if Wednesday morning’s EIA oil inventory report comes in outside the boundaries of the expectations. I have left my individual market views the same. They are detailed in the table at the beginning of the newsletter. The market remains in a mode where very short term price reversals can happen at any time on little new supporting data.

As of Tuesday evening (NY Time) when I published Wednesday morning’s report prices are quietly mixed with Asia trading relatively quiet.

Current Expected Trading Range

Expected Trading Range

3/10/10

Change

Low

High End

From

End Support

Resistance

11:06 AM

Yesterday

Apr WTI

$81.21

($0.28)

$79.44

$81.68

Apr Brent

$79.71

($0.20)

$77.44

$80.00

Apr HO

$2.0879

($0.0019)

$2.0550

$2.1000

Apr RBOB

$2.2625

$0.0022

$2.2100

$2.3000

Apr NG

$4.510

($0.006)

$4.200

$5.000

Dow Futures

10,558

(6)

10,000

10,800

US Dollar Index

80.61

0.005

78.850

81.000

Euro/$

1.3597

0.0004

1.3450

1.3775

Yen/$

1.1115

(0.0002)

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.

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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