Weekly energy inventory report preview

"Real riches are the riches possessed inside."

B.C. Forbes

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

N

N

N

N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

N

N

N

CBr

Market Sentiment

N

N

N

CBr

Overall View

N

N

N

CBr

Bias

N

N

N

CBr

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

CBr - Cautiously Bearish

The perception trade remains well in place as evidenced by Tuesday’s trading activity. Even after the third month in a row of declining home sales the equity markets in the U.S. surged higher on the view that it could have been worse. In fact equities increased another 1% on Tuesday offsetting the negative impact of a firming dollar on oil prices. Oil was able to gain modestly on the day as participants chose to focus their attention more on rising equities rather than on the rising dollar. Although the surge in equity values suggest the economic recovery is well in place the oil complex did not quit see it that way on Tuesday as oil prices rose only modestly on the day as the current bearish fundamentals have continued to cap out the gains.

Even though the currency markets were mostly ignored by the oil sector today concern still exists over the growing exposure to sovereign debt issues evolving in various countries around the world with Greece still leading the way. The Eurozone has turned a problem into a bit of a three ring circus as it is yet to come up with any consensus on a bailout package for Greece. The way it is handling the Greece situation is sending a message to the markets that the EU has not been able to figure out how to solve Greece and possibly other problems that are looming in the EU: Spain, Portugal, Ireland and maybe even the UK as all have seen significant increases in their foreign debt exposure. In the latest twist of events in the EU the two big economic powerhouses are now suggesting that the IMF should be part of the equation in solving the Greece debt issues. This is a switch from just a few days ago when the President of the EU indicated the solution should be entirely contained within the EU. I remain of the view that the EU will eventually come up with a solution but the length of time it is taking to get there and the daily flip flopping by some of its leadership (i.e. Germany in particular) is certainly going a long way in keeping the euro under pressure (recipient the US dollar which has been continuing to gain ground).

On a global basis equities markets moved modestly higher on Tuesday as shown in the EMI Global Equity Index table below. The Index is now 0.1% higher on the week with the year to date gains currently at 0.5%. Eight of the ten bourses in the Index have now gone positive for the year with only China and Hong Kong remaining in negative territory. The UK and USA are holding onto the number one and two spots in the Index as participants are viewing the economic recovery in these regions as only slowly evolving with little chance their Central Banks are anywhere near ready to raise interest rates. In fact the Chicago Federal Bank President said in a speech on Tuesday in Shanghai that the US Central bank is likely to keep an accommodative interest rate policy for at least another six months. An extremely low interest rate environment coupled with very easy money flow has fueled the equity rallies in the advanced economy world and will continue to keep cash flowing into equities as long as alternative yields remain close to zero and the economic data continue to validate that the recovery is still in place. On the other hand the emerging world economies have been recovering and expanding at a very strong pace and Central bankers in this part of the world are already beginning to move into inflation fighting mode and starting to raise interest rates. This has dampened equity gains in those markets while equity values in the west are still pushing higher.

EMI Global Equity Index

3/24/10

Change

Change

2010 YTD

2010

From

From

Change

6:26 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,889

103

0.95%

4.4%

Can/S&P-TSX

12,045

77

0.65%

2.5%

Lon/FTSE

5,674

29

0.52%

4.8%

Paris/Cac 40

3,953

25

0.63%

0.4%

Germany/Dax

6,017

30

0.50%

1.0%

Japan/Nikkei

10,774

(51)

-0.47%

2.2%

HongKong/HangSeng

20,988

55

0.26%

-4.0%

Aussie/SYDI

4,888

40

0.83%

0.1%

China/Shanghai A

3,201

(23)

-0.70%

-6.9%

Brazil/Bvspa

69,173

131

0.19%

0.9%

EMI Global Equity Index

14,760

42

0.3%

0.5%

Further supporting oil prices on Tuesday were forecasts for a mostly neutral to even mildly bullish round of oil inventory reports. However, the first shot over the bow was certainly not overly bullish as the API reported a surge of about 7.5 million barrels in crude oil stocks in their Tuesday afternoon report. The results of the API report are summarized in the following table along with my projections and comparisons to last year and the five year average for the same week. The API reported crude oil builds in all five PADD districts which was far above any of the expectations…including mine. Refiners cut utilization rates a surprising 0.5% resulting in lower refiner demand for crude oil. The cut in run rates coupled with a strong increase of over 1 million barrels a day in crude oil imports created the bearish result seen in the report. As mentioned in yesterday’s newsletter crude oil stocks in floating storage are in a destocking pattern and with OPEC compliance rates at the lowest level since they embarked on a reduced production strategy (back to September 2008) it is no surprise that crude oil imports are slowly rising…as evidenced in today’s API report. If the EIA data is in sync with the API report it would result in the year over year deficit narrowing strongly to just 6.1 million barrels while the overhang versus the five year average for the same week will surge to over 20 million barrels. Not overly bullish.

Refined product inventories in the API report were mixed with gasoline stocks declining by less than 100,000 barrels on the week or less than the expectations while distillate fuel stocks fell by about 2.5 million barrels or significantly more than any of the expectations. If the EIA data is in line with the API report the gasoline surplus versus both last year and the five year average for the same week will grow. A growing surplus of gasoline is the opposite of what the industry needs to occur if they expect to see refinery margins regain much of the lost ground that has occurred during the recession. Even with refinery utilization rates off by 0.5% the API reported only a very small decline in gasoline stocks. A bump up in gasoline imports more than offset the reduced production due to cuts in run rates.

Projections

3/24/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

7.5

1.0

(11.6)

15.9

Gasoline

(0.1)

(0.9)

11.8

7.1

Distillate

(2.5)

(0.6)

3.6

26.6

Ref. Runs%

-0.5%

-0.1%

-1.6%

-5.6%

Change Level

80.8%

80.5%

82.0%

86.0%

On the other hand distillate fuel stocks declined by about 2.5 million barrels versus projections for build of about 600,000 barrels. If the EIA data shows a similar result the year over year surplus will narrow to just 1.5 million barrels or the lowest level (versus a comparison to the prior period) in well over a year. The overhang versus the five year average for the same week would also narrow to under 25 million barrels. With relatively mild winter weather last week a significant portion of the distillate fuel decline most likely was a result of another increase in economy sensitive diesel fuel demand. We will be looking closely at Wednesday’s EIA data for conformation.

Overall I categorize this week’s API report as biased to the bearish side as the huge build in crude oil and smaller than expected decline in gasoline stocks more than offset the larger than expected decline in distillate fuel inventories...especially with the winter heating season now over. The market reaction to the API report was mostly muted as most participants have learned that often times the API and EIA data are out of sync. The only reaction that was evident shortly after the data was released late Tuesday afternoon was a firming of HO relative to both RBOB and WTI. The API result is a warning sign that the short HO/long RBOB spread we have recommended could retrace a bit today especially if the EIA refined product inventory results are in line with the API. On the other hand there was nothing in the API report to change my current view on the short WTI/long Brent spread.

Nat Gas prices staged a modest short covering rally increasing about 1.1% on the day as it followed oil and equities to higher ground. Nat Gas remains in a downtrend as prices have declined 17 out of the last 26 trading session as the value of the spot contract has depreciated about $1.7/mmbtu or 30% across the heart of the winter heating season (from mid Jan until today). I can’t think a more bearish validation by the market than for a key heating fuel to decline throughout most of the main part of the heating season during a winter that was mostly colder than normal. It drives home the impact of a commodity that is oversupplied on all fronts.

Nat Gas prices continue to be driven by weather and inventories in a backdrop of bearish fundamentals. The latest forecast for this week’s EIA Nat Gas report is surprisingly looking for a modest injection into inventory of about 10 to 15 BCF. This is a bit early for Nat Gas to switch into an injection mode but with the weather relatively mild and production churning away it may not be such a big surprise. Last year and the five year average both showed a modest decline in stocks for the same week. I would categorize this week’s forecast as another bearish point for Nat Gas. I see nothing that would change my bearish view in the short term. Even the weather forecast has moved back into projecting major pockets of above normal temperatures for the next several weeks in the US.

I am leaving my individual market views the same for today as detailed in the table at the beginning the newsletter. I remain of the opinion that equities are a bit overdone, the dollar is likely to remain firm until the EU comes to a decision on Greece and the current oil and Nat Gas fundamentals continue to be bearish. This suggests that oil prices may struggle trying to breach the upper end of its trading range (around $83.95/bbl) while Nat Gas may have little resistance to testing the next support level of $4/mmbtu. Most of the markets we follow are in transition and are likely to continue to remain in this mode for at least the short term. Data coming out of China over the last few days has been supportive for oil while the economic data coming from the west suggests the economic recovery is still on track. So even though the financial and oil markets are trading at levels that suggest a downside correction may be looming it could be some time before it occurs. Remain cautious in all flat price trading as price reversals can occur at any time on little new data.

The following table summarizes the prices around 6 PM EST as I am publishing Wednesday morning’s report on Tuesday evening.

Current Expected Trading Range

Expected Trading Range

3/24/10

Change

Low

High End

From

End Support

Resistance

6:27 AM

Yesterday

Apr WTI

$81.25

$0.57

$81.25

$83.00

May Brent

$80.80

$0.92

$79.50

$81.75

Apr HO

$2.0837

$0.0108

$2.0750

$2.1400

Apr RBOB

$2.2562

$0.0056

$2.2300

$2.3200

Apr NG

$4.079

($0.054)

$4.155

$4.600

Dow Futures

10,731

4

10,400

10,800

US Dollar Index

80.78

(0.195)

78.850

81.000

Euro/$

1.3559

0.0023

1.3450

1.3775

Yen/$

1.1103

0.0046

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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Email info@energyinstitution.org

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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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