Weekly energy inventory report preview

“We give advice by the bucket, but take it by the grain.”

William R. Alger

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

N

N

N

CBr

US Dollar

Cbr

Cbr

Cbr

Cbr

Global Equities

CBu

CBu

CBu

CBu

10 Yr Treasuries

Cbr

Cbr

Cbr

Cbr

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 fed as the economic news coming from the three major areas of the world (Asia, US & Europe) have been favorable so far this week. This has kept the majority of the bears on the sidelines but it has not resulted in a rush to buying in any of the major markets we follow. The gains this week have been modest with activity seemingly a bit below normal as many players begin to spruce up their books for first quarter ending results coupled with many players starting to head to the sidelines for the Good Friday and Easter holiday weekend. That said oil is now only about $1 per barrel below a test of the 2010 high of $83.95, a point that could signal a new trading range for oil if it is breached strongly.

The main driver for oil prices this week has been the financials with the U.S. dollar a bit weaker (the euro firmer) and most global equity markets higher on the positive economic data. The major economic data event of the week will be the U.S. non-farm payroll number schedule to be released on Friday morning (when most financial markets will be closed in observance of Good Friday. This morning EU economic data hit the market. First the latest inflation data for the EU spiked to 1.5% versus 0.9% in February, above the expectations for an increase to 1.2%. Growing inflation exposure is a positive for the euro as it suggest that the ECB could be forced to raise interest sooner than expected. On the other hand the latest EU unemployment rate rose to 10% from the previous month’s 9.9%. This is the highest unemployment level in the EU since August of 1998. Today’s unemployment rate was within the market expectations. Separately Germany — the economic powerhouse in the EU — reported a decline in its unemployment rate to 8.5% for March versus 8.7% in February.

A mixed employment picture in Europe and one that highlights the difficult situation the European Central Bank is going to have as they look at inflation creeping higher but the overall employment picture in the total EU still growing. Raising interest rates to mitigate the impact of inflation could quickly result in a slowing of the EU recovery and thus further employment problems going forward. On one hand this morning data out of Europe is somewhat positive for the euro, negative for the U.S. dollar and thus positive for oil prices. But on the other hand I think the data is not completing enough to suggest that the ECB is going to raise interest rates in the short term (especially before the U.S. Central bank begins to raise rates in the US). Thus this morning’s firming of the euro may not be sustainable in the short term.

This morning the first shot at what the U.S. employment situation was in March hits the media airwaves when ADP releases their latest job survey. The market is expecting the ADP data to show companies added about 40,000 jobs in March or the most since December of 2007. The market will react to this data as participants position themselves for Friday’s non-farm payroll number which is expected to show job gains of about 190,000 to 200,000 jobs or the highest level in about three years. If the expectations are met for employment gains (even though a major portion of the non-farm payroll number will be reflective of temporary census worker jobs added) it will be a positive for the U.S. dollar and will likely negate the gains in the euro so far this week. If so a positive or bullish jobs number can quickly turn out to be a negative for oil prices (if the USD firms as well as for equities) if the market perceives this is a signal that will result in the Fed beginning to raise short term interest rates sooner than expected.

Equities have progressed well this week as evidenced by the gains in the EMI Global Equity Index (table shown below). The Index has increased by about 1.3% for the week bringing the year to date gain to 1.8%. As the quarter closed in Asia both China and Hong Kong not only remain at the bottom of the list of bourses in the Index but it is the first time in a very long time that both of these markets ended negatively for a quarter. In spite of Japan still muddled in a deflation state it’s bourse topped the list as of this morning ending the quarter with a gain of 5.2%. Both the United States and London are not far behind Japan and depending on the rest of today’s trading activity which could result in either of these markets taking over the top spot. Global equities have been supportive for oil prices this week ( so far).

EMI Global Equity Index

3/31/10

Change

Change

2010 YTD

2010

From

From

Change

7:31 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,907

12

0.11%

4.6%

Can/S&P-TSX

12,044

14

0.12%

2.5%

Lon/FTSE

5,672

(38)

-0.67%

4.8%

Paris/Cac 40

3,989

2

0.04%

1.3%

Germany/Dax

6,151

8

0.14%

3.2%

Japan/Nikkei

11,097

111

1.01%

5.2%

HongKong/HangSeng

21,375

137

0.65%

-2.3%

Aussie/SYDI

4,927

20

0.40%

0.9%

China/Shanghai A

3,280

5

0.15%

-4.6%

Brazil/Bvspa

69,960

20

0.03%

2.0%

EMI Global Equity Index

14,940

29

0.2%

1.8%

Later this morning investor/traders will get another snapshot of the condition of oil U.S. fundamentals when the EIA releases their inventory report. The inventory picture has been improving on the refined product side but has deteriorated a bit on the crude oil front. The market is currently looking for any signs that the fundamentals are slowly becoming more reflective of what the economic data and the performance of the equity markets are suggesting, a recovering economy eventually beginning to translate into an increase in oil demand. Yesterday afternoon the API released a mildly supportive report. The following table summarizes the API results along with my projections for the EIA report and a comparison to last year and the five-year average for the same week.

Projections

3/31/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

0.4

1.5

(6.7)

23.1

Gasoline

(0.9)

(0.5)

7.3

6.7

Distillate

(1.0)

(0.8)

0.7

25.5

Ref. Runs%

1.3%

0.1%

-0.5%

-4.6%

Change Level

82.1%

81.2%

81.7%

85.8%

The API reported a smaller than expected build in crude oil stocks of about 400,000 barrels as imports declined almost 300,000 barrels per day. If the EIA report is in line with the API data (it was for the most part last week for crude oil) the year over year deficit will widen to almost 8 million barrels while the overhang vs. the five-year average for the same week will narrow to about 22 million barrels. The API reported a big jump in refinery utilization rates of 1.3% resulting in an increase in refinery demand for crude oil. The combination of increased refinery demand and lower imports kept this week’s storage build at below expected levels. Although the API reported a strong crude oil stock build in PADD 2, Cushing stocks declined modestly on the week. If this is confirmed by the EIA it could be a negative for our short WTI/long Brent spread. In fact the spread is also approaching a technical reversal level at around $1.25/bbl (premium to WTI) that would suggest going flat and possibly reversing the direction of the trade. Look closely at today’s EIA data and the market reaction. In the meantime for those still in the trade your stop should be placed marginally above the technical resistance level mentioned above.

The outcome of refined product inventories in the API was supportive of the aforementioned theory of economic recovery translating to an increase in oil demand. Both gasoline and distillate fuel stocks declined a bit more than the projections in spite of a big increase in refinery utilization rates. Gasoline stocks declined about 900,000 barrels and if the EIA data is in sync it would narrow the year over year surplus to a tad under 7 million barrels with the five year overhang moving closer to the 6 million barrel mark. The API data suggests that implied gasoline demand may have risen a bit on the week. However, the latest MasterCard data did not show an increase in demand. MasterCard’s demand data...a measure of gasoline demand based on purchases of retail gasoline at the pump... declined by 1.3% to 9.531 million barrels per day for the same timeframe as both the EIA and API reports are based on. Gasoline demand has been recovering at a snail’s pace versus distillate fuel and will likely continue at this pace until the employment situation in the US improves significantly.

The API reported a decline of about 1 million barrels of distillate inventories or marginally above the expectations. As mentioned above economy sensitive diesel fuel demand has been in a recovery pattern since about the middle of last year. This week’s API data suggests that the recovery pattern is still in place especially with a strong increase in supply as a result of the 1.3% increase in refinery runs and only limited heating fuel demand last week. The switch to the long HO/short RBOB spread continued to be supported by last night’s API data. The spread has been firming (in favor of HO) since breaking out of its technical resistance level about a week ago. I continue to favor the spread from the long HO side.

As mentioned last week Nat Gas will go through bouts of short covering as it has done over the last several trading sessions. The new front month May contract is starting its last month of existence at slightly above the $4/mmbtu level. However, life above this level is going to be difficult and directly dependent on how the fundamentals evolve over the next few weeks. The industry is currently expecting a build of about 10 to 40 BCF with the consensus calling for a build of around the 20 BCF level. As mentioned in previous newsletters the inventory building season for Nat Gas has started a little early this year which has added to the bearish sentiment in the market place. With the weather continuing to warm in most areas of the US and with inventories off to an early start to building I remain bearish for Nat Gas in the short to even medium term.

My individual market views are detailed in the table at the beginning of the report. My overall view and bias is neutral for oil with the deciding issue in the short term being if WTI can solidly breach the $83.95/bbl resistance level or not. The ability to do this or not will depend on a combination of today’s EIA inventory report and even more importantly on the US jobs picture on Friday (with some indication coming from this morning’s 8:15 am EST ADP job report). Today is expiration day for the spot Nymex refined product contracts so that should add a bit more volatility to the equation. The momentum is marginally biased to the upside for oil at the moment but it is not so strong as to preclude a price reversal at any time if any of the data events discussed in this morning newsletter are bearish.

Currently prices are mostly firm with the exception of the US dollar and the Dow.

Current Expected Trading Range

Expected Trading Range

3/31/10

Change

Low

High End

From

End Support

Resistance

7:32 AM

Yesterday

May WTI

$82.92

$0.55

$79.00

$83.95

May Brent

$81.78

$0.50

$77.00

$82.90

Apr HO

$2.1378

$0.0131

$2.0250

$2.1400

Apr RBOB

$2.2829

$0.0082

$2.2000

$2.3000

May NG

$4.056

$0.083

$3.450

$4.320

10 YR Treasuries

115.98

0.05

114.11

116.59

Dow Futures

10,843

(11)

10,600

10,900

US Dollar Index

81.425

(0.313)

80.250

83.500

Euro/$

1.3483

0.0062

1.2990

1.3500

Yen/$

1.0716

(0.0062)

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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