Energy inventory report preview

“Live the life you love to live.”

Anil Gupta

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

N

N

CBr

US Dollar

CBu

CBu

CBu

CBu

Global Equities

CBu

CBu

CBu

CBu

10 Yr Treasuries

Cbr

Cbr

Cbr

Cbr

Geopolitics

CBu

CBu

CBu

CBu

Technicals

CBu

CBu

CBu

CBr

Market Sentiment

CBu

CBu

CBu

CBr

Overall View

CBu

CBu

CBu

CBr

Bias

CBu

CBu

CBu

CBr

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

CBr - Cautiously Bearish

The oil complex traded either side of unchanged for most of the session with crude oil ending the day with a modest gain as investor/traders await this morning’s EIA data. The financial markets put in a mixed session with the dollar gaining ground and equities hovering near the unchanged mark in the U.S. The main piece of economic information came in the form of the minutes from the last U.S. Fed FOMC meeting. Participants scrutinized the writings of the Fed focusing on the Fed’s statement on their policy of low interest rates. They continued to state that low rates will be in place for an extended period of time but is contingent on the economy and they would take action to keep inflation in check if needed. That said they also saw a slowdown in inflation across the U.S. economy that could remain the pattern for the foreseeable future thus minimizing any need to deviate from their low interest policy anytime soon.

In addition the low inflation environment coupled with a high unemployment rate should provide for an accommodative monetary policy at least for several more months (or even more). The scenario looks like it will remain one of low rates and minimal intervention by the Fed until there are much more definitive signs that the U.S. economy is in a full blown expansion. I believe the most important piece of data the Fed will be looking at is the unemployment level. Until that improves strongly and is clearly in a sustainable trend of jobs growth the Fed is going to be slow to pull the trigger on increasing rates…unless of course the current inflation outlook changes. For now the stage remains positive for equities and neutral to weaker for the US dollar. Since oil prices have slowly been decoupling themselves from the direction of the dollar the main oil driver has been the direction of equities. As such the current stage remains supportive for higher oil prices going forward.

Oil prices going forward also remains contingent on what OPEC does insofar as putting more oil into the market to stabilize prices (always a goal of Saudi Arabia) now that crude oil has clearly broken out of the $70 to $80/bbl trading range. In addition the perception traders will continue to look for signs energy demand is growing as the economy recovers. Yesterday we saw the first of the three recurring monthly oil forecasting reports with the release of the EIA Short Term Energy Outlook. In spite of the positive economic data that has been hitting the media airwaves of late the EIA did not make any material changes to their global oil demand growth forecast for 2010. In fact this month’s number is marginally lower than what was forecast last month. Following are the main highlights from this month’s report.

Crude Oil and Liquid Fuels Overview: EIA's assessment of world oil markets is largely unchanged from last month's Outlook, and world oil prices will likely continue to firm and increase slightly in response to the global economic recovery. As long as the global economy continues to recover, and the Organization of the Petroleum Exporting Countries (OPEC) remains satisfied with its constrained supply targets, global oil markets should remain in this situation. Major uncertainties include the pace of global economic recovery and the extent to which the largest economies continue their stimulus and other economic policies.

Global Crude Oil and Liquid Fuels Consumption EIA projects that world oil consumption will grow by 1.5 million barrels per day (bbl/d) in 2010 and 1.6 million bbl/d in 2011, similar to the forecast of last month. This growth is the result of an expected recovery in the global economy, with world gross domestic product (GDP, on an oil-weighted basis) assumed to rise by more than 3 percent per year. EIA has revised its assessment for Asia upwards and Europe downwards for 2010 in response to preliminary first-quarter data for those regions. Most of the growth in oil consumption is expected in the Asia-Pacific and Middle East regions.

Non-OPEC Supply: Non-OPEC supply is projected to increase by 600,000 bbl/d in 2010, about 50,000 bbl/d more than last month's Outlook, because of a revised forecast for production in North America. Non-OPEC supplies are then expected to fall slightly in 2011, as declining production in mature areas more than offsets any new production growth. The largest source of growth in 2010 is the United States, followed by Brazil, Azerbaijan, and Kazakhstan. Offsetting this projected supply growth in 2010 are further declines in mature fields in Mexico, the United Kingdom, and Norway.

OPEC Supply: OPEC left its production policy unchanged at its last meeting in Vienna on March 17, 2010, and is not scheduled to meet again until October 14 to review its crude oil production targets. EIA projects that OPEC production of crude oil will increase by 0.3 million bbl/d in 2010, primarily in Angola and Nigeria. However, OPEC production of non-crude petroleum liquids, which are not subject to OPEC production targets, are expected to increase by 0.6 million bbl/d in 2010 and 0.7 million bbl/d in 2011. Overall, EIA also projects a slight increase in OPEC surplus crude oil production capacity through 2011 from first-quarter 2010 levels

OECD Petroleum Inventories: EIA estimates that commercial oil inventories held in the Organization for Economic Cooperation and Development (OECD) countries stood at 2.67 billion barrels at the end of the first quarter of 2010. This level is equivalent to about 58 days of forward cover, and is about 69 million barrels more than the previous 5-year average for the corresponding time of year. Although OECD oil inventories are still projected to remain at the upper end of the historical range over the forecast period, they are falling as a result of higher oil consumption and OPEC production restraint.

U.S. Natural Gas Inventories: On March 26, 2010, working natural gas in storage was 1,638 Bcf, 160 Bcf above the previous 5-year average (2005-2009) and 16 Bcf below the level during the corresponding week last year. Warmer-than-normal weather in March (HDDs were 10 percent below the 30-year normal for the month) contributed to an estimated monthly storage withdrawal of about 49 Bcf, or around 116 Bcf below the previous 5-year average for the month. Natural gas stocks at the end of March (the end of the withdrawal season) are estimated to be 1,656 Bcf, an amount comparable to stocks at the end of March last year. EIA expects continued production strength to contribute to high inventories again this fall. The current forecast for the end of October is 3,771 Bcf, only slightly below the record storage volume reached last fall. The forecast injection of 2,063 Bcf between March and November is about 5 percent below the stock build that occurred over the corresponding period last year, but it is more than 6 percent above the previous 5-year average.

Overall I view the EIA STEO report as neutral with little market reaction after the report was released mid-day yesterday. Today the EIA will release their latest oil inventory snapshot. The API released their inventory report yesterday afternoon and as usual it was full of surprises. The API data are summarized in the following table. As shown crude oil inventories built about 1.1 million barrels which was right in line with my projection but below the market consensus. On the other hand gasoline stocks declined about 3 million barrels which was well above my projection as well as the consensus. Distillate stocks actually built as compared to everyone forecasting another decline in stocks. Refinery utilization rates surged another 2.6% pushing run rates above last year at this time.

Projections

4/7/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

1.1

1.0

(5.9)

20.5

Gasoline

(3.0)

(0.8)

6.6

12.3

Distillate

0.7

(1.2)

2.6

27.3

Ref. Runs%

2.6%

0.1%

0.9%

-3.8%

Change Level

84.7%

82.7%

81.8%

86.5%

The API report was interesting but as we all know often times the API report is not in line with what the EIA data shows. Thus there has been only a minimal reaction to the API report. Oil prices are on the defensive so far this morning and the only clear impact of the API report has been a weakening of HO versus RBOB. In fact it may be an early warning signal for those that remain in the long HO/RBOB spread we recommended several weeks ago. HO has appreciated about $0.06/gal since our recommendation and is a bit overdue for a correction. If the EIA data is in sync with the API refined products inventory data HO should loses value versus gasoline. Work with tight stops coming into today’s trading session and pay close attention to the EIA data. I would categorize last night’s API report as neutral to marginally bearish. However, the EIA report will set the current fundamental stage for today’s trading.

As expected Nat Gas prices moved back into a defensive posture on Tuesday after a few days of short covering. Yesterday’s EIA Short Term Energy Outlook lowered its price forecast for Nat Gas for 2010 versus what they forecast last month. As I have been saying for months Nat Gas is bearish and remains bearish for the short to medium term. Tomorrow’s Nat Gas inventory report is likely to add to the bearish sentiment as the projected build in inventories of around 30 BCF is greater than both last years and the five year average injection level. In fact at the rate of injections that are forecast the EIA is projecting the inventory level for the start of next winter’s heating season to be very near the record high inventory level at the start of this past winter heating season…not a very bullish scenario. I remain bearish Nat Gas.

My individual market views are detailed in the table at the beginning of the newsletter. The stage continues to be favorable for further gains in equities and commodities in general…including oil. The direction of the dollar is less clear at the moment. That said oil prices are becoming more and more susceptible to a downside correction. Watch for any formal comments coming from the Saudi’s regarding the current high oil price environment and certainly pay close attention to this morning’s inventory report. I continue to suggest working with tight, trailing stops for all flat prices trades.

Currently most markets in the EMI Price Board are starting today’s trading session in negative territory.

Current Expected Trading Range

Expected Trading Range

4/7/10

Change

Low

High End

From

End Support

Resistance

6:09 AM

Yesterday

May WTI

$86.59

($0.25)

$79.00

$83.95

May Brent

$86.07

($0.08)

$77.00

$82.90

May HO

$2.2600

($0.0083)

$2.0250

$2.1400

May RBOB

$2.3448

($0.0035)

$2.2000

$2.3000

May NG

$4.116

$0.020

$3.450

$4.320

10 YR Treasuries

115.44

0.22

114.11

116.59

Dow Futures

10,902

(11)

10,600

10,900

US Dollar Index

81.62

0.050

80.250

83.500

Euro/$

1.3386

(0.0008)

1.2990

1.3500

Yen/$

1.0646

(0.0007)

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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