Energy inventory report preview

“Success is just a matter of attitude.”

Darcy E. Gibbons

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

N

N

N

CBr

Overall View

N

N

N

CBr

Bias

N

N

N

N

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

CBr - Cautiously Bearish

Yesterday was a volatile day in both the oil and natural gas markets as the intraday trading range was extremely wide for both commodities. Oil started the day deeply in negative territory after a bearish monthly oil report released by the IEA coupled with a firmer dollar and mostly weaker equity markets. As the day progressed oil bottomed out, the dollar revered and U.S. equities erased all of their morning losses and moved into positive territory. That was enough to move oil into positive territory only to end the day with marginal losses. Nat gas experienced another round of short covering and for the first time in a while it was able to hold onto the gains right through the close. As we have discussed oil is not as strongly linked to the financials as it was just a few weeks ago. We are now going through periods of time when oil participants pay a bit more attention to the fundamentals.

This morning is not one of those times that the market is reacting to the latest fundamentals as both last night’s API inventory report and this morning OPEC monthly oil assessment were both biased to the bearish side. Even with the U.S. dollar marginally lower and equities only slightly positive oil is up by over 1%. For the moment oil is back to focusing on the financials. WTI is now once again trading above the breakout level and if the current level is maintained we could get a technical boost to the next price plateau in the short to medium term.

On the equity front global stock values have been mixed this week as shown by the EMI Global Equity Index table below. On the week the Index has lost about 0.5% dropping the year to date gains to 3.3%. China remains at the bottom of the list with London still holding on to the top spot. In general, the developed world markets continue to outperform the emerging markets. The likelihood of emerging market countries raising short term interest rates ahead of the developed world is the primary reason why the global markets are performing the way they are. Emerging markets are recovering from the recession at a brisk pace as compared to the sluggish growth from OECD nations. In fact tomorrow China will release their latest GDP number for the first quarter with the consensus expecting a double digit level of 11.5%.

EMI Global Equity Index

4/14/10

Change

Change

2010 YTD

2010

From

From

Change

8:18 AM

Yesterday

Yesterday %

%

US/Dow Jones

11,019

13

0.12%

5.7%

Can/S&P-TSX

12,102

(47)

-0.39%

3.0%

Lon/FTSE

5,762

(16)

-0.28%

6.4%

Paris/Cac 40

4,062

30

0.76%

3.2%

Germany/Dax

6,277

46

0.75%

5.4%

Japan/Nikkei

11,205

44

0.39%

6.2%

HongKong/HangSeng

22,121

18

0.08%

1.1%

Aussie/SYDI

5,018

39

0.79%

2.8%

China/Shanghai A

3,320

5

0.16%

-3.4%

Brazil/Bvspa

70,792

178

0.25%

3.2%

EMI Global Equity Index

15,168

31

0.3%

3.3%

If the actual data comes in as forecast it would be the largest year over year growth since the second half of 2007. Needless to say China’s economy is on fire compared to the United States and EU region. It is not will China raise short term interest rates, it is only when will it occur. Many think it will coincide with China allowing its currency to move higher. I believe China will likely raise rates at least three times in 2010 as they begin a more focused effort to mitigate the potential for inflation and new bubbles. With the majority of the projected oil demand growth coming from non-OECD Asia a slowing of China’s economy could result in the current oil oversupply situation remaining in place for a longer period of time than currently projected.

In fact one of OPEC’s concerns in their latest oil report (just released) is demand growth for 2010 and whether or not it will perform as projected. The majority of the conclusions from the OPEC report are pretty much in line with the EIA and IEA reports.

OPEC did not change its forecast for oil demand growth for 2010 versus last month’s report. They highlighted that economic optimism is driving oil price momentum. The combination of a steady stream of positive macroeconomic indicators and a manufacturing led recovery in the US has lifted the overall market sentiment. The positive sentiment has boosted investment flows into both equities and commodities...in particular oil. OPEC highlighted in the report that on the Nymex, speculators, as reflected by money manager activity, have extended net long positions in crude oil futures to a record high. OPEC has long been critical of speculative activity in oil markets and blamed speculators for rising oil prices, especially during period when supply is plentiful, like the current timeframe. They gave no indication of any changes in their production strategy.

Speaking of bearish fundamentals the API released their latest inventory snapshot which showed across the board build in everything and another increase in refinery runs. The API results are shown in the following table along with my projections and a comparison to last year and the five year average assuming the EIA data is in line with the projections. Not only did the API report across the board build they were all larger than forecast with a big reversal in gasoline. The API showed a crude oil build of about 1.4 million barrels even though refinery demand increased a bit and imports declined by over 700,000 bpd. The majority of the crude oil build was in PADD2 and Cushing, Ok suggesting that the short WTI/long Brent spread should continue to perform if the EIA data is in line with the API.

Projections

4/14/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

1.4

1.1

(9.5)

21.5

Gasoline

1.6

(0.6)

5.3

12.8

Distillate

1.7

1.0

7.1

29.4

Ref. Runs%

0.1%

0.2%

4.3%

-1.2%

Change Level

84.8%

84.7%

80.4%

85.9%

Refined products were even more bearish than crude oil in the API report in that everyone (including myself) were projecting a normal seasonal decline in gasoline stocks. The API showed a large atypical build for this time of the year of 1.6 million barrels. If the EIA data is in line it would widen the overhang versus last year to about 7.5 million barrels while the surplus versus the five-year average for the same week would increase to about 15 million barrels. It also suggests that demand is still tepid and is likely to remain tepid as long as the employment situation in the US does not improve significantly. Distillate fuel built almost twice as much as projected suggesting that the current early to start HO building season is more likely to follow the path of 2009 rather than the five year average. If so the market could be in for another year of record high distillate stocks heading into the next winter heating season.

Another bearish snapshot and yet oil prices are firm across the board this morning. Investor/traders are back to discounting the current fundamentals and investing cash into what the fundamentals might be down the road. This has been the main momentum driver supporting oil and many other commodity prices throughout the rally that has been in place for a little over a year now. How much higher or how much longer economic optimism (if I can use OPEC’s terminology) can carry oil prices is still an unknown. In trying to assess this point I like to refer back to the so called day when everything went from bad to disastrous...September 15...the day Lehman filed for Chapter 11 bankruptcy. At that point everyone in the world began to sell anything that had the word asset in its description. As shown in the following table many assets may be higher but some are still below where they were on Sep 15th. Most equity markets have now fully recovered with emerging markets like China beyond recovery mode and well into growth mode. This stellar recovery in equities has fed the economic optimism as equity markets correlate well with economic growth as measured by GDP. That said energy prices are still below the levels they were at on Lehman day with Nat Gas still down over 40%. Finally inventories remain above where they were and demand is still not fully recovered so another data point that suggests investor/traders are focused on the forward fundamental scenario and discounting the current balances.

Select Market Performance Since Lehman Bankruptcy Filing - 9/15/08

Lehman Bankruptcy

Today

Change

Change

9/15/2008

4/14/2010

Value

%

Dow Jones Index

10,959

11,019

60

0.6%

SP 500 Index

1,195

1,199

4

0.3%

China Shanghai A Shares

2,179

3,320

1,141

52.4%

EMI Global Equity Index

13,643

15,168

1,525

11.2%

Euro/$

1.4222

1.3621

-0.0601

-4.2%

Yen/$

0.9451

1.0693

0.1242

13.1%

Spot WTI -$/bbl

$95.71

$84.71

($11.00)

-11.5%

Spot Brent - $/bbl

$92.31

$85.49

($6.82)

-7.4%

Spot Dubai - $/bbl

$92.04

$83.44

($8.60)

-9.3%

Spot Nat Gas - $/mmbtu

$7.374

$4.175

($3.199)

-43.4%

Tot US Com. Stocks, 000 bbls

962,673

1,049,554

86,881

9.0%

Tot US Imp Demand -000 bpd

19,049

18,907

(142)

-0.7%

Tomorrow the EIA will release the latest snapshot of Nat gas inventories. Much like oil the current fundamentals are bearish and after tomorrow’s report they are likely to remain bearish. The latest consensus is calling for an injection level of between 65 to 70 BCF. If the actual data comes in within the projected range it would strongly exceed last year’s injection level of just 21 BCF as well as the five year average for the same week. Nat Gas stocks continue to be following pretty much the same injection path as last year with all signs still pointing to record high inventory levels heading into the upcoming winter heating season.

About the only positive thing I can say about Nat Gas is it is not likely to completely collapse from the current level as industrial/commercial demand is likely to start picking up as the US economic recovery continues. It is time to watch the action of the commercial sector as hedgers and buyers tend to normally lead commodity markets higher. The way Nat Gas has been trading over the last week or so it seems that each time we drop below the $4/mmbtu level a short covering rally follows and possibly some new buying may be emerging. Although I remain bearish Nat Gas I think we are approaching a level of activity that suggests strong downside moves are less likely than an upward recovery. I am now starting to think that Nat gas may spend more time in the upper end of its trading range rather than the lower end. Time to be cautions if you are playing the market from the short side. Buy side hedgers may want to consider embarking on a hedging program for small portions of their forward requirements.

My individual market views are detailed in the table at the beginning of the newsletter. I left everything the same for oil but upgraded my bias for Nat Gas to neutral for the reasons mentioned above. Currently everything in the EMI price board is firming except for the US dollar.

Current Expected Trading Range

Expected Trading Range

4/14/10

Change

Low

High End

From

End Support

Resistance

8:20 AM

Yesterday

May WTI

$84.87

$0.82

$79.00

$86.00

May Brent

$85.49

$0.77

$77.00

$86.50

May HO

$2.2271

$0.0129

$2.0250

$2.3000

May RBOB

$2.3140

$0.0047

$2.2000

$2.3500

May NG

$4.175

$0.015

$3.450

$4.320

10 YR Treasuries

116.41

(0.17)

114.11

116.59

Dow Futures

11,010

47

10,600

11,700

US Dollar Index

80.48

(0.145)

80.250

83.500

Euro/$

1.3621

0.0025

1.2990

1.3850

Yen/$

1.0693

(0.0045)

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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