Energy inventory report preview

“Anything that comes easy, comes wrong.”

Josephine Tessier

EMI QuickView Short Term Market Overview

Impact on Energy Prices

Price Drivers

Crude

Gasoline

HO/Diesel

Nat Gas

Supply

Cbr

Cbr

Cbr

CBr

Demand

N

N

N

N

Inventories

Cbr

Cbr

Cbr

CBr

US Dollar

Cbr

Cbr

Cbr

Cbr

Global Equities

Cbr

Cbr

Cbr

Cbr

10 Yr Treasuries

N

N

N

N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

Cbr

Cbr

Cbr

N

Market Sentiment

Cbr

Cbr

Cbr

N

Overall View

Cbr

Cbr

Cbr

N

Bias

Cbr

Cbr

Cbr

N

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

CBr - Cautiously Bearish

Yesterday was another one of those good old fashioned fire sale days in risky asset classes that seems to be happening too frequently in 2010. Pretty much everything with the word asset in it was up for sale as equities, most currencies (except for the US dollar) and commodities all lost significant value (2 to 4% depending on the asset) as fears of contagion from the still unresolved Greek debt crisis swept around the market. By the end of the day oil prices were a lot less overvalued than they were just a few days ago as prices are now approaching that $70 to $80/bbl trading range that was in place for months until the last upside breakout which occurred around March of this year. There are many non-financial reasons why oil and other commodities were hit with a strong round of selling yesterday but the single biggest bearish driver is the risk aversion mentality that is overtaking the market as a result of the ongoing Greek sovereign debt saga and the possibility of it spreading to other weak states in the Eurozone.

The EU leadership has done a poor job in solving this crisis suggesting to me that the whole concept of a single currency among many diverse countries may not turn out to be such a great idea for the future. The whole concept of bailouts whether in Europe or in the US has not been embraced by the populace. However, unlike the EU the US moved swiftly with an unpopular TARP program shortly after the collapse of Lehman Brothers resulting in a stabilization of the evolving private banking crisis and ultimately contributing to moving the US economic into a recovery mode about 4 to 5 months after TARP was implemented. TARP coupled with an aggressive Quantitative Easing Program and other monetary measures all contributed to eliminating what might have been a major collapse of the global banking system.

The sovereign debt issues in Europe are not much different from the private sector problems of last year. However, the EU has wasted months debating the issue and even as of this writing it is still unclear as to whether or not the kingpin in the whole bailout process...Germany...will even approve the package. It will be debated and voted on at the end of this week. With elections coming up in Germany in the short term and the Greece bailout package being very unpopular among the people of Germany it is not a given that it will be approved by the Germans. Without Germany’s support there is no near term resolution to the problem and as such the possibility exists that the whole single currency system can begin to fall like a house of cards. I still do not think that the EU membership will allow Greece to default as there is way too much at risk at this point including a massive downward spiral in the EU economy.

The lack of conviction on the part of the EU in solving the problem quickly has completely shattered the confidence of investor/traders around the globe as fear becomes the main emotion driving asset prices in trading arenas in all regions of the world. Until there is a believable and unified resolution to Greece and a belief that the problems in Greece will not spread to Spain, Portugal, Ireland and Italy (all countries with varying degrees of debt problems) asset prices will be capped and the likelihood of a major recovery rally may not evolve as quickly as many participants would hope for. The declines in equities and commodities in 2008 and into early 2009 was a result in fear that the financial crisis in the private sector might push the global economy into a depression greater and longer than the great depression of 1929. The public sector problems in Europe are now creating similar fears that a default by Greece or a spreading of the problem around Europe and elsewhere could result in pushing the global economy back into a massive downturn thus derailing the fragile global economic recovery experienced so far.

The EU needs to step up quickly and decisively and be done with the Greek bailout program and possibly look at entering into an aggressive Quantitative Easing Program so as to keep longer term yields at reasonably low levels until the risk premium in some of the debt issues in Europe starts to dissipate. If they do not I believe global equity markets will experience a significant downside correction (well beyond what we have seen so far ) and this will spread into oil and other commodities as the developed world in particular becomes susceptible to a major slowing of the economic recovery.

The EMI Global Equity Index (table shown below) has continued to lose value as the fear factor spreads from Europe. Over the last twenty four hours the EMI Index lost 1.2% and is now down 2.6% on the week and 3% year to date. Half of the bourses in the Index are now in negative territory for the year with the UK just about ready to enter negative territory. The US and Japan jointly hold the top spot in the Index with a YTD gain of 4.8%. With tightening continuing in non-OECD regions...in particular Asia... coupled with the evolving situation in Europe the entire global equity environment may be in for further losses before one can expect a recovery rally. I do not see equities providing any support for oil prices or the broader commodity market anytime soon.

EMI Global Equity Index

5/5/10

Change

Change

2010 YTD

2010

From

From

Change

7:32 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,927

(225)

-2.02%

4.8%

Can/S&P-TSX

12,031

(166)

-1.36%

2.4%

Lon/FTSE

5,411

(142)

-2.56%

0.0%

Paris/Cac 40

3,684

(6)

-0.15%

-6.4%

Germany/Dax

6,000

(6)

-0.11%

0.7%

Japan/Nikkei

11,057

133

1.21%

4.8%

HongKong/HangSeng

20,763

(48)

-0.23%

-5.1%

Aussie/SYDI

4,753

(54)

-1.12%

-2.7%

China/Shanghai A

2,972

(37)

-1.23%

-13.5%

Brazil/Bvspa

64,869

(2,250)

-3.35%

-5.4%

EMI Global Equity Index

14,247

(280)

-1.93%

-3.0%

The rush to safety as risk aversion now becomes a new watchword is toward the US dollar and into lower risk investments like US Treasuries bonds and simple low yielding money market funds. Much like when commodities move into periods of storing we may now be entering a period where more and more cash gets parked or stored waiting for a more stable picture of the global financial situation. The US Dollar Index is now trading at a level not seen since May of 2009 when the global economy was only in the early stages of recovery while the euro is at its lowest level since April of 2009. Both of these instruments are approaching key technical levels that if breached could result in the US Dollar Index appreciating another 10 to 15% with losses of about the same magnitude for the euro. Much like equities the currency markets are bearish for oil prices as well as other commodity prices.

I know I have mostly focused on the financial side this morning but unfortunately the evolving situation in Greece is the single largest driver of global markets as we suggested it would be for the last several weeks. With no support coming from the externals oil participants are forced to focus on the current fundamentals as the perception trade is now in jeopardy. This morning we get the latest oil inventory report from the EIA. If last night’s API report is any indication we can expect yet another bearish data point suggesting oil is still overvalued as of today. The API results are summarized in the following table along with my projections and comparisons to last year and the five year average assuming the actual EIA data is in line with the projections. Although the API data is often out of sync with the EIA data the market has reacted negatively since the API numbers have been released with oil prices down another 1.2 to 1.5% since right before the API numbers were issued.

Projections

5/5/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

3.0

1.3

(16.1)

15.4

Gasoline

1.5

0.5

11.7

16.9

Distillate

1.4

1.5

6.8

33.9

Ref Change Level

2.7%

0.1%

3.8%

0.8%

Utilization %

87.4%

89.1%

85.3%

88.3%

The API reported a larger than projected across the board build in inventories and another significant increase in refinery run rates. If the EIA data is in line with the API data it will result in an even larger surplus of all refined products as well as crude oil. It also suggests that there has been no impact on supply from the BP oil spill as the API reported a modest increase in crude oil imports last week. They also reported a large increase in crude oil stocks at Cushing, Ok thus providing more downward pressure on the WTI/Brent spread. The API data was simply bearish.

Many signs suggest the selling of assets...including oil... is not yet over. The next few days will be pivotal as to whether the asset markets are just in a simple downside correction or if we are entering a period of a prolonged downward trend. Much will be riding on the outcome of the vote on the Greek bailout package as well as the outcome of the elections in the UK and Germany. My individual market views are detailed in the table at the beginning of the newsletter. For oil I am back to being bearish for the short term as I await the outcome of the events mentioned above. The market still remains susceptible to price directional changes at any time on little new information. The two main drivers for oil prices today will be the EIA report as well as the 30 second news snippets that hit the media airwaves about Greece and other areas of the EU.

Current Expected Trading Range

Expected Trading Range

5/5/10

Change

Low

High End

From

End Support

Resistance

7:32 AM

Yesterday

June WTI

$81.42

($1.32)

$84.00

$87.60

Jun Brent

$84.55

($1.12)

$85.50

$88.25

June HO

$2.2319

($0.0276)

$2.2200

$2.3600

June RBOB

$2.2915

($0.0307)

$2.3200

$2.4400

June NG

$3.994

($0.019)

$3.870

$4.410

10 YR Treasuries

118.28

0.14

117.00

118.50

Dow Futures

10,870

(22)

10,900

11,200

US Dollar Index

83.765

0.344

81.700

82.900

Euro/$

1.2936

(0.0069)

1.3100

1.3450

Yen/$

1.0556

(0.0041)

1.0600

1.0800

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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