Energy inventory report preview

“A prudent question is one half of wisdom.”

Francis Bacon

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

CBu

Market Sentiment

Cbr

Cbr

Cbr

N

Overall View

Cbr

Cbr

Cbr

N

Bias

Cbr

Cbr

Cbr

CBu

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

CBr - Cautiously Bearish

Just when everything looked like it was moving into a stabilization mode and a welcome short covering rally was underway in most asset classes the German government threw a monkey wrench into the mix by announcing a ban on naked short selling of debt securities, selected financial institution stocks as well as credit default swaps. The ban began immediately and will remain in place until the end of March 2011. In addition Chancellor Angela Merkel said she would push hard at the upcoming G20 meeting to impose a tax on all financial transactions. The actions by Germany came in the midst of a short covering rally in oil and many other asset classes. As the announcement hit the media airwaves markets abruptly reversed and plunged lower as uncertainty and fear once again took control of the market sentiment. When governments intervene in markets it usually results in a whole slew of unintended consequences. The German action is likely to reduce liquidity in Eurozone trading just at the time when the opposite is needed. It also has raised a huge flag to the market suggesting that the German actions can only mean the financial crisis in the EU may be even worse than most expected. Even the IMF is not a big proponent of the ban on short selling as they are of the belief that markets will only find their way around the restrictions and as such creating even more uncertainty and fear in the market .

As I mentioned yesterday in the newsletter I though the market was stabilizing and all of the bad news surrounding the EU was already known and well priced into the all financial markets and the only exposure at the moment was new unknown bad news emerging. Well that view did not last very long as new unknown bad news emerged when Germany made their announcement. The markets are fragile at best with fear the main ingredient in the market sentiment formula. For the moment most all traditional information that normally impacts markets is being ignored and a cloud of negativity is suffocating the markets as the bears remain well in control. For example yesterday saw good news from several corporate earnings reports only to be ignored along with inflation data from several regions of the world that looked relatively tame. None of this matters at the moment as the only issue front and center on the minds of the investor/traders is how deep is the EU sovereign debt problem is, will it spread to other regions of the world, will the U.S. debt problem quickly become an issue and how does all of this impact the fragile global economic recovery. So far the market has taken a position on the aforementioned questions with a negative and bearish viewpoint.

Global governments are playing a major role in trying to juggle their individual economies and the major unintended consequence is the impact they are having on all financial and commodity markets. The actions by governments are split into two camps for two distinctly different reasons. Non-OECD Asian economies are embarking on a program to intentionally slow their economies so as to mitigate the potential for inflation going forward. The financial institutions in most of these countries are relatively stable and sound while government treasuries are surplus cash with little if any sovereign debt issues. On the other hand most OECD or developed world economies are struggling to recover from the great recession with unemployment at or above double digit levels and GDP only slowly expanding. The economic performance to date in these regions is after massive government stimulus spending programs that are now coming to an end leaving massive sovereign debt problems that are growing by the hour and contributing to the fear and uncertainty griping all investor/traders.

Many governments in the OECD world are focusing all of their attention on doing what they can do to blame only the financial sector for all the problems of the world. In the United States, Congress is about to pass a financial regulation bill that is likely to strip that sector of about 20 to 25% of its earnings power according to some estimates which in turn will impact employment as well as market functionality as liquidity is reduced and trading and investing dollars find another avenue for investing possibly reducing the transparency in the marketplace. The new ruling by the EU regarding hedge funds that passed this week (against the objection by the UK and USA) will likely result in an exodus of hedge funds to other regions around the world (likely Asia) further impacting employment in that region of the world. The action by Germany is negatively impacting the markets as we speak with the full ramifications still not known. In my view what needs to be the main focus of attention in almost every one of the OECD nations is to install smart regulations that allow markets to be markets and function in an orderly fashion (they are not functioning in an orderly fashion at the moment) and focus all of their attention on stopping and reducing all of the unnecessary spending on programs that are bringing down countries like Greece and possibly even the US. Sovereign debt is a killer that will be the cloud maker over growth for years to come.

The moral of my story is as much as we all watch the fundamentals, technicals and pricing inter-relationships for all of the markets we invest in and trade we have to pay close attention to what all of these governments are doing as they are having a systemic impact on all of the markets. This pattern is not likely to reverse itself anytime soon. The whole situation is beginning to feel like the aftermath of what happened after the collapse of Lehman in September of 2008. We may now be in Lehman Part II, except this is originating from the public debt side of the equation rather than from the private side. We are clearly in a macro trading pattern with all of the normal drivers only impacting price direction from time to time.

Equity markets are on the defensive in most locations as shown in the EMI Global Equity Index table below. Most markets have lost ground over the last twenty four hours leaving only three bourse with marginal gains for the year. I actually expect those gains to be wiped out today as markets in the United States are pointing to a significantly lower open so far. If equity markets are truly the leading indicators for the individual economies the equity markets are projecting a poor performance going forward. Money continues to flow out of the risk trade and into safe haven U.S. dollars and yen with money mostly being invested in U.S. Treasury bonds as even the flow of cash to gold and silver seems to be subsiding as both of these commodities are lower this morning in the midst of uncertainty.

EMI Global Equity Index

5/19/10

Change

Change

2010 YTD

2010

From

From

Change

8:06 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,511

(115)

-1.08%

0.8%

Can/S&P-TSX

11,765

(48)

-0.41%

0.2%

Lon/FTSE

5,307

45

0.85%

-1.9%

Paris/Cac 40

3,528

(101)

-2.78%

-10.4%

Germany/Dax

6,029

(163)

-2.63%

1.2%

Japan/Nikkei

10,187

7

0.07%

-3.4%

HongKong/HangSeng

19,579

230

1.19%

-10.5%

Aussie/SYDI

4,414

(1)

-0.02%

-9.6%

China/Shanghai A

2,714

37

1.37%

-21.1%

Brazil/Bvspa

60,841

(2,025)

-3.22%

-11.3%

EMI Global Equity Index

13,487

(214)

-1.56%

-8.1%

This morning the EIA will release their latest oil inventory report after the API released a mixed and confusing report late yesterday afternoon. The API data is summarized in the following table along with comparisons to last year and the five-year average for the same week. The API reported a surprise decline in crude oil stocks even though imports soared by over 2 million barrels per day more than offsetting the 1% increase in refinery utilization rates. Cushing, Ok crude oil stocks increased by almost 1 million barrels and if confirmed by the EIA in their report it would set yet another record high for that region of the country. It would also be bearish for the WTI/Brent spread which was hit with a round of short covering yesterday.

Projections

5/19/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

(0.8)

0.9

(7.2)

19.5

Gasoline

1.0

(0.8)

13.0

14.4

Distillate

(0.3)

1.0

7.2

35.2

Ref Change Level

1.0%

-0.2%

4.5%

-0.5%

Utilization %

85.9%

88.2%

83.7%

88.7%

On the refined product front the API data was once again mixed with a surprise build of 1 million barrels in gasoline stocks and an equally surprising decline of about 300,000 barrels of distillate fuel stocks. The results of the API data strongly suggest waiting to react until the EIA data is released later this morning. In fact the market has pretty much ignored the API refined product inventories as the HO/RBOB spread is continuing to deprecate in value (HO declining vs. RBOB) even though gasoline stocks built and distillate stocks declined in the API report. Over the last two trading sessions this spread has broken out of a technical triangle pattern to the downside and if today’s EIA report confirms the breakout via inventories for gasoline and distillate fuel coming in more like the projections it would be a decent time to enter a short HO/long RBOB spread ( I would enter into the July spread as June is only weeks from expiration).

Natural gas also started Tuesday with a strong push above the consolidation range breakout level only to be pushed back into the trading range pretty quickly. As I have been indicating for weeks nat gas is likely to remain in the upper half of the trading range but I still do not believe there is enough momentum at the moment to stage an upside breakout and maintain prices above the range for any sustained period of time. The current fundamentals remain bearish as inventories are on a path to hit a new record high by the end of this year’s building season. However, most analysts are projecting a below average injection into inventories this week of around 70 BCF. Even if the number is in the 70’s the overhang vs. last year and the five-year average will not change very much. Until there is a clear indication that cooling demand is picking up and/or hurricanes are actually becoming a threat prices are likely to remain within the consolidation trading range for the foreseeable future.

I have downgraded my individual market views based on the tremendous negativity that is engulfing all markets. However, I would not be the least bit surprised to see price reversals at any time for any of the financial or commodity markets. The markets are not trading in an orderly or rational fashion rather we are being driven by fear, uncertainty and 30-second news snippets. The sidelines are not a bad place to be until some of the abnormal volatility subsides. Having cash ready to be deployed is not the worst thing in the world...with “having cash” being the keywords. Expect to hear more and more comments about the eventual demise of the Euro. Angela Merkel was just quoted in the press as saying the euro is in jeopardy. This is all feeding into the fear mentality in the market.

Of note we are in a price area for oil where we can expect to see comments starting to emerge from various OPEC countries as they embark on trying to jawbone prices higher. This is their usual pattern during downturns and when that does not work (which it most likely will not) there will be talk of an emergency meeting. Watch this area closely over the next several weeks, especially if oil prices remain below $70/bbl.

Currently most all of the assets in the EMI Price Board are in negative territory with oil prices trading at level not seen since October of 2009.

Current Expected Trading Range

Expected Trading Range

5/19/10

Change

Low

High End

From

End Support

Resistance

8:06 AM

Yesterday

June WTI

$68.25

($1.16)

$70.00

$87.60

Jul Brent

$73.59

($0.84)

$80.00

$88.25

June HO

$1.9442

($0.0173)

$2.0000

$2.3600

June RBOB

$2.0234

($0.0197)

$2.0000

$2.4400

June NG

$4.312

($0.030)

$3.870

$4.410

10 YR Treasuries

120.28

0.08

117.00

118.50

Dow Futures

10,432

(58)

10,500

11,200

US Dollar Index

87.26

(0.055)

81.700

88.000

Euro/$

1.222

0.0013

1.2500

1.3450

Yen/$

1.0930

0.0090

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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