Energy inventory report preview

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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

N

N

N

N

Global Equities

N

N

N

N

10 Yr Treasuries

N

N

N

N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

Cbr

Cbr

Cbr

CBu

Market Sentiment

N

N

N

N

Overall View

N

N

N

N

Bias

N

N

N

N

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

CBr - Cautiously Bearish

For the first time in weeks markets in the United States showed some of the tell tale signs of stabilizing, at least for one trading session. Tuesday’s trading in the United States started out with selling coming from all directions as the big five market movers: EU sovereign debt, Korea, Asian tightening, new financial regulations and Iran all raised their heads and pushed participants into a bit of a panic mode. However, by mid-morning the selling seemed to dissipate and financial and commodity prices began to slowly move off of their early morning lows and end the day near unchanged for equities as WTI settled above the $70 per bbl level. It is much too early to say whether yesterday was a major trend turning point or nothing other than a modest short covering move. Fresh buying was not visible and as such I would have to categorize yesterday’s appearance of stabilization (toward the end of the day) as solely related to the weak shorts heading to the sidelines, especially with a long U.S. holiday weekend just around the corner.

The latest economic forecasts released by the OECD this morning is projecting growth across the OECD (which includes the US) to rise by 2.7% in 2010 as compared to their last forecast for 2010 released in November, which projected a growth rate of 1.9%. According to the OECD U.S. forecast projected to grow by 3% this year with the Eurozone coming in at 1.2%. Tomorrow morning the U.S. Commerce Department will release the second estimate of first quarter GDP which is expected to come in at around 3.3%. The current growth projections are still very positive in light of the sovereign debt issues evolving in the EU. The numbers do suggest that the sovereign debt problems are much more an issue that can negatively impact credit and capital markets with the impact on economic growth a secondary outcome.

If actual growth in the OECD performs as forecasted oil consumption may not be impacted as negatively as thought just a few weeks ago. In addition if the message from China is that they may hold back on aggressive tightening of their monetary policy until the worst of the EU situation blows over oil demand from that part of the world should still remain robust. The bottom line is if economic growth is maintained the overhang that has capped oil prices (and even contributed to the recent 20% decline) may have a chance of starting to dissipate. Interestingly I am beginning to see some light dabbling, in the form of buy and hold type investors slowly moving back into oil as an asset class that is oversold and once again has upside potential. Something to watch very closely over the next several weeks.

Global equities have been rebounding over the last twenty four hours as shown by the EMI Global Equity Index (table below). The Index is still lower on the week (by about 1.3%) but over the last 24 hours we have see both the Asian and European bourses trading in positive territory following yesterday’s stabilization in the United States and on a growing belief that the downside move may be a bit overdone (in any other words short covering). Futures markets are currently pointing to a positive open for U.S. equity markets which if it holds throughout the day may result in the Index erasing all of this week’s losses. As mentioned above it is still much too early to conclude that the selling is completely over and we are now returning to the upward bullish trend in equities that was in place before the selling began several weeks ago. The best that can be said at this point is that we can expect more short covering, especially heading into the long three day holiday weekend.

EMI Global Equity Index

5/26/10

Change

Change

2010 YTD

2010

From

From

Change

7:49 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,044

(23)

-0.23%

-3.7%

Can/S&P-TSX

11,518

(3)

-0.03%

-1.9%

Lon/FTSE

5,026

86

1.74%

-7.1%

Paris/Cac 40

3,422

67

2.01%

-13.1%

Germany/Dax

5,782

80

1.41%

-2.9%

Japan/Nikkei

9,522

63

0.67%

-9.7%

HongKong/HangSeng

19,196

211

1.11%

-12.2%

Aussie/SYDI

4,330

44

1.03%

-11.3%

China/Shanghai A

2,760

9

0.33%

-19.7%

Brazil/Bvspa

59,184

(731)

-1.22%

-13.7%

EMI Global Equity Index

13,078

(20)

-0.15%

-10.9%

Late yesterday afternoon the API released their latest snapshot of oil inventories. The API data is shown in the following table along with comparisons to last year and the five year average for the same week. This morning the EIA will release their report at 10:30 AM est. The API data was interesting. They showed a crude oil build of around 600,000 barrels or within the expectations, a much larger than projected draw in gasoline inventories and a larger than expected build in distillate fuel. Refinery utilization rates remained the same as last week. They reported a big drop in crude oil imports of about 1.5 million barrels per day and modest decline in PADD 2 crude oil stocks of about 600,000 barrels (positive of the WTI/Brent spread). The big number from the API was the much larger than expected draw in gasoline stocks. A surprise because it far exceeded expectations but not a surprise from the perspective that it is reflective of both wholesalers and retailers moving gasoline from primary to secondary and tertiary storage in anticipation of a big driving weekend in the United States.

Projections

5/26/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

0.6

0.8

(5.0)

21.6

Gasoline

(3.2)

(0.5)

17.7

14.6

Distillate

1.5

0.5

5.2

33.0

Ref Change Level

0.0%

-0.2%

5.9%

-1.3%

Utilization %

85.9%

87.7%

81.8%

89.0%

The market has reacted somewhat positively to the API data and oil prices are currently firm across the board (partially a result of the report and partially a result of all assets firming in overnight trading). At the moment WTI is continuing to appreciate vs. Brent and RBOB is appreciating vs. heating oil (HO). If the EIA data is in sync with the API data expect the aforementioned relationships to continue to move in their current directions. It may be time to consider a long WTI/short Brent trade as well as a long RBOB/short HO trade. WTI/Brent is currently trading above its downward technical pattern and if the EIA data shows declines in both PADD 2 and Cushing stocks I would suggest going long the spread with a tight, trailing stop. The July HO/RBOB spread is still trading within the boundaries of a technical consolidation (triangle) pattern but currently poised for a breakout in favor of RBOB. I am remaining on the sidelines for this spread until digesting this mornings EIA data.

Tomorrow the EIA will release the latest natural gas inventories. The market is looking for an injection level of about 100 BCF which would be marginally below last year’s build of 106 BCF for the same week. The nat gas story remains the same as it has been for well over a month and that is it is oversupplied, inventories are on a path to hit record high levels by the end of the building season but prices remain supported as participants await the outcome of the summer cooling season, the hurricane season and the impact the economic recovery will have on industrial demand. The nat gas market is in the midst of the perception trade, much like oil has been in for well over a year. The perception is still somewhat positive as evidence by the fact that nat gas prices have not completely fallen out of bed, especially over the last several weeks during the massive asset selling that has taken place around the globe. I still expect nat gas to remain within its trading range for the foreseeable future.

My individual market views are detailed in the table at the beginning of the newsletter. I have upgraded several of the oil drivers as well as my view to neutral, not because I believe we are back in a formal uptrend rather more to reflect the fact that we may be in the midst of a short covering rally for the next several days. The markets are extremely fluid with most participants much more in trading mode rather than an investment mode. As such we can continue to expect sudden directional switches at any time. The markets are also very oversold and susceptible to further short covering. Cash preservation still remains the optimum trade.

Currently most asset classes in the EMI Price Board are starting the day in positive territory.

Current Expected Trading Range

Expected Trading Range

5/26/10

Change

Low

High End

From

End Support

Resistance

7:50 AM

Yesterday

Jul WTI

$70.79

$2.04

$70.00

$81.80

Jul Brent

$71.40

$1.85

$70.00

$73.67

June HO

$1.9113

$0.0396

$1.8500

$2.0200

June RBOB

$1.9797

$0.0489

$1.9000

$2.0500

June NG

$4.133

$0.082

$3.870

$4.410

10 YR Treasuries

121.05

(0.63)

120.00

122.00

Dow Futures

10,100

75

9,736

10,285

US Dollar Index

86.715

(0.173)

84.000

87.000

Euro/$

1.2327

0.0009

1.2330

1.2850

Yen/$

1.1067

(0.0032)

1.0900

1.1380

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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