Energy inventory report preview

“If going into the past was as easy as taking a step backward, we would never move forward.”

Nicole Valenica

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

N

N

N

CBu

Market Sentiment

N

N

N

N

Overall View

N

N

N

N

Bias

Cbr

Cbr

Cbr

CBr

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

CBr - Cautiously Bearish

Asset values declined on Tuesday after erasing the gains from Monday’s holiday trading and then some. The big five drivers...Europe, Iran, China, US Finregs and North Korea continue to plague the market and thus maintaining a negative overall market sentiment. The markets are not only biased to the downside they are laden with bear traps as short covering pushed prices higher on Tuesday only to quickly reverse and get hit with a strong round of selling toward the end of the trading session. Oil prices declined almost 2% on Tuesday while Natural Gas fell 2.1% on the day. Buying and holding energy or any other traditional commodity at this point in time is still a no win situation. We are clearly in a trading market and any position taking should be done with a short time horizon and with clearly defined and followed stops as price reversals are likely to happen at any time on little new information. Both financial and commodity markets are continuing to trade the headlines du jour with that pattern expected to continue for the foreseeable future. There are no signs that any of the markets we follow are near a stabilization point nor does it look like volatility will return to more normal levels any time soon.

Adding to the angst overnight was an announcement that the Prime Minister of Japan...the world’s second largest economy... will resign just two months before elections and only nine months into office as his popularity has plunged of late. The Japanese economy is still fighting deflation and since the new party took office the economy has continued to sputter. The Japanese equity and currency markets declined on the news further increasing the cloud that is slowly forming over all of Asia. Although the Asian cloud is coming a bit from Europe and North Korea, it is more from the perception that the meteoritic growth in this region of the world will be slow going forward as governments...like China implement measures to intentionally slow down growth and avoid a potential bout of inflation.

With many market participants now viewing the global economic recovery as moving into slow motion this sentiment continues to be reflected in equity markets (as well as other asset classes). The EMI Global Equity Index is back on the defensive after gaining some ground last week (table shown below). Over the last twenty four hours the EMI Index has declined by 0.6% with all ten bourses losing ground on the week as well as remaining in negative territory for the year to date with only Germany and Canada within earshot of moving into positive territory for the year. Market participants view Germany as a big recipient of a falling Euro as it is the largest export country within the EU while Canada’s economy seems to be progressing better than most of its peers in the G7 group as it was the first of the group to actually announce an increase in short term interest rates yesterday (from 0.25 to 0.5%). The combination of falling oil prices and a view that global oil consumption may lag the projections is holding down gains in Canadian equities as well as the Canadian dollar as Canada’s economy is very commodity dependent. The action in global equity markets over the last two days continues to support my view that last week’s net gains were all the result of short covering and not fresh buying coming into the market. The bottom pickers are still hiding in the bushes and are nowhere to be found. Equities are still not supportive for energy prices nor are most other traditional commodity prices.

EMI Global Equity Index

6/2/10

Change

Change

2010 YTD

2010

From

From

Change

7:30 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,024

(113)

-1.11%

-3.9%

Can/S&P-TSX

11,572

(191)

-1.62%

-1.5%

Lon/FTSE

5,163

(25)

-0.48%

-4.6%

Paris/Cac 40

3,460

(41)

-1.16%

-12.1%

Germany/Dax

5,938

(41)

-0.68%

-0.3%

Japan/Nikkei

9,712

(51)

-0.52%

-7.9%

HongKong/HangSeng

19,497

(270)

-1.36%

-10.9%

Aussie/SYDI

4,437

(42)

-0.94%

-9.1%

China/Shanghai A

2,693

(92)

-3.29%

-21.6%

Brazil/Bvspa

61,841

(106)

-0.17%

-9.8%

EMI Global Equity Index

13,434

(97)

-0.72%

-8.5%

On the currency front the Euro was pummeled early in Tuesday’s session but for the fifth time since mid-May it tested and held the lower support level of the trading range that is forming. The Euro has found some technical support around the 1.2150 level as some view this level as a point where there could be intervention by the EU member countries. The Euro vigilantes continue to try to break it down further; for the moment support is holding but adding to the overall volatility in most other markets as fears of the Euro breaking down even further are making participants in every market jumpy and laden with uncertainty and fear. The Euro is back on the defensive this morning after yesterday’s strong bounce off of support. A weak Euro and resultant strong US dollar is a negative for equities, oil and other commodity prices.

This afternoon the weekly round of oil inventory reports gets under way with the release of the weekly API data followed by the more widely watched EIA report tomorrow morning at 10:30 am EST. This week’s reports are delayed by a day due to the holiday in the US this week. The following table summarizes my projections for this week along with a comparison to last year and the five year average for the same week assuming the actual EIA data is in sync with the projections. I am expecting a modest decline in crude oil and gasoline stocks and a seasonal build in distillate fuel stocks. Even with a 600,000 barrels projected decline in crude oil stocks the year over year is still expected to show a surplus of 1.4 million barrels while the overhang versus the five year average for the same week will still be over 25 million barrels.

Projections

6/2/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(0.6)

1.4

25.3

Gasoline

(1.0)

17.2

13.9

Distillate

0.7

4.9

31.8

Ref Change Level

0.1%

2.8%

-2.4%

Utilization %

87.9%

85.1%

90.3%

Refined product inventories are expected to show a mixed result with gasoline inventories projected to drawdown by about 1 million barrels as wholesalers continued to move gasoline in preparation of last week’s holiday in the US. On the other hand, I am expecting a build of about 700,000 barrels of distillate fuel as the industry is currently in the building season for heating fuels and the forward curve contango remains economically viable for storing distillate fuel. Both gasoline and distillate stocks are still expected to show a sizeable surplus versus both last year and the five year average for the same week. In fact gasoline stocks are expected to show an overhang of over 17 million barrels versus last year while gasoline implied demand is still about 1.4% below last year. I would view this week’s report as neutral to bias to the bearish side if the actual results are in line with the projections.

There is a contingency of Wall Street analysts that are recommending a buy and hold position for oil on the premise that demand will increase enough by the third quarter of this year which will then result in a dissipation of the inventory overhang. I still do not see that scenario materializing this year. Total commercial stocks of crude oil and refined products are still about 77 million barrels above the five year average. With roughly 200 days left in the year oil demand in the US will have to increase (immediately) by about 400,000 barrels a day and continue for the rest of the year just for the total overhang of oil in inventory to drop back down to the five year average. For interest, the EIA in last month’s Short term Energy Outlook projected only about a 100,000 barrel a day increase in total oil consumption in the US. The next EIA report is due out next week.

With a considerable amount of oil still sitting in floating storage along with an overhang in many other consuming nations around the world the likelihood of the oil surplus going away in the medium term is still not highly probable in my view. I think the projections of the oil overhang being dissipated are correct but the timing of the projections are off and in my estimation it will not occur until 2011 some time. My view is premised on no unplanned supply interruptions like hurricanes or those caused by geopolitical events. If the projected active hurricane season hits the Gulf of Mexico this year, it could change my supply balances very quickly. I remain of the view that oil is likely to be range bound and choppy for the short term and not yet ready for a sustainable upside move.

Tomorrow the EIA will also release the latest snapshot of Nat Gas inventories. I am expecting an injection level of around 100 BCF. If the actual number comes in as projected it would be below last year’s above normal injection level of 124 BCF and likely provide a positive backdrop to Nat Gas trading (at least for a day). Irrespective of the outcome I do not see anything that will move Nat Gas prices out of the trading range it has been in for several months. Nat Gas participants have already priced in the oversupply situation and are more focused on the perception of what will be down the road. That perception includes what an active hurricane season may do to supply, what a hotter than normal summer will do to demand and how quickly will industrial consumption increase as the US economy continues to recover (assuming it does). Nat Gas prices will remain range bound until reality and perception come closer together.

My individual market views are detailed in the table at the beginning of the newsletter. Caution remains the keyword and cash preservation continues to be the optimum strategy. Trade with a short term horizon.

Currently prices are mixed.

Current Expected Trading Range

Expected Trading Range

6/2/10

Change

Low

High End

From

End Support

Resistance

7:30 AM

Yesterday

Jul WTI

$72.20

($0.38)

$69.25

$77.70

Jul Brent

$72.50

($0.21)

$72.00

$78.40

Jul HO

$1.9681

($0.0023)

$1.9450

$2.0800

Jul RBOB

$1.9811

($0.0014)

$1.9500

$2.1070

Jul NG

$4.260

$0.012

$3.870

$4.410

10 YR Treasuries

120.83

0.16

120.00

122.00

Dow Futures

10,069

50

9,845

10,250

US Dollar Index

86.96

0.235

85.450

88.100

Euro/$

1.2232

(0.0026)

1.2130

1.2680

Yen/$

1.0883

(0.0080)

1.0900

1.1200

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.

PH: (888) 871-1207

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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