Energy inventory report preview for June 30

Quote of the Day

“A true friend is one soul in two bodies.”

Aristotle

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

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Cbr

Cbr

CBr

US Dollar

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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

N

Market Sentiment

Cbr

Cbr

Cbr

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Overall View

N

N

N

N

Bias

Cbr

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

CBr - Cautiously Bearish

The market sentiment was not only bearish on Tuesday it was dismal. The double dip trade is more and more becoming the best way to describe the activities in the global financial and commodity markets of late. It all started with a downward revision to the leading economic indicators for China followed by mediocre economic data coming out of Europe and culminated by a huge drop of about 10 points in the US consumer confidence indicator. Trader/investors continued to dump risk asset classes in favor of moving even more cash to the sidelines and into safe haven instruments like the US dollar, US Treasuries and the Japanese Yen. Gold firmed a bit on Tuesday but nothing to indicate there was a huge flow of cash moving into Gold.

Selling has continued throughout the Asian trading session with a bit of short covering seeming to emerge in European trading at the moment as shown in the EMI Global Equity Index (table below). The Index is currently lower by 3.4% on the week with the year to date loss now at 8.8% or just 0.8% below the peak year to date loss from the third week in May. Germany is still hanging on to a minor year to date gain of 0.3% while four bourses in the Index are now showing double digit losses for 2010. China remains the loss leader this year with a loss approaching 27% and solidly in bear market territory. As of this writing US equity futures are modestly positive indicating a positive opening for US markets. Global equities continue to be a negative influence on oil prices as well as the broader commodity markets.

EMI Global Equity Index

6/30/10

Change

Change

2010 YTD

2010

From

From

Change

7:52 AM

Yesterday

Yesterday %

%

US/Dow Jones

9,870

(268)

-2.65%

-5.3%

Can/S&P-TSX

11,264

(343)

-2.96%

-4.1%

Lon/FTSE

4,955

41

0.83%

-8.5%

Paris/Cac 40

3,459

25

0.73%

-12.1%

Germany/Dax

5,978

27

0.45%

0.3%

Japan/Nikkei

9,382

(188)

-1.96%

-11.0%

HongKong/HangSeng

20,129

(120)

-0.59%

-8.0%

Aussie/SYDI

4,301

(44)

-1.01%

-11.9%

China/Shanghai A

2,514

(30)

-1.18%

-26.9%

Brazil/Bvspa

61,978

(2,247)

-3.50%

-9.6%

EMI Global Equity Index

13,383

(315)

-2.30%

-8.8%

The Euro has been under siege all week on a combination of renewed concerns over the sovereign debt issues in Europe coupled with anticipation as to how the European banks were going to refinance a yearlong loan program that comes due on Thursday. This morning the ECB said it will lend banks about 132 billion Euros for three months or less than (about half as much) what many economist projected. About 442 billion Euros are due for repayment tomorrow. The demand for three month money was on the low side and a positive sign that the European banks may be in better financial condition than many market participants have been assuming and are not in need of as much liquidity as originally thought. The Euro has rebounded on this news so far this morning and is currently up by about 0.6% versus yesterday’s close. This has resulted in a modest recovery in oil prices and equity values in Europe.

Even with this morning’s modest short covering rally in the Euro it remains at the lower end of the trading range it has been in since mid-June but only slightly below the uptrend resistance level of the upward recovery trend that began in early June when the Euro plunged below the 1.19 level. At the moment, the positive euro and weaker US dollar is a positive for oil prices but this morning’s current Euro move is far from a strong move and could easily revert back to the downside once the weak shorts completely exit the market. Before I would get too positive on the Euro I would like to see a close above the 1.2325 level for a day or two which would technically indicate that the Euro was heading for a retest of the upper end of the trading range and thus providing support for oil and commodity prices for more than a few hours.

Late yesterday afternoon the API reported their weekly oil inventories which were overall bearish with the exception of the larger than expected decline in crude oil stocks. The API data along with my projections and a comparison to last year and the five year average for the same week are shown in the following table. Staying with the positives the API reported a crude oil draw of about 3.4 million barrels versus a projection for a decline of about 1 million barrels. A 0.3% increase in refinery utilization rates coupled with a 440,000 bpd reduction in imports both contributed to the crude oil inventory decline. If the EIA data is in sync with the API the crude oil inventory surplus would still be over 10 million barrels versus last year and over 27 million barrels versus the five year average.

Projections

6/30/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(3.4)

(1.0)

13.9

29.5

Gasoline

0.9

(0.5)

5.8

6.4

Distillate

4.0

1.0

2.9

29.8

Ref Change Level

0.3%

0.2%

2.6%

-1.5%

Utilization %

86.9%

89.6%

87.0%

91.1%

On the other side of the equation the rest of the API report was bearish as they reported a surprise build in gasoline stocks and significantly larger than expected build in distillate fuel stocks. Gasoline stocks increased by about 900,000 barrels versus an expected decline of about 500,000 barrels as the long holiday weekend approaches. If the EIA data is in line with the API report, the gasoline inventory surplus will have widened to over 7 million barrels versus last year and almost 8 million barrels versus the five year average.

Distillate fuel was the most bearish part of the API report showing a stock build of almost 4 million barrels. Based on the API data the surplus versus last year would be about 6 million barrels while the overhang versus the five year average for the same week would be well over the 30 million barrel mark. The huge distillate fuel surplus has been lingering in the market since 2008 with no sign of it dissipating anytime soon. Since a major portion of distillate fuel is economy sensitive diesel fuel it suggests that the US economy may in fact be slowing as diesel demand may be starting to languish once again. We will have to delve into the details of this morning’s EIA report, but for the moment it looks like long RBOB/short HO may be the optimum direction for this spread going forward.

Upon the release of the API report the market also interpreted it as bearish as oil prices continued to decline. The upward movement in oil prices so far this morning is being driven by the gains in the Euro (see above) and not necessarily based on the decline in crude oil stocks in the API report. After yesterday’s 3% decline in oil prices the outcome of this morning’s EIA report is likely to be discounted if it is bearish as long as the Euro is in recovery mode. If the Euro slips back into negative territory during the trading session, oil prices will likely revert back to the defensive irrespective of the outcome of the EIA report.

Nat Gas was also clearly on the defensive on Tuesday and into this morning (so far) as Alex moved out of harm’s way from a Nat Gas production perspective. The weather forecast for the next several weeks is still modestly supportive for increased consumption as a major portion of the US will be experiencing above normal temperatures in about a week or so. Whether or not the weather is enough to support a recovery rally in Nat Gas prices in the short term is not certain. Nat Gas prices are now trading at the lower end of the trading range and if we close below the current level we could then see prices moving back to the $4/mmbtu level in the short to medium term.

Tomorrow’s EIA inventory report will contribute to where prices go from here. At the moment it is looking like Nat Gas stocks will once again underperform versus last year and the five year average. I am expecting a net injection to inventory of around 68 BCF versus last year’s 73 BCF injection and an 82BCF injection for the five year average for the same week. Although total supply remains robust the surplus in inventory has been slowly narrowing over the last three weeks and this pattern may very well continue if warmer than normal weather lingers in parts of the US.

My individual market views are detailed in the table at the beginning of the newsletter. My views remain the same for today. Headlines and macro indicators will continue to drive prices for both the financial and commodity markets at least for the rest of this week and likely for the rest of the month. The market sentiment continues to suggest that the double dip trade is emerging. It is too early in the day to say if yesterday’s massive decline is over as all that is happening so far this morning is short covering in the Euro which is supporting European and US equities as well as oil prices at the moment. Stay small and short in all flat price trading as the market will only become more volatile as the week progresses and as liquidity begins to dry up ahead of the long holiday weekend in the US.

Watch the 1040 level in the S&P Index if breached and if it closes below this level we could see another major move to the downside in equities which will carry over into oil and Nat Gas prices. The technicals of the equity and currency (Euro in particular) markets are at precarious levels that could easily be breached and result in lower financial and commodity prices for all of the global markets. The big fundamental number comes on Friday when the non-farm payroll number is released in the US on a day when liquidity is likely to be below normal. Any deviations from the expectations will result in a an overreaction to the data with one outcome being the aforementioned key technical support levels for equity indices and the Euro being breached. The rest of this week will be volatile with a high potential for price reversals at any time. Caution remains the keyword.

Currently oil is firming while Nat Gas is still under pressure. The July RBOB & HO Nymex contracts expire today. Today is also the last day of the month, quarter and first half of the year and as such investment and hedge funds may still be adjusting their portfolios which could result in unexpected moves in either direction. With Gold and the US dollar about the only investment instruments that are in positive territory for the quarter and the first half of the year, the investment funds have been and will continue to adjust their portfolios to be invested with the possibilities of another period of fear and uncertainty.

Current Expected Trading Range

Expected Trading Range

6/30/10

Change

Low

High End

From

End Support

Resistance

7:53 AM

Yesterday

Aug WTI

$76.55

$0.61

$70.00

$80.00

Aug Brent

$75.99

$0.55

$72.00

$78.40

Jul HO

$2.0289

$0.0076

$2.0000

$2.1500

Jul RBOB

$2.0799

$0.0079

$2.0000

$2.1400

Aug NG

$4.495

($0.053)

$4.000

$5.000

10 YR Treasuries

122.42

(0.11)

118.00

124.00

Dow Futures

9,852

55

9,730

10,300

US Dollar Index

86.045

(0.295)

85.450

90.000

Euro/$

1.2285

0.0071

1.1500

1.2300

Yen/$

1.1283

(0.0030)

1.0800

1.1400

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.

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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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