Oil demand growth continues to decline

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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

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 clearly an upside correction or short covering rally in a downward trending market. After a strong performance in both Asia and Europe and into the US trading session, equities, oil and Nat Gas prices began to sell-off by mid-day resulting in a marginally lower closes for oil and Nat Gas and a modest positive settle for US equities. Although the Euro put in a strong performance, equities and commodities were still overwhelmed by the negatives and the possibility of a double dip recession. The sole piece of economic news coming out of the US on Tuesday was also biased to the bearish side as the ISM Service Index increased less than expected.

The only event providing a floor on oil and Nat Gas prices is the developing weather disturbance in the Gulf of Mexico that has a medium or 40% chance of strengthening to a tropical cyclone in the next 48 hours. However the path of this weather pattern is still not clear as it hovers around the Yucatan Peninsula. Absent the storm, oil prices would likely be testing the next level of support of around $70/bbl.

Overnight most equity markets were sold into in Asia with the selling continuing in Europe and in US equity futures markets. However, in the last 24 hours the EMI Global Equity Index has gained about 0.6% on the week and now stands at a year to date loss of 9.3%. However with the pattern that US equity futures are currently trading in yesterday’s gains are likely to be erased pretty early on this morning. The main positive event occurring in the last 24 hours was an announcement by the Chinese government that they are bringing forward about $100 billion dollar in infrastructure spending this year. With China representing about 40% of the projected oil demand growth for oil, the move is a positive support for oil prices in general as energy related prices firmed strongly when China embarked on a similar program about a year or so ago. The market is looking at the infrastructure programs as a possible offset to the expected decline in consumption as a result of China’s tight monetary policy. China’s equity market is the only positive bourse in Asia today even as China indicated today that it is committed to reigning in liquidity and stemming inflation. Global equity markets continue to project a slowing global economy and thus faltering oil consumption going forward.

EMI Global Equity Index

7/7/10

Change

Change

2010 YTD

2010

From

From

Change

8:17 AM

Yesterday

Yesterday %

%

US/Dow Jones

9,744

57

0.59%

-6.6%

Can/S&P-TSX

11,200

108

0.97%

-4.6%

Lon/FTSE

4,910

(55)

-1.11%

-9.3%

Paris/Cac 40

3,374

(48)

-1.40%

-14.3%

Germany/Dax

5,872

(69)

-1.16%

-1.4%

Japan/Nikkei

9,280

(58)

-0.62%

-12.0%

HongKong/HangSeng

19,857

(227)

-1.13%

-9.2%

Aussie/SYDI

4,255

(22)

-0.51%

-12.9%

China/Shanghai A

2,538

12

0.48%

-26.2%

Brazil/Bvspa

62,065

1,199

1.97%

-9.5%

EMI Global Equity Index

13,309

90

0.68%

-9.3%

On the currency front the Euro is back on the defensive this morning after breaking a key technical resistance level last Friday. At the moment the Euro is stuck in a narrow trading range as the market awaits tomorrow’s ECB meetings and any news on the pending European bank stress tests. Since bottoming at the end of June the Euro has been in an upward move providing a positive backdrop for oil prices as well as the broader commodity complex. So far this morning the Euro is a negative for both equity and commodity markets.

Today, two oil fundamental reports will hit the media airwaves with the release of the EIA Short Term Energy Outlook around midsession and the API weekly oil inventory report at 4:30 PM EST. Tomorrow morning at 11 am the EIA will release the more widely followed weekly oil inventory report with the Nat Gas inventory report coming out its normal time at 10:30 am. As I have discussed for the last several months, the oil consumption forecasts have been optimistic in all three monthly reports (EIA, IEA and OPEC). With announced austerity programs in Europe, monetary tightening in China and just about every piece of economic data released over the last several weeks projecting a slowdown in the US economy, all three reporting agencies will likely cut their projections for oil consumption growth for both 2010 and 2011 with the EIA report the first to do so today. Based on everything I am looking at I do not see anything that suggests that oil demand growth will not decline compared to previous projections. If the agencies do not cut their projections the actual consumption numbers will come up far short of the projections. I think today’s EIA report will support the resolve of the market bears.

The following table summarizes my projections for this week’s round of oil inventory reports along with a comparison to last year and the five year average for the same week. This is a difficult week to project as supply and imports were likely impacted by Hurricane Alex as Gulf oil & Nat Gas producers enacted preventive safety measures last week. In addition, the data reflects the lead up to the biggest driving holiday in the US and should have resulted in a strong movement of gasoline stocks out of primary storage and into secondary storage as retailers prepared for the weekend. However, with all that is going on in the Gulf as a result of the BP disaster, gasoline consumption was likely lower than normal in the resort areas of the Gulf.

Projections

7/7/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(2.0)

13.8

30.3

Gasoline

(1.0)

4.0

6.2

Distillate

1.0

1.7

29.3

Ref Change Level

-0.1%

1.5%

-2.7%

Utilization %

88.3%

86.8%

91.0%

The above all said I am expecting a decline of about 2 million barrels of crude oil, a 1 million barrel draw in gasoline and a seasonal build of about 1 million barrels of distillate fuel. Refinery utilization rates likely declined marginally on the week. Even if the actual data is in line with my projections the year over year overhang of crude oil stocks will still be around 13.8 million barrels while the surplus versus the five year average for the same week will still be over 30 million barrels. Needles to say crude oil supply continues to outstrip demand as the surplus in the US alone has been in existence since the fourth quarter of 2008 with no end in sight.

On the refined product front I am projecting a modest gasoline inventory draw of about 1 million barrels but one that is certainly not nearly enough to eliminate the year over year and five year average surplus. As I have indicated for months even with implied gasoline demand showing improvements over last year, the relatively high level of refinery utilization rates as well as the robust level of imports is more than offsetting any increase in demand so far this year. The surplus is likely to last throughout the summer driving season in the US.

On the distillate front, I am expecting a normal seasonal build of about 1 million barrels. The distillate surplus versus last year should come in around 2 million barrels while the overhang versus the five year average for the same week will be a tad below the 30 million barrel mark. Overall if the actual API and EIA data are in sync with the projections, I would categorize this week’s inventory report cycle as neutral to biased to the bearish side. The neutral rating is based on the weekly changes while the bearish bias comes from the persistently large overhang in inventories that have been in place for over a year and half.

The EIA will also be releasing the latest snapshot of Nat Gas stocks tomorrow. I am expecting a net injection into inventory of about 69 BCF on a combination of increased cooling demand resulting from the large portions of the US that experienced much hotter than normal temperatures over the last week but were offset a bit by the likely decline in industrial consumption for the week as a result of the long holiday weekend in the US. If the actual data is in sync with the projection it will be the fourth week in a row where current inventories underperformed compared to the previous year as well as the five year average for the same week. Last year the injection level was 74 BCF with the five year average injection level at 80 BCF.

The overhang in Nat Gas inventories has been modestly improving over the last month or so and is likely to continue on this path as long as the weather pattern in the US remains hotter than normal in large parts of the US. The latest weather forecasts by NOAA show above normal temperatures in large parts of the US for the next several weeks, especially in the large population centers like the US East and West coasts. At the moment the current weather pattern is supportive for Nat Gas prices. In addition the tropical storm season has been active so far and we are not even at the peak of the season. As mentioned above there is a pattern currently hovering around the Yucatan Peninsula that could possibly impact Nat Gas producing operations over the next week if it continues to strengthen and moves toward the Nat Gas rich portion of the Gulf. At the moment, the evolving storm and the warm temperatures are providing a floor to Nat Gas prices. I continue to expect Nat Gas to trade in the wide trading range it has been in for weeks.

Headlines and macroeconomic indicators will continue to dominate the market direction. My individual market views are detailed in the table at the beginning of the newsletter. Overall the market sentiment for all risk asset classes remains biased to the bearish side. As this is a relatively quiet economic week we may not see any change in this pattern until the major corporations begin to report earnings next week. Most analysts are expecting another good earnings season but the most import part of the earnings report will be the forward guidance that the companies release regarding expected going forward conditions. With all signs pointing to a slow down, the guidance may result in a negative backdrop over the expected good second quarter earnings. At the moment I am not expecting much that can change the sentiment for equities or oil prices in the short term.

Currently energy prices are positive with equities and the Euro in negative territory.

Current Expected Trading Range

Expected Trading Range

7/7/10

Change

Low

High End

From

End Support

Resistance

8:18 AM

Yesterday

Aug WTI

$72.15

$0.17

$70.00

$76.00

Aug Brent

$71.72

$0.27

$70.40

$74.25

Aug HO

$1.9327

$0.0155

$1.8650

$1.9700

Aug RBOB

$1.9857

$0.0144

$1.8900

$2.0500

Aug NG

$4.765

$0.083

$4.000

$5.000

10 YR Treasuries

122.84

0.11

118.00

124.00

Dow Futures

9,650

(32)

9,500

9,800

US Dollar Index

84.55

0.244

83.100

85.300

Euro/$

1.2568

(0.0055)

1.2480

1.2680

Yen/$

1.1481

0.0033

1.1320

1.1550

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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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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