Energy inventory report shows growing supplies

“In business, the competition will bite you if you keep running; if you stand still, they will swallow you.”

William Knudsen Jr.

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

CBu

CBu

CBu

CBu

10 Yr Treasuries

N

N

N

N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

Cbr

Cbr

Cbr

N

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

Corporate earnings have outperformed so far this week and the global equity and commodity markets have reacted positively to the news. WTI put in another strong performance on Tuesday gaining almost 3% or $2.20 per barrel on the back of yet another triple digit gain in the Dow. The direction of the oil market is closely linked to the direction of equity markets all based on the perception trade once again. Investor/traders continue to view gains in equities as a leading indicator for growth in the economy which in turn will lead to increased consumption of oil and other commodities. Even a projected slowing in oil demand growth for 2011 forecast by the IEA yesterday did not de-link the aforementioned perception analysis/trade. The short term direction of the oil market is going to be directly linked to the short term direction of equities and the US dollar with all other micro drivers taking a back seat. We remain clearly in the macro or headline mode with most every risk asset class closely correlated to each other...all will rise and fall based on the pretty much the same signals. Of course there will be some outliers to this pattern but the majority of commodities will rise with rising equities and a falling US dollar with the direction of equities the dominate macro driver at the moment.

The positive earnings continued to flow after the close of the U.S. markets on Tuesday as both Intel and Yum reported better than expected results with very positive forward guidance coming from Intel. After hours trading in both the equity and oil markets reacted positively to the results with oil completely ignoring a bearish API inventory report (more details below) that was released about the same time. Gaines in equity markets continued into and throughout Asian hours on a combination of the latest earnings reports as well as the latest growth economic growth figures out of Singapore. Singapore’s growth surged to 18.1% in the first half of 2010 and taking over the top spot as Asia’s fastest growing economy. Singapore’s astonishing economic recovery suggests that the Asian region is still robust even as several countries (including China) tighten monetary policy.

As shown in the EMI Global Equity Index (table shown below) all of the major bourses in Asia had sizeable gains including China. In fact most Asian markets increased by a larger percentage than the gains seen in the US markets on Tuesday. This has resulted in the EMI Index gaining about 0.8% for the week with only China showing double digit losses for 2010. The Index is now down only 5.9% for the year or about half as much as it was just weeks ago. The buying frenzy has subsided as the major indices in Europe have now slipped into negative territory after 6 days of solid gains in Europe. However US equity futures markets are all still setting up for a positive start to the US trading session. Equities have been positive for both oil and the broader commodity complex.

EMI Global Equity Index

7/14/10

Change

Change

2010 YTD

2010

From

From

Change

7:45 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,363

147

1.44%

-0.6%

Can/S&P-TSX

11,673

107

0.93%

-0.6%

Lon/FTSE

5,240

(31)

-0.59%

-3.2%

Paris/Cac 40

3,615

(23)

-0.63%

-8.2%

Germany/Dax

6,184

(7)

-0.11%

3.8%

Japan/Nikkei

9,795

258

2.71%

-7.1%

HongKong/HangSeng

20,561

130

0.64%

-6.0%

Aussie/SYDI

4,462

82

1.87%

-8.6%

China/Shanghai A

2,589

21

0.82%

-24.7%

Brazil/Bvspa

63,686

725

1.15%

-7.1%

EMI Global Equity Index

13,817

141

1.03%

-5.9%

On the oil fundamental front yesterday’s IEA monthly oil assessment suggested inventories were still growing and forecasted oil demand in 2011 will be slowing including a slowing in China’s consumption. Overnight a China research group forecast a slowing of imports of oil into China as refining margins wane and economic activity slows due to tightening. The forecast suggests that oil imports in the second half of the year could decline by 19% after record high levels in June. Overall energy related industries seem to be slowing. For example car sales rose at the slowest rate in 15 month in June while electricity consumption rose at the slowest pace due to a slowing in manufacturing. With China representing about 50% of total global oil demand growth in 2010 any slowing in China’s energy utilization will have a profound impact on global oil balances and further contribute to the current surplus lasting even longer than anticipated. It also suggests that the perception trade...rising equities/rising economy/rising oil consumption may not be as strongly linked as many participants believe.

Last night the API released a bearish oil inventory report that has pretty much been discounted so far. The API data is summarized in the following table along with my projections as well as with a comparison to last year and the five year average for the same week. The API report showed a surprise build of 1.7 million barrels in crude oil inventories against a projecting for the third week of declines. If the EIA data is in sync with the API crude oil data the year over year surplus would be over 15 million barrels while the overhang versus the five year average for the same week would be approaching the 30 million barrel mark.

Projections

7/14/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

1.7

(1.1)

12.6

26.7

Gasoline

1.7

0.5

5.4

8.1

Distillate

3.2

1.0

1.4

28.0

Ref Change Level

0.4%

-0.1%

1.8%

-1.8%

Utilization %

87.1%

89.7%

87.9%

91.5%

On the refined product front utilization rates increased yet again resulting in a surprise build in gasoline stocks and a much larger than forecast build in distillate fuel inventories. The API reported a stunning build of 1.7 million barrels of gasoline inventories during the highest driving demand week of the year. The gasoline inventory overhang will be over 6 million barrels versus last year if the EIA data is in agreement with the API numbers. The surplus versus the five year average will be approaching the 10 million barrel mark even as the US is in the heart of the high gasoline demand season. It continues to suggest that consumption is being impacted by the astronomically high level of unemployment.

Distillate fuel built by 3.2 million barrels in the API report versus an expectation for a more modest build of about 1 million barrels. If the EIA data is in sync the surplus versus the five year average will exceed the 30 million barrel mark. With economy sensitive diesel fuel making up a large portion of the distillate fuel pool the API numbers are indicating that demand for diesel fuel is also waning suggesting that economic activity at the manufacturing and retail levels may be also waning in the US as unfinished and finished goods have to be shipped by rail and truck which are the largest consumers of diesel fuel in the US. This may be yet another leading indicator that is suggesting the US economic recovery is slowing (in spite of the recent earnings reports released this week).

Oil prices have only started to react to the bearish API data over the last few hours of trading with crude oil and refined products lower across the board on both the Nymex and ICE exchanges. Equity futures are still in positive territory in the United States while the U.S. dollar is trading either side of unchanged suggesting that the current round of selling is more related to the bearish API data as well as the bearish oil import forecast coming out of China. The entire move in oil prices over the last week or so from the range low to current levels is all based on the perception trade.

However, the current and projected fundamental data from the IEA, China and the latest API report (still to be confirmed by the EIA later this morning) do not support the premise of the perception trade as described previously. With China in slowing mode, Europe in austerity mode and the US also looking like the next six months of growth will not match up to the last six months it suggests to me that global oil consumption will not perform as many of the perception traders think. Oil prices are overvalued based on just about any measurement...current fundamentals, projected fundamentals and technicals which have moved back below the breakout level.

My individual market views are detailed in the table at the beginning of the newsletter. I remain in the neutral corner as I believe oil is overvalued and due for a correction to the downside. The financial markets are very enthusiastic about the prospects for the rest of the earnings season after the great results so far. If this pattern continues throughout the next week or so equity markets should remain relatively firm and dampen any downside corrective move in oil price even if this morning’s EIA report is as bearish as the API data was last night. Headlines and macros are still the main directional drivers for the energy complex with fundamentals and technicals taking a back seat...unless the fundamentals strongly deviate from the projections.

Currently energy prices are lower while equities and the Euro are trading in positive territory.

Current Expected Trading Range

Expected Trading Range

7/14/10

Change

Low

High End

From

End Support

Resistance

7:46 AM

Yesterday

Aug WTI

$76.62

($0.53)

$70.00

$77.50

Aug Brent

$76.29

($0.36)

$70.40

$78.00

Aug HO

$2.0329

($0.0145)

$1.9700

$2.0600

Aug RBOB

$2.0674

($0.0147)

$2.0500

$2.1000

Aug NG

$4.345

($0.009)

$4.000

$5.000

10 YR Treasuries

121.67

0.02

118.00

124.00

Dow Futures

10,320

32

9,800

10,500

US Dollar Index

83.785

(0.036)

83.100

85.300

Euro/$

1.2699

(0.0003)

1.2600

1.2800

Yen/$

1.1295

(0.0005)

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.

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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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