Tropical storm bolsters energies

Quote of the Day

“No man has a good enough memory to make a successful liar.”

Abraham Lincoln

EMI QuickView Short Term Market Overview

Impact on Energy Prices

Price Drivers

Crude

Gasoline

HO/Diesel

Nat Gas

Supply

Cbr

Cbr

Cbr

CBr

Demand

Cbr

Cbr

Cbr

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

CBu

CBu

CBu

CBu

Market Sentiment

N

N

N

N

Overall View

N

N

N

N

Bias

CBu

CBu

CBu

CBu

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

CBr - Cautiously Bearish

Wednesday was turnaround day or in other words what we have seen happen very frequently...another price direction reversal. The bearish news began on Monday with the release of several key earnings reports that all met or exceeded expectations on the bottom line or earnings front but missed on the widely watched top line or revenue side. The market is very focused on revenues this go around as it is viewed as a better gauge of the sustainability of the economic recovery since it represents consumer spending which makes up about 70% of the US economy. Profits are viewed as still mainly driven by cost cutting which is not a sustainable strategy for the corporate world or the economy. IBM was the most noteworthy of the bunch on Monday night which resulted in broad based afterhours selling. The bearish news rolled over into early Tuesday’s trading as the bellwether of Wall Street...Goldman... reported a disappointing earnings reports based on Goldman’s usual standards. Much like many other companies that have reported so far, Goldman met on earnings (after several key one time charges were adjusted) but missed on revenues. The US equity market started the session with triple digit losses and the bears were further fueled by yet another housing starts reports that came in with significantly lower than what was expected.

However, after investor/traders dug a little deeper into the earnings reports as well as the new permit data in the housing numbers the selling backed off a bit and the market slowly regained its sea legs and worked its way all the way back into positive territory and never looked back. Crude oil prices followed the lead and trading pattern of the US equity markets and pretty much discounted the rising Euro/falling dollar pattern in the currency market (which is normally a negative for oil prices). In the end both oil and Nat Gas prices (as well as the broader commodity markets in general) ended the day with modest gains.

Oil and Nat Gas prices were further bolstered on Tuesday and continue to be supported this morning by the upgrading of the strong tropical wave in the Caribbean. NOAA upgraded the weather pattern to a 60% on Tuesday and to 70% this morning in the 5 a.m. report. It is a high probability of now becoming a tropical depression or storm in the next 48 hours. When the chances exceed the 50% level it starts to really get my attention and the potential storm is still far enough away from the Gulf of Mexico to result in this storm working its way into the Gulf and possibly impacting the oil and Nat Gas rich producing region in the Gulf.

Right now the storm is located near the eastern Dominican Republic and is impacting a wide area stretching from the northern Leeward Islands westward to Hispaniola. Irrespective of further strengthening, the storm will impact the current area at least for the next 48 hours and likely beyond that. This weather pattern can now be considered a price driver over the short term with the magnitude of the impact a direct result of it first strengthening to a hurricane and then it moving into the Gulf of Mexico and finally taking a path that would take it the region between approximately Houston on the west end of the Gulf to just east of New Orleans (this is the main energy producing and refining area of the Gulf). If it ultimately moves as described the impact will be significant...if it remains out of the aforementioned area any current price impact that has already been incorporated into the price (all of Tuesday’s and today’s gains) will disappear in a heartbeat.

The going forward strategy to employ with this potential weather problem is to either cover any short positions you may have and/or use a tight trailing stop and be prepared for a higher level of price volatility. If it turns into a Tropical Depression, I would consider selling more September out of the money crude oil and Nat Gas puts ( I sold some on Tuesday) as this is a conservative way to play an uptick from a storm. If it begins to look like it will move to the energy producing sweet spot in the Gulf I would then get flat price long (in addition to the aforementioned options position) and also add front to back spreads. Trading around a potential storm is quit dangerous (remember Amaranth’s adventures with hurricane season) and should be done very cautiously and with a definitive exit plan for each new entered trade. I also suggest working with tight enough stops so as to not spend too much money if the storm either fizzles out or does not head to the GOM (which happens very frequently). Be careful!

Back to the financial front, last night Apple reported their earnings report and unlike some of the companies before them they just blew away all of the estimates from a bottom line, top line and going forward guidance perspective. This resulted in a rally in after hours trading that has carried over into Asia and Europe so far. The EMI Global Equity Index (table below) is now 1.8% higher on the week narrowing the year to date loss to 6%. Even Germany has moved back into positive territory for 2010 as the Euro has been on the defensive for the last several days which is a positive for the largest exporter in the EU. Japan was the lone outlier or only bourse in the Index that has declined in the last twenty four hours. Japan is now showing a year to date loss of 12% as confusion reigns as to the makeup of the government as well as their plan to fight deflation. Even China’s equity markets rose for a third day in row on a view of a potential easing by the government. Overall global equity markets are back to providing positive support for oil prices and the broader commodity complex at the moment.

This morning the EIA will release the latest oil inventory snapshot. Last night the API released their report which was mixed as shown in the following table along with a comparison to last year and the five year average for the same week, assuming the EIA data is in sync with my projections. The API reported a small decline in crude oil stocks versus my projection for a small build (the industry is expecting a decline of about 300,000 barrels) as imports increased offsetting some of the increased refiner demand for crude oil as a result of the 1.6% increase in refinery utilization rates reported in the API report.

Projections

7/21/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(0.2)

0.0

10.4

24.2

Gasoline

(0.4)

(1.0)

4.6

8.2

Distillate

1.0

1.3

3.4

29.3

Ref Change Level

1.6%

-0.2%

4.5%

0.3%

Utilization %

88.7%

90.3%

85.8%

90.0%

As has been the case for the last several weeks, gasoline has been underperforming with that pattern continuing in the API report. They showed only a modest decline of about 400,000 barrels in gasoline inventories versus an expectations for a draw of 1 million barrels. So far the high demand summer driving season has been anything but spectacular insofar as gasoline consumption and inventory destocking goes. Distillate fuel stocks built by about 1 million barrels, or modestly less than the expectations. Much like gasoline economy sensitive diesel fuel has also been underperforming of late.

Overall I would categorize last night’s API report as neutral to biased to the bearish side. However, even if this morning’s EIA report is in line with the API numbers the market is likely to discount the results and quickly move on to following the developing storm in the Caribbean, the next batch of earnings reports and the two days of testimony coming from US Fed Chairman Bernanke starting with the Senate this morning and finishing up with the House tomorrow. The market will likely grasp hold of anything and everything he says regarding the Fed’s projection for the US economy for the remainder of 2010 and beyond. Remember slowing is the word in all forecasts and I am certain we will hear that word many, many times over the next 48 hours.

My individual market views are detailed in the table at the beginning of the newsletter. I upgraded my bias for oil and Nat Gas strictly based on the potential impact of the developing storm in the Caribbean as well as the positive tone the equity markets have taken over the last twenty four hours. Beyond that I am still relatively neutral with an expectation that absent the storm potential both oil and Nat Gas prices will continue to trade within the wide trading ranges they have been in place for most of the summer. The financial and commodity markets will continue to be headline and macro data driven for the foreseeable future with a high probability of price direction reversals at anytime...much like we experienced yesterday. Stay small and make sure you have tight exit plans that will get you out of the market quickly if we begin to flip-flop once again.

Currently most all risk asset classes in the EMI Price Board are starting the US session in positive territory.

Current Expected Trading Range

Expected Trading Range

7/21/10

Change

Low

High End

From

End Support

Resistance

7:34 AM

Yesterday

Sep WTI

$78.15

$0.57

$71.50

$80.00

Sep Brent

$76.76

$0.54

$74.00

$77.80

Aug HO

$2.0365

$0.0166

$1.9700

$2.0700

Aug RBOB

$2.0920

$0.0195

$2.0100

$2.1000

Aug NG

$4.630

$0.040

$4.000

$5.000

10 YR Treasuries

123.17

(0.06)

118.00

124.00

Dow Futures

10,193

15

10,000

10,370

US Dollar Index

83.05

0.121

81.300

83.500

Euro/$

1.2834

(0.0082)

1.2700

1.3075

Yen/$

1.1494

0.0032

1.1400

1.1650

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.

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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