Bearish energy inventory report expected

“Every human-being has the propensity to be an upstanding citizen.”

Greg Evans

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

N

US Dollar

CBu

CBu

CBu

CBu

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

CBu

CBu

CBu

CBu

Overall View

CBu

CBu

CBu

CBu

Bias

CBu

CBu

CBu

CBu

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

CBr - Cautiously Bearish

The passing of TS Bonnie finally caught up with the oil complex as a modest round of profit taking selling engulfed the complex throughout Tuesday’s session. The fact that U.S. equities traded either side of unchanged throughout most of the session (finally to end higher on the day — after oil settled for the session) while the Euro struggled to stay in positive territory did not help the oil bull’s cause. After the dust settled oil ended the day losing almost 2% of its value with more bearish news hitting the media airwaves after the settle, a surprise build in crude oil stocks as reported in the weekly API inventory report (more details later in the newsletter). Oil has struggled each time it approaches the upper end of the trading range (around $80/bbl) mostly due to the fact that the fundamentals remain bearish. The last attempt to breach the upper resistance level of the trading range occurred in the third week of June which was unsuccessful. Although the fundamentals have not improved a whole lot since then the overall market sentiment is much less negative than it was in June. As such we may not see a retracement all the way back to the lower support area of the range (around $71.50/bbl basis the Sep WTI contract). Actually as I have been discussing in the newsletter where oil prices go will be highly impacted by the direction of the global equity and currency markets in the short- to medium-term with the fundamentals capping any attempt for a strong upward surge.

On the equity front the EMI Global Equity Index continued to gain ground on the week and the year. The Index is now 1% higher for the week resulting in the year to date loss narrowing to just 3%. Both the U.S. and German bourses remain in the winner’s column for 2010 while China’s Shanghai A shares appear to have finally improved enough to be moving out of bear market categorization and possibly on its way to a recovery move. China’s Index has gained almost 7% over the last two weeks and has now dropped below the 20% loss level (bear market gauge) to a year to date loss of 19.7%. China has been and remains the main economic and commodity growth engine of the world. The fact that investor/traders have finally re-emerged from a buying perspective in China’s equity markets is a more definitive sign that China may have in fact achieved a soft landing.

EMI Global Equity Index

7/28/10

Change

Change

2010 YTD

2010

From

From

Change

7:19 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,538

12

0.12%

1.1%

Can/S&P-TSX

11,717

(29)

-0.25%

-0.3%

Lon/FTSE

5,368

2

0.04%

-0.8%

Paris/Cac 40

3,688

22

0.60%

-6.3%

Germany/Dax

6,215

8

0.13%

4.3%

Japan/Nikkei

9,753

256

2.70%

-7.5%

HongKong/HangSeng

21,091

118

0.56%

-3.6%

Aussie/SYDI

4,530

33

0.73%

-7.2%

China/Shanghai A

2,760

61

2.26%

-19.7%

Brazil/Bvspa

66,674

231

0.35%

-2.8%

EMI Global Equity Index

14,233

71

0.50%

-3.0%

The early turnaround we have seen in China’s equity market is a sign supporting the slow and grow scenario rather than the gloom and doom double dip recession scenario. Asia’s bourses are now trading at a 10-week high as earnings for China’s industrial companies are coming in as positive as what we have seen so far during the current earnings season in the West. Equities have also remained firm in Europe (so far) with U.S. equity futures hovering around the unchanged level.

There has been a lot of positive and supporting news circulating over the last week or so that has propelled the global equity markets out of the doldrums. This move in the externals has also prompted the move we have seen in oil prices as well as the broader commodity complex of prices. However, as corporate earnings wind down the markets are facing two big economic numbers coming out for the U.S. economy over the next week or so. This Friday is the second quarter GDP number and next Friday is the very important non-farm payrolls number and the unemployment rate.

These numbers will be analyzed from the perspective of either supporting the slow and grow scenario or the doom and gloom scenario. If GDP comes in lower than expected (projected to be about 2.5%) and/or private sector job creation is less than expected (plus 83,000 new private sector jobs expected) the equity, currency and oil markets are going to experience a strong move to the downside. If not we can expect to see values of all risk asset classes slowly continue in recovery mode as has been the pattern for the last few weeks. Similar economic data will also be coming out for other areas in the developed world over the next few weeks and will also impact market direction in much the same way as just discussed. Market movements over the next week or so will define the trend for the rest of the summer and into the very critical November elections. The momentum and market sentiment is biased to the slow and grow scenario but any deviation from the expectations to the negative side for the upcoming batch of economic data will change the sentiment in heartbeat. Fasten your seatbelts and get ready for a rocky few weeks of action in all of the financial and commodity markets.

Today may be a bit rocky in the oil complex especially if the financial markets do not provide any significant directional guidance for oil prices and investor/traders are forced to look at the latest oil fundamentals for price direction. This morning the EIA will release the latest weekly oil inventory snapshot. The following table summarizes my projections along with the actual results that the API released late yesterday afternoon...which was viewed as bearish by the marketplace.

Projections

7/28/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs. Proj.

Crude Oil

3.1

(1.5)

4.2

24.2

Gasoline

0.9

0.5

9.6

12.4

Distillate

0.4

1.5

5.5

31.0

Ref Change Level

-1.3%

-0.5%

6.4%

1.0%

Utilization %

87.4%

91.0%

84.6%

90.0%

Although most projections are calling for a modest decline in crude oil stocks (partially due to the shut-ins related to TS Bonnie) the API reported a huge build in crude oil inventories of 3.1 million barrels. They also reported that crude oil imports increased by 1.7 million barrels per day and refinery utilization rates declined by 1.3%, the two main reasons why crude oil stocks built. Refinery run rates have been running well above last year as well as the five year average even as total implied refined product demand is still over 4% below the five year average level. With refined product inventories robust and crack spreads in a seasonal downtrend I have been projecting that run rates will likely recede and continue to decline for the next month or two. There is a lot of refined product floating around the world as refinery run rates have been high in most regions of the world. For example run rates in Japan are at a 10-week high.

The downward adjustment in run rates in the United States helped soften the blow of mediocre implied refined product demand and growing inventories as the API reported a much lower build of around 400,000 barrels of distillate fuel compared to an expectation for a build of about 1.5 million barrels. Unfortunately the overhang in gasoline stocks widened according to the API report as stocks built by about 900,000 barrels or more than the projected build of 500,000 barrels.

If the EIA data is in sync with the API report I would (as will the market) categorize this week’s fundamental snapshot as bearish. It would result in total commercial stocks of crude oil and refined products increasing for yet another week and also continuing to raise a question mark as to how much oil demand is actually growing (or not) as a result of the economic recovery in the US. As I have said repeatedly oil fundamentals are a negative on oil prices and will limit any major move to the upside in the short to medium term irrespective as to what happens with the global equity and currency markets.

Oil traders will be looking closely at this morning’s detail results of changes in crude oil stocks...especially for PADD 2 and Cushing as the WTI/Brent spread has failed to remain above the upper end of its trading range resistance and seems poised for a downward correction. At the moment I would suggest a short Sep WTI/long Brent spread if the inventory data are supportive. The spread is trading around the $1.30/bbl level with the range resistance around the $1.45/bbl level. This may be an opportunity to enter the trade with a reasonable stopping out level of around $1.45 to $1.50/bbl level. I am looking to short the spread if the inventory data supports the above scenario.

My individual market views are detailed in the table at the beginning of the newsletter and remain the same for today. Extreme caution should be taken for all flat price strategies for all of the reasons discussed above. Currently most risk assets are mildly negative except for Nat Gas which is holding firm on concern over the above normal level of cooling demand associated with the heat wave hitting a major portion of the US.

Current Expected Trading Range

Expected Trading Range

7/28/10

Change

Low

High End

From

End Support

Resistance

7:20 AM

Yesterday

Sep WTI

$77.35

($0.15)

$71.50

$80.00

Sep Brent

$76.02

($0.11)

$74.00

$77.80

Aug HO

$2.0047

($0.0013)

$1.9700

$2.0700

Aug RBOB

$2.0587

($0.0101)

$2.0100

$2.1800

Aug NG

$4.710

$0.035

$4.000

$5.000

10 YR Treasuries

122.36

0.03

118.00

124.00

Dow Futures

10,490

(4)

10,000

10,370

US Dollar Index

82.24

(0.088)

81.300

83.500

Euro/$

1.3001

0.0010

1.2700

1.3075

Yen/$

1.1385

0.0010

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.

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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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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