“The most important single central fact about a free market is that no exchange takes place unless both parties benefit.”
|EMI QuickView Short Term Market Overview|
|Impact on Energy Prices|
|Price Drivers||Crude||Gasoline||HO/Diesel||Nat Gas|
|10 Yr Treasuries||N||N||N||N|
|N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish|
|CBr - Cautiously Bearish|
After oil prices surged higher over the last several weeks on the back of a declining U.S. dollar oil prices have now been on the defensive for the last several days as the U.S. dollar has reversed higher while the Euro has been falling. The dollar is attracting safe haven buyers as the US Fed painted a negative picture yesterday indicating that the U.S. economy is slowing and the recovery was weaker than anticipated. With a slow growth scenario getting another reaffirmation the demand for risk assets that had re-emerged over the last month or so may be once again waning as evidenced by cash flowing back into the US dollar over the last two days. The Fed said the pace of the economic recovery is likely to be more modest in the near term than previously anticipated. They left the short term interest rate at near zero and indicated it would remain at that level for an extended period of time. It also decided to keep its balance sheet constant by reinvesting maturing instruments back into U.S. Treasuries thus providing plenty of cash for the system.
After the Fed announcement the markets recovered some of its earlier losses (pre-Fed meeting announcement). However, selling has reemerged in both Asia and Europe so far with U.S. equity futures also pointing to a lower opening on Wall Street. Oil is following the low equity price environment and the firming U.S. dollar and is currently well trading well below the $80/bbl mark. The EMI Global Equity Index (table shown below) has deteriorated further over the last twenty four hours. The Index is now down by 1.2% for the week widening the year to date loss of 2.8%. China was the only bourse to remain in positive territory over the last twenty four hours although its bourse is still back into bear market territory. The global equity markets are clearly trading based on a slow and grow economic pattern and certainly not a vibrant recovery mode. Global equities have been supportive for oil and other risk assets but that pattern may be changing after the Fed comments work their way into the projected market sentiment.
|EMI Global Equity Index|
|7:23 AM||Yesterday||Yesterday %||%|
|EMI Global Equity Index||14,264||(147)||-1.02%||-2.8%|
Oil prices are on the defensive even though a newly upgraded Tropical Depression 5 has formed in the Gulf of Mexico and is heading on a projected path to the sweet spot for oil and Nat Gas producing operations as shown in the following graphic. At the moment TD5 is only expected to strengthen into a tropical storm and not reach hurricane status before making landfall early Friday morning. As such the industry is not likely to lose much production and whatever is lost will only be related to pre-emptive, safety shut-downs as the projected intensity of TD5 does not appear to be strong enough to result in permanent infrastructure damage. There is also a new weather pattern out in the Atlantic that currently only has a 10% chance of strengthening and thus falling into the category of watching to see how it evolves. For now that may be a story for next week (if at all).
The EIA released their Short Term Energy Outlook yesterday afternoon. The most noteworthy part of their report is the modest increase in their forecast for oil consumption. A conclusion I have difficulty in absorbing as more and more macroeconomic data are suggesting a slowing of the economy. Following are the oil highlights of their report.
Global Crude Oil and Liquid Fuels Consumption. Projected world oil consumption increases by 1.6 million barrels per day (bbl/d) in 2010. Countries outside of the OECD, especially China, Saudi Arabia, and Brazil, represent most of the expected growth in world oil consumption. Among the OECD countries, only the United States is expected to show significant increases in oil consumption of about 0.15 million bbl/d in both 2010 and 2011. Projected global oil consumption grows by another 1.5 million bbl/d in 2011.
U.S. Liquid Fuels Consumption. Projected total liquid fuels consumption grows by 140,000 bbl/d (0.7 percent) in 2010 and 170,000 bbl/d (0.9 percent) in 2011 as all of the major petroleum products register consumption growth. This reverses the trend of falling consumption over the last 4 years. A year-over-year decline in total liquid fuels consumption averaging 40,000 bbl/d in the first quarter of 2010 was followed by a year-over-year rise in consumption averaging 380,000 bbl/d in the second quarter of 2010, led by increases in motor gasoline and distillate fuel oil consumption. During 2010 as a whole, gasoline and distillate fuel are projected to increase by 0.3 percent and 1.4 percent, respectively. Projected gasoline consumption growth increases to 0.8 percent in 2011 while distillate fuel consumption growth falls slightly to 1.2 percent. Jet fuel consumption grows more slowly, at an average annual rate of about 0.5 percent through 2011, resulting from the drop in air carrier capacity over the last 2 years. Airlines are expected to remain reluctant to expand capacity in the immediate future, relying on increases in utilization rates as air passenger and freight transport recovers from the recession.
Non-OPEC Supply. EIA's non-OPEC oil supply forecast was raised by 100,000 bbl/d, with an expected 720,000 bbl/d growth in 2010 primarily from the United States, Brazil and Azerbaijan. Forecast non-OPEC production falls for only the third time over a 15-year period, with a 160,000 bbl/d decline in 2011 led by reduced production from Mexico and the North Sea.
OPEC Supply. EIA expects OPEC crude oil production to rise somewhat through 2011 to accommodate increasing world oil demand and to maintain OPEC market objectives. Projected total OPEC petroleum liquids production increases by 1.0 and 1.2 million bbl/d in 2010 and 2011, respectively, with non-crude petroleum liquids expected to increase by 0.6 million bbl/d in 2010 and by 0.7 million bbl/d in 2011. With the remaining OPEC supply reflecting an increase in crude oil production, OPEC surplus crude oil production capacity should remain about 5 million bbl/d, versus 4.3 million bbl/d in 2009 and 1.5 million in 2008.
OECD Petroleum Inventories. Commercial oil inventories held by OECD countries stood at an estimated 2.75 billion barrels at the end of the second quarter of 2010, equivalent to about 61 days of forward cover, and about 92 million barrels more than the previous 5-year average for the corresponding time of year. OECD oil inventories are expected to be relatively flat through the forecast period, although days-forward-cover should remain high.
The IEA also just released their monthly oil report. Following are the main highlights of this report. Much like the EIA the IEA revised upward their forecast for oil consumption on stronger GDP assumptions. However, they did acknowledge the downside risks to consumption especially with China starting to show signs of declining energy utilization. China reported today that its industrial output grew by the smallest amount in the last 11 months.
Crude oil futures trended higher in July on stronger financial markets and supply outages in the US Gulf of Mexico and the North Sea. By early August, prices rose to their highest level in three months before retreating on more comfortable supplies and concerns over the global economic recovery. WTI and Brent currently stand near $80/bbl.
Global oil demand for 2010 and 2011 is revised higher on stronger GDP assumptions and baseline adjustments. Demand is seen at 86.6 mb/d in 2010 (+2.2% or +1.8 mb/d year-on-year) and 87.9 mb/d in 2011 (+1.5% or +1.3 mb/d). Weaker economic recovery, a third lower than the base case, would cut the 2010 and 2011 prognoses by 290 kb/d and 1.2 mb/d, respectively.
Global oil supply rose 850 kb/d to 87.2 mb/d in July, as Norwegian maintenance ended and OPEC boosted supplies. Non-OPEC supply estimates for 2010 are hiked to 52.6 mb/d, rising to 52.9 mb/d in 2011. BP has plugged its leaking well in the Gulf of Mexico, but we now identify 60 kb/d of potential lost output due to regional project delays in 2010, rising to 100 kb/d in 2011.
OPEC crude oil supplies edged up 220 kb/d to 29.2 mb/d in July, on higher output from Nigeria and the UAE. The ‘call on OPEC crude and stock change’ is reduced by 100 kb/d for both this year and 2011, to 28.8 mb/d and 29.1 mb/d, respectively. OPEC NGLs are forecast to rise by 600 kb/d to 5.9 mb/d in 2011, similar growth to 2010.
Global refinery crude throughputs are revised up 425 kb/d for 2Q10 on strong European runs. At 73.9 mb/d, 2Q10 global runs are 1.8 mb/d higher year-on-year, with growth underpinned by expansions in China and a recovery in US refinery activity. Forecast 3Q10 runs are hiked to 74.7 mb/d, 1.1 mb/d above 3Q09.
OECD industry stocks fell by 0.8 mb in June to 2 760 mb, or 61.0 days of forward demand cover. Preliminary data point to a seasonal 21.5 mb build in the OECD in July, driven by product increases in the US, while crude and products held in short-term floating storage fell.
This morning the EIA will be releasing their latest snapshot of oil inventories. The API released their report late yesterday afternoon which came in supportive for both crude oil and gasoline and bearish for distillate fuel. The API results are summarized in the following table along with my projections and a comparison to the five year average for the same week assuming that the EIA actual data is in line with the projections. The API reported a decline in crude oil inventories of 2.2 million barrels versus a projection for a decline of 1.5 million barrels. On the gasoline front the big 1.5 million barrel decline was a bit of a surprise as most were projecting a small build to only a small decline. However, distillate fuel inventories built about twice as much as the projections.
|API||Current||Change from||Change from|
|Results||Projections||Last Year||5 Year|
|mmbls||vs. Proj.||vs Proj.|
|Ref Change Level||-1.5%||-0.5%||7.2%||1.2%|
The reaction to last night’s API report has been muted on a combination that market participants are much more comfortable with the EIA data coupled with the bearish news out of China, firming US dollar, weaker equities and downside demand risk warning by the IEA...all bearish for oil. How much of a reaction we see in the market today after the EIA report will be a function as to how active the financial markets are at the release time.
My individual market views are detailed in the table at the beginning of the newsletter and have been downgraded for the oil complex. I am mostly in the neutral corner with a marginal bias to the downside for the short term or as long as the US dollar continues to firm.
Currently, most risk assets in the EMI Price Board (table below) are on the defensive except for Nat Gas and the US dollar.
|Current Expected Trading Range||Expected Trading Range|
|10 YR Treasuries||125.38||0.39||118.00||124.00|
|US Dollar Index||81.75||0.826||80.150||82.550|
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.
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