Oil overhang grow as driving season ends

Quote of the Day

“Change is not reform any more than noise is not music.”

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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

Cbr

Cbr

Cbr

N

Inventories

Cbr

Cbr

Cbr

N

US Dollar

Cbr

Cbr

Cbr

CBu

Global Equities

Cbr

Cbr

Cbr

N

10 Yr Treasuries

Cbr

Cbr

Cbr

N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

Cbr

Cbr

Cbr

CBr

Market Sentiment

Cbr

Cbr

Cbr

CBr

Overall View

Cbr

Cbr

Cbr

CBr

Bias

Cbr

Cbr

Cbr

CBr

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

CBr - Cautiously Bearish

A modest equity rally on Tuesday resulted in a modest short covering based rally in oil prices. With oil so highly correlated to both equities and the US dollar, any sustained change in sentiment in the financial markets could very well translate to a bottoming of oil prices. If yesterday’s action in the financial sector was a possible beginning of the market starting to become a bit more positive that the economic recovery might not move into a double dip recession, we could see a new trend forming that would suggest that the US economy may still continue to expand. That is why the financial markets traded as they did on Tuesday. If so it will be a positive for future oil consumption growth and thus possibly supportive for prices over the medium term. Tuesday’s macroeconomic data also showed an unexpected increase in industrial production suggesting that manufacturing is in fact a key behind the US economic recovery. Any increase in this sector should directly translate to an increase in economy sensitive diesel fuel consumption which has been under pressure since mid-May of this year. Output climbed 1% as factories produced computers, autos and industrial machinery to name a few…many of these facilities require raw materials to be shipped to factories as well as finished good to be shipped to distribution facilities …all consuming diesel fuel in the process. This is encouraging for the medium term prospect for the diesel demand side of the equation possibly indicating that the significant inventory building seen of late could possibly begin to ease a bit. We will have to watch how this evolves over the next month or so.

The EMI Global equity Index has continued to gain ground on the week as shown in the following table. The Index is currently up by 1.2% on the week narrowing the year to date loss to 3%. Germany is still the only bourse with a positive gain for the year with the US and Canada once again on the cusp of returning back into positive territory. China has been slowly inching out of bear market territory and has seen its year to date loss narrow to 18.7%. Overnight Asian markets were mixed with most bourses losing ground except for Japan which recovered some of its previous day’s losses. The selling has continued in Europe with most markets falling for the first time in about 5 days on a few mediocre corporate earnings reports,as well as on concerns that the sovereign debt issues may raise their head again before too long. US equity futures are currently hovering near the unchanged level suggesting an uneventful opening on Wall Street this morning. Overall equities are still a positive for oil prices as is the falling US dollar.

EMI Global Equity Index

8/18/10

Change

Change

2010 YTD

2010

From

From

Change

7:09 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,406

104

1.01%

-0.2%

Can/S&P-TSX

11,729

176

1.52%

-0.1%

Lon/FTSE

5,321

(29)

-0.54%

-1.7%

Paris/Cac 40

3,659

(4)

-0.11%

-7.0%

Germany/Dax

6,207

1

0.02%

4.2%

Japan/Nikkei

9,241

79

0.86%

-12.4%

HongKong/HangSeng

21,023

(115)

-0.54%

-3.9%

Aussie/SYDI

4,475

(2)

-0.04%

-8.3%

China/Shanghai A

2,794

(6)

-0.21%

-18.7%

Brazil/Bvspa

67,584

882

1.32%

-1.5%

EMI Global Equity Index

14,244

109

0.77%

-3.0%

However, for the first time in a while, oil investor/traders are focusing on the very bearish API inventory report that was released late yesterday afternoon. The more widely watched EIA data which is due out this morning at 10:30 am EST may impact prices in the short term much more than in previous weeks after the way the market is reacting to last night’s API data release. My individual projections for the EIA report are detailed in the following table along with the API results and a comparison to last year and the five year average for the same week. As mentioned yesterday, the inventory reports tend to only impact short term price direction when the externals are not strongly supportive in either direction (as is the case this morning) and when the results strongly deviate from the expectations…as was the case with the most recent API data.

Projections

8/18/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

5.9

(1.3)

10.1

26.1

Gasoline

2.0

(0.5)

13.1

21.6

Distillate

2.1

1.0

11.8

35.1

Ref Change Level

1.3%

-0.2%

3.9%

-1.6%

Utilization %

85.5%

87.9%

84.0%

89.5%

The API reported a huge across the board build in oil stocks. They showed a 5.9 million barrel build in crude oil stocks even as they reported a 1.4 million barrel decline in crude oil imports and a surprisingly 1.3% increase in refinery utilization rates...both suggestive for a draw or at least a much more modest build in crude oil stocks. If the EIA crude oil data is in sync with the API results, the year over year crude oil overhang would grow to 17.3 million barrels while the surplus versus the five year average for the same week would be well over the 30 million barrel mark.

With refinery run rates surging higher, the API reported a much larger than expected build in both gasoline and distillate fuel. The API reported a huge 2 million barrel build in gasoline stocks at the height of the high demand summer driving season. If the EIA data is in line with the API, gasoline build the year over year surplus of gasoline will increase to over 15 million barrels while the overhang compared to the five year average will be approaching 25 million barrels. As I have been indicating gasoline stocks are not only very surplus they are likely to end the driving season at a higher level than where they were at the start of the season (end of May). In fact, assuming today’s EIA data shows the same increase in gasoline inventories as did the API data total gasoline inventories would be about 6.5 million barrels higher this week than at the end of May. With only two weeks left to the driving season, the gasoline overhang is going to impact the refining sector for months to come.

Of equal concern to participants was yet another huge build in distillate stocks suggesting that economy sensitive diesel fuel demand may not be picking up as discussed in the opening of the newsletter. The API reported a 2.1 million barrel build in distillate stocks widening the overhang versus last year to almost 13 million barrels, if the EIA data is in sync with the API results, while the surplus versus the five year average for the same week would come in at over 36 million barrels. Not a very pretty picture for HO & diesel fuel prices going forward.

Overall the API report was bearish and if the EIA data confirms the API number the oil fundamentals as measured by inventories will be viewed by the market as very bearish. We have already seen the oil market sentiment drifting into a bearish bias since the release of the API data last night as prices are down strongly even as equities are stable and the US dollar is in retreat. No matter how you look at the current fundamentals, they are simply bearish…barring any major surprise from the EIA data in the opposite direction as compared to what was reported by the API. In fact the surplus versus last year and the five year average are projected to be in double digit figures for all of the major commodities in the complex. No matter how firm equities get, or how weak the US dollar gets, the bearish oil fundamentals will be a cap on prices for the foreseeable future. On the other hand, if the financials become a negative for oil prices, the market is going to be forced to focus more on the oil fundamentals and that will not be a pretty picture for prices.

In the category of something to keep an eye on, the latest from the hurricane center is showing a low probability disturbance in the Caribbean Sea that currently has about a 10% chance of strengthening into a tropical cyclone over the next 48 hours. Not a very high probability event, but one we must put on our radar and watch how it evolves over the next several days. The oil market is currently not paying any attention to this evolving weather event as prices are strongly lower at the moment. The market is not likely to react to this event very quickly as the probability is still too low and this year’s track record has not been very damaging to oil or Nat Gas supplies in the Gulf of Mexico.

My individual market views are detailed in the table at the beginning of the newsletter and remain the same for today. I expect the financials will continue to be the main price drivers for oil for the rest of this week and likely into next week. However, we are seeing oil fundamentals actually impacting the short term direction of oil prices this morning. How long that continues will be a direct function as to whether or not the equity markets follow through on yesterday’s strong short covering rally in US equities. Absent a strong upside move in US equities, it could result in a strong downside move in oil based on the bearish fundamentals if the EIA data is in line with what the API reported last night. Overall liquidity will be at a reduced level as many traders & investors remain in vacation mode for the next few weeks.

Currently, most risk assets are in negative territory even as the US dollar continues to move lower.

Current Expected Trading Range

Expected Trading Range

8/18/10

Change

Low

High End

From

End Support

Resistance

7:09 AM

Yesterday

Sep WTI

$74.77

($1.00)

$72.00

$84.50

Oct Brent

$75.95

($0.98)

$76.00

$84.00

Sep HO

$2.0070

($0.0189)

$2.0000

$2.2000

Sep RBOB

$1.9250

($0.0282)

$190.0000

$2.1800

Sep NG

$4.264

($0.003)

$4.100

$5.000

10 YR Treasuries

125.86

0.19

118.00

128.00

Dow Futures

10,356

(2)

10,150

10,850

US Dollar Index

82.195

(0.129)

80.150

82.550

Euro/$

1.2886

(0.0003)

1.2700

1.3100

Yen/$

1.1733

0.0029

1.1400

1.1900

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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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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