Energy fundamentals/technicals bearish

“Problems cannot be solved at the same level of awareness that created them.”

Albert Einstein

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

The selling of pretty much every risk asset continued throughout Tuesday’s trading session and overnight in both Asia and Europe so far. It is hard to find any investor/traders that do not now think the global economy is in fact slowing with more and more participants starting to price in the possibility of a double dip recession. The flow of cash from risk assets into the U.S. dollar and U.S. Treasuries is not only continuing but the pace seems to be picking up. The memories of many in the markets at the end of 2008 and early 2009 are still too vivid in participant’s minds resulting in investors being much more concerned about principal preservation rather than yield, which is why money continues to flow into low yielding U.S. Treasury bonds. The result on Tuesday was another pummeling of oil prices.

Yesterday’s macroeconomic data was simply bad and bearish. Existing home sales in the United States dropped to the lowest level in years. Existing home sales declined by 27% in July again reflecting the end of the government rebate program on April 30. On an annualized basis existing home sales are now running about half of normal, pre recession levels. This rather dire number will likely be a prelude for Friday’s final second quarter GDP number which is expected to be revised down to only about 1.5%; very paltry and thus very bearish for the financial and commodity markets. This morning new home sales will be released. As I have been discussing for the last several weeks there is not much out there that is supportive of oil prices nor just about any traditional commodity for that matter

As shown in the following continuation chart for the spot Nymex WTI contract the price decline that has been in place since early August continues with the market experiencing a very light round of short covering this morning ahead of today’s EIA oil inventory report. However, prices are clearly on a path to test the next technical support level of around $69.50/bbl (the $70/bbl number is more a psychological support rather than a technical support level) and if breached could result in prices ultimately working their way down to the mid-$60’s as shown on the chart. When the dust settles I think prices will eventually head into the $60’s and eventually test the mid May lows of around $64/bbl. I do not see anything (barring a hurricane) that will support an upward price move anytime soon. The technicals are simply bearish.

Today the EIA will release their latest snapshot of oil stocks. Late yesterday afternoon the API released a surprise set of numbers as summarized in the following table along with my projections and a comparison to last year and the five year average for the same week assuming the EIA data is in sync with the projections. With only hours to go before the release of the EIA data I caution to not get too excited about the API data which was a bit bullish for crude oil but bearish for both gasoline and distillate fuel. As I have discussed many times in this newsletter the API data should be used for nothing other than just another projection for the EIA data and not a set a numbers that anyone should invest any trading capital in.

Projections

8/25/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(1.8)

1.0

11.4

27.4

Gasoline

0.7

0.2

15.5

24.1

Distillate

1.9

1.2

13.0

35.5

Ref Change Level

-0.5%

0.2%

3.0%

0.0%

Utilization %

85.0%

90.2%

87.2%

90.2%

That said the API reported a surprise decline of 1.8 million barrels of crude oil stocks even though they reported an increase in crude oil imports and a reduction in refinery utilization rates of 0.5%, basically an illogical outcome. An increase in imports results in more supply while a reduction in refinery runs results in less demand for crude and thus the API data should not have shown such a large decline in stocks. On the other side of the barrel the API data was also a bit illogical since both gasoline and distillate fuel showed larger than expected builds even though runs declined. Likely implied demand decreased and/or refined products increased strongly or more than enough to offset the loss of production from a decline in utilization rates. We will have to watch the EIA data closely especially insofar as demand is concerned. With the US economy in the slow and grow mode all eyes will be focused on how a slowing is impacting oil demand. The API data is suggesting this week’s EIA data may be a negative in the demand area.

I am expecting an across the board inventory build in the oil complex with crude oil stocks expected to grow by about 1 million barrels. After declining for a few weeks I am expecting imports to increase and offset the minor increase I am projecting for refinery utilization rates of 0.2%. If the EIA data is in sync with the projections the year over year surplus will widen to 11.4 million barrels while the overhang versus the five year average for the same week will come in at 27.4 million barrels.

With runs expected to hold steady and demand slowly waning I am expecting modest builds in both gasoline and distillate fuel. Gasoline stocks are expected to grow by about 200,000 barrels as wholesalers begin to move gasoline into secondary inventories in preparation for the long holiday weekend in the United States next week. However, the year over year overhang will still be around 15.5 million barrels while the surplus versus the five-year average for the same week will be at 24.1 million barrels. As I have discussed in previous newsletters not only is the industry plagued with a huge surplus of gasoline in inventory but all signs point to the summer driving season ending with inventories above where they started the season at the end of May.

Distillate fuel likely built another 1.2 million barrels as economy sensitive diesel fuel implied demand continues to decrease and following the slowly developing downtrend that has been in place since about May of this year or around the same time the U.S. economy began to slow down. The distillate fuel overhang versus both last year and the five-year average continues to grow. However, the refining sector continues to produce it as the forward curve contango economically supports storing distillate fuel. Overall I would categorize this week’s inventory report as bearish if the actual numbers are in sync with the projections. Total commercial stocks of crude oil and refined products will have built yet again for the twentieth week out of the last twenty one weeks — simply bearish.

On the tropical weather front there are now three events evolving in the tropics as shown in the following graphic. Hurricane Danielle weakened a bit late yesterday and is currently forecast to take a northern path with the likelihood of it impacting anyplace in the US not very probable as of this morning. As far as oil or Nat Gas supply is concerned Danielle will have no impact and thus the energy markets are completely ignoring this storm.

At the moment there is another weather pattern hovering off of the coast of West Africa that currently has a 90% probability of strengthening into a tropical depression in the next forty eight hours. Even though the new weather pattern is relatively close to Danielle it does not mean it will follow the exact same path as Danielle but could follow a different pattern. However, it is currently so far away from the Gulf of Mexico and still not even a hurricane it is of little interest to market participants except as an event to keep on the radar to see how it evolves over the next few days.

Although NOAA has not yet published any projected path for this second storm several private forecasts are already indicating that is it likely to follow the path of Danielle which would not be a threat to either oil or Nat Gas producing operations in the Gulf of Mexico. Although it is still too early to discount this current storm it surely looks like the two storms in the Atlantic at the moment are simply following the path of everything so far this season...either fizzling out or moving out of harm’s way insofar as energy producing operations are concerned.

Finally as shown on the graphic a new wave has formed in the Gulf of Mexico. At the moment this event is a low probability pattern with just a 10% chance of strengthening into a tropical cyclone over the next forty eight hours. At the moment it is not impacting oil prices and will not be priced into the market unless it quickly strengthens to a weather event that has the potential to impact production. If nothing else it is still a reminder that the tropical season is now in its peak period and it is not uncommon to see several storms working at the same time.

With oil prices still highly correlated to the direction of the financials it does not look like energy prices will be getting much support from the externals anytime soon. The EMI Global Equity Index table shown below has continued to lose ground with the Index now down about 2% on the week and 6.1% year to date. All ten bourses that make up the Index remain in negative territory for 2010 with the current level back to where it was trading at in early July. The financial markets continue to be a drag on oil and commodity prices and will remain so until the market sentiment starts to change.

My individual market views are detailed in the table at the beginning of the newsletter and remain the same for today...still bearish. As I have been recommending flat price traders should continue to trade from the short side of the market until proven wrong but employing tight, trailing stops as the market is oversold and susceptible to a short covering correction. Today’s inventory report is likely to take on a greater degree of importance than it has in the past as the financial markets are negative and likely to remain negative for the rest of the week at a minimum. Today durable goods orders and new home sales hit the media airwaves. If they come in anything like yesterday’s housing data the sellers will be out in full force for yet another day.

Currently prices are mixed.

Current Expected Trading Range

Expected Trading Range

8/25/10

Change

Low

High End

From

End Support

Resistance

7:38 AM

Yesterday

OCt WTI

$71.60

($0.03)

$71.00

$84.50

Oct Brent

$72.51

$0.13

$70.00

$76.00

Sep HO

$1.9420

$0.0063

$1.8500

$2.0000

Sep RBOB

$1.8450

($0.0044)

$1.8000

$2.0000

Sep NG

$4.033

($0.006)

$3.800

$4.150

10 YR Treasuries

126.44

0.03

118.00

128.00

Dow Futures

10,003

(20)

10,000

10,850

US Dollar Index

83.345

0.139

80.150

85.000

Euro/$

1.2654

(0.0052)

1.2400

1.2900

Yen/$

1.1838

(0.0034)

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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