Oil and dollar driven by Chinese rate hike

Late yesterday afternoon the API released their latest inventory assessment. The API released a relatively neutral inventory report showing a surprisingly larger than expected crude oil inventory build of about 2.3 million barrels along with a smaller than expected decline in gasoline stocks of just 0.1 million barrels while distillate fuel stocks were within the expectation for a draw of around 900,000 barrels. The results of the API report are summarized in the following table along with my projections for this week’s inventory report and a comparison to last year as well as the five-year average for the same week. So far the reaction to the API report has been muted with prices primarily trading around the moves in the U.S. dollar and global equity markets.

My projections for this week’s inventory report are summarized in the following table along with a comparison to last year as well as to the five-year average for the same week. I am expecting a mixed report with a modest build in crude oil (as a result of refinery utilization rates declining) and modest draws in both gasoline and distillate fuel. If the actual numbers are in sync with my projections for a crude oil build of 1 million barrels, it would raise a question mark about the early start of a destocking trend in crude oil seen over the last few weeks. However, the declines to date have not had a significant impact on the overhang that has persisted in the United States throughout the entire economic recovery. As such I would categorize this week’s crude oil inventory data as biased to the neutral side as the year-over-year surplus will still be around 22.5 million barrels while the overhang vs. the five-year average for the same week will have narrowed modestly to 38.6 million barrels.

With runs expected to decline by only 0.2% and demand waning, I am expecting only a modest draw in gasoline stocks and in distillate fuel. Gasoline stocks are expected to decline by about 1 million barrels as refiners continue to wind down from the higher demand summer driving season and turn their attention to the upcoming winter heating season. This week the gasoline year-over-year overhang is projected to hold at around 10.3 million barrels while the surplus vs. the five-year average for the same week will be down to 16.5 million barrels. The industry seems to be starting to work off the surplus that has remained since the end of the driving season in an effort to at least put a floor on gasoline prices heading into the winter heating season.

Distillate fuel likely drew by about 0.8 million barrels as economy sensitive diesel fuel implied demand also continues to wane even with agriculture demand for the harvest along with distillate fuel exports likely having increased as the arb is open and the U.S. dollar is weak vs. most major currencies that are likely recipients of U.S. exports of distillate fuel. If the actual EIA data is in sync with my distillate fuel projection the surplus vs. last year will have narrowed to just 1.7 million barrels while the overhang vs. the five-year average will be steady at 32.9 million barrels. With the US dollar likely to remain on the defensive and with the current strike in France now spreading to other French refineries, exports of distillate fuel may increase over the next several weeks resulting in a further reduction of the inventory overhang.

If the EIA report is within the projection, I would expect the market to view the results as mostly neutral with a slight bias to the bullish side as total commercial stocks of crude oil and refined products are likely to have declined marginally for the second week in a row. However, whether or not the market reacts at all to the inventory report will be dependent on what is going on in the financial markets today. If any combination of equities rising and the U.S. dollar declining occurs, the market is likely to discount the inventories and focus more on the perception trade or what the fundamentals might be down the road. On the other hand, if the financial markets are not supportive, the market will be forced to look at and digest the current fundamentals which seem to be improving but still surplus.

On the tropical weather front, there is now only one tropical weather pattern that still remains in the tropics. The pattern that is located over the southwestern Caribbean is now a high probability wave or one that has a 70% chance of strengthening into a tropical cyclone over the next 48 hours. Of note, even if the storm in the western Caribbean does organize and strengthen, it is forecast to remain in that area of the world and not work its way to the Gulf of Mexico and thus not threaten oil or Nat Gas producing operations. With a little over a month left to the tropical weather season the probability of any hurricane related disruptions remain on the low side at this point in time.

My individual market views are detailed in the table at the beginning of the newsletter. I have downgraded my oil views to neutral after yesterday’s strong round of profit taking selling even though I view it at the moment as a short-term move. However, I want to see how the market digests what seems to be a possible realignment of the U.S. dollar vs. most major currencies over the next day or so. I still see ongoing support continuing from the financial sector and a slowly evolving improvement in oil fundamentals over the medium term. Equities are neutral for oil and the broader commodity complex while the U.S. dollar is marginally supportive. Oil prices are lower so far this morning as it is in the midst of another decline.

I remain bearish for Nat Gas as the fundamentals continue to be bearish with yet another above average injection into storage forecast for this week’s EIA report.

Currently most all risk assets are in positive territory as U.S. trading gets underway as shown in the EMI Price Board table below.

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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