“Life must be lived as played.”
Plato
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EMI QuickView Short Term Market Overview | ||||
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Impact on Energy Prices | ||||
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Price Drivers |
Crude |
Gasoline |
HO/Diesel |
Nat Gas |
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Supply |
N |
N |
N |
CBr |
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Demand |
N |
N |
N |
CBr |
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Inventories |
N |
N |
N |
CBr |
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US Dollar |
CBu |
CBu |
CBu |
CBu |
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Global Equities |
CBu |
CBu |
CBu |
CBu |
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10 Yr Treasuries |
N |
N |
N |
N |
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Geopolitics |
CBu |
CBu |
CBu |
CBu |
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Technicals |
CBu |
CBu |
CBu |
CBu |
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Market Sentiment |
CBu |
CBu |
CBu |
CBu |
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Overall View |
CBu |
CBu |
CBu |
CBu |
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Bias |
CBu |
CBu |
CBu |
CBu |
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N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish | ||||
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CBr - Cautiously Bearish |
The buy the rumor, sell the fact trade has taken a while to set in but so far this week the sell the fact part of the big three events from last week has set in a bit as just about every asset class has given back some of last week’s gains as the US dollar continues to firm ahead of the start of tomorrow’s G20 meeting in South Korea. The modest level of selling in risk asserts and the short covering rally in the US dollar are not a surprise and have been expected as I have been warning since last week. About the only surprise is the fact that it took until this week to set in. That all said so far the selling has only been modest as the market sentiment is still positive for all assets and negative for the dollar irrespective of what is discussed at G20. At the moment the dollar is the single major catalyst for all financial and commodity markets. If the dollar returns back to its defensive direction equities and commodities will move back to higher ground. I am still of the view that after the dust settles this week (after G20 is over) dollar selling will likely resume as the fundamentals of the dollar are simply bearish as the US Fed begins to print money to support its QE2 program.
Equity values have succumbed to a round of profit taking selling as shown in the EMI Global Equity table below. The EMI Index is now lower by 0.7% on the week narrowing the year to date gain for 2010 to 5.6%...still near the highs of the year. The Paris bourse slipped back into the negative column for the year leaving six bourses in the winners column. Germany regained the lead over Hong Kong as most Asian markets declined today on concerns that China’s inflation exposure will result in further tightening in the foreseeable future. In fact China reportedly told some banks today to raise their capital reserve ratios by 0.5% effective November 15th. China also posted a better than expected $27 billion trade surplus for October keeping the inflation concern at an elevated level. The selling in Asia spread to Europe with all of the main bourses modestly lower. European bourses have also been pressured by several companies earnings reports missing profit expectations. Overall the equity markets are a negative for oil and commodity prices in the very short term as is the firming US dollar. However, once the corrective actions are over, equities should rally on the back of a falling dollar resulting in the commodity rally continuing.
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EMI Global Equity Index | ||||
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11/10/10 |
Change |
Change |
2010 YTD | |
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2010 |
From |
From |
Change | |
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6:19 AM |
Yesterday |
Yesterday % |
% | |
|
US/Dow Jones |
11,347 |
(60) |
-0.53% |
8.8% |
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Can/S&P-TSX |
12,917 |
(136) |
-1.04% |
10.0% |
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Lon/FTSE |
5,863 |
(12) |
-0.20% |
8.3% |
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Paris/Cac 40 |
3,927 |
(18) |
-0.46% |
-0.2% |
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Germany/Dax |
6,771 |
(17) |
-0.25% |
13.7% |
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Japan/Nikkei |
9,830 |
136 |
1.40% |
-6.8% |
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HongKong/HangSeng |
24,501 |
(210) |
-0.85% |
12.0% |
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Aussie/SYDI |
4,700 |
(41) |
-0.86% |
-3.7% |
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China/Shanghai A |
3,263 |
(21) |
-0.64% |
-5.1% |
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Brazil/Bvspa |
71,888 |
(770) |
-1.06% |
4.8% |
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EMI Global Equity Index |
15,501 |
(115) |
-0.74% |
5.6% |
Late yesterday afternoon the API released their latest inventory assessment. The API released another strongly bullish inventory report (second week in a row) showing a surprisingly larger than expected across the board build versus expectations for a mixed report with more modest changes in inventories. The API reported a crude oil inventory draw of about 7.4 million barrels along with a large decline in gasoline stocks of just 3.4 million barrels while distillate fuel stocks declined yet again by a whopping 4.0 million barrels versus most expectations calling for a decline of about 1.7 million barrels. The results of the API report are summarized in the following table. So far the reaction to the API report has been non-existent as oil prices are in negative territory as the US dollar is firming and global equities are lower.
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Projections |
11/10/10 | |||
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API |
Current |
Change from |
Change from | |
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Results |
Projections |
Last Year |
5 Year | |
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mmbls |
vs. Proj. |
vs Proj. | ||
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Crude Oil |
(7.4) |
1.0 |
31.5 |
48.1 |
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Gasoline |
(3.4) |
(0.7) |
0.7 |
10.8 |
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Distillate |
(4.0) |
(1.7) |
(4.6) |
27.1 |
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Ref Change Level |
3.1% |
-0.2% |
1.7% |
-3.5% |
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Utilization % |
84.3% |
81.6% |
79.9% |
85.1% |
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report with a modest build in crude but with modest declines in both gasoline and distillate fuel inventories. If the actual numbers are in sync with my projections for a crude oil build of about 1.0 million barrels it would be a bit concerning indicating that the destocking of late may not be taking hold and it could result in capping the short term rally seen in crude oil prices over eh last week or so. As such I would categorize this week’s crude oil inventory data as biased to the bearish side as the year over year surplus will be around 31.5 million barrels while the overhang versus the five year average for the same week will still come in around 48.1 million barrels.
With runs expected to decrease by only 0.2% but with imports slowing I am expecting only a modest decrease in gasoline stocks. Gasoline stocks are expected to draw by about 700,000 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 decline at around the 700,000 barrel level while the surplus versus the five year average for the same week will be around 10.8 million barrels.
Distillate fuel likely drew by about 1.7 million barrels as economy sensitive diesel fuel implied demand continues to remain steady with agriculture demand for the harvest along with distillate fuel exports which have increased as the arb is still open and the US dollar is weak versus most major currencies that are likely recipients of US exports of distillate fuel. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely be about 4.6 million barrels below last year while the overhang versus the five year average will drop to 27.1 million barrels. With the US dollar likely to remain on the defensive and with the situation in France likely to impact the balances in Europe for many months into the future demand for gasoil into Europe (from the US and elsewhere) should remain strong over the next several months further helping to reduce the overhang of distillate fuel heading into the winter heating season.
As usual do not overreact to the API data as the EIA data will be released in a few hours. 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 combined are likely to have decreased marginally for the week. However, if the EIA report is in sync with the very bullish API report market participants are likely to push prices up to yet a new level. Just looking at the three main commodities the API reported a combined decline of 14.8 million barrels which is very substantial. Today’s EIA report should be very interesting and with minimal macro data hitting the streets it could be a price drive.
Yesterday the EIA released their latest Short Term Energy Outlook which I view as supportive. Some of the highlights of the report follow.
Crude Oil and Liquid Fuels Overview. Growth in global oil consumption remains strong. In the current Outlook, the projected growth in world real GDP (weighted by oil consumption) is 3.9 percent in 2010. Continued upward revisions this year's world oil consumption, particularly for Europe and China, have led to an expected world consumption growth of 2.0 million bbl/d for 2010. EIA expects this consumption growth to be met in almost equal parts by a 1.0 million bbl/d increase in production from Organization of the Petroleum Exporting Countries (OPEC) and 1.0 million bbl/d increase in non-OPEC supply. While commercial oil inventories in the Organization for Economic Cooperation and Development (OECD) countries remain high, floating oil storage has been declining. EIA believes that the projected gradual reduction in OECD oil inventories over the forecast period should lend support to firming oil prices.
Global Crude Oil and Liquid Fuels Consumption. EIA has revised world oil consumption growth in 2010 upward in response to stronger-than-expected growth in European oil demand during the second and third quarters of 2010, as well as continued strong growth in China. The non-OECD regions, especially China, the Middle East, and Brazil, represent most of the expected growth in world oil consumption in 2011. Among the OECD regions, EIA expects North America to show almost all the oil consumption growth in 2011, with a gain of nearly 0.4 million bbl/d. In 2011, EIA expects global oil consumption growth of 1.4 million bbl/d.
Non-OPEC Supply. Most of the 1.0 million bbl/d projected growth of non-OPEC supply in 2010 comes from the United States, Brazil, and the former Soviet Union. However, this growth in world supply is not sustained in the 2011 forecast. Total non-OPEC supply falls by 250,000 bbl/d in 2011, primarily because of declining total North American and North Sea production as well as decreasing supplies from Russia. This would be only the third time in the last 15 years that non-OPEC supplies fall year-over-year, following non-OPEC production declines in 2005 and 2008, which were primarily the result of supply disruptions in the Gulf of Mexico.
OPEC Supply. OPEC left its production targets unchanged at its October meeting, noting that global oil markets were well supplied. However, EIA projects that OPEC crude oil production will increase by 0.3 and 0.5 million bbl/d in 2010 and 2011, respectively. Projected OPEC non-crude petroleum liquids production, which is not subject to OPEC production quotas, increases by 0.7 million bbl/d in both 2010 and 2011. OPEC surplus capacity should remain near 5 million bbl/d, compared with 4.3 million in 2009 and 1.5 million in 2008 .
OECD Petroleum Inventories. Commercial oil inventories held by OECD countries stood at an estimated 2.76 billion barrels at the end of the third quarter of 2010, equivalent to about 60 days of forward cover, and roughly 70 million barrels more than the 5-year average for the corresponding time of year . OECD oil inventories decline through the forecast period, though days-forward-cover may remain relatively high by historical standards.
U.S. Liquid Fuels Consumption. Projected total U.S. liquid fuels consumption increases by 260,000 bbl/d (1.4 percent) in 2010, which is about 60,000 bbl/d higher than forecast in last month's Outlook. 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 averaging 520,000 bbl/d in the second and third quarters, led by increases in motor gasoline and distillate fuel oil consumption. During 2010 as a whole, projected gasoline consumption increases by 0.3 percent and distillate consumption increases by 3.4 percent. Total liquid fuels consumption increases by a further 120,000 bbl/d (0.6 percent) in 2011, as all of the major petroleum products register consumption growth. Gasoline, distillate fuel, and jet fuel consumption each increase by 0.7 percent in 2011.
My individual market views are detailed in the table at the beginning of the newsletter. I am maintaining my oil views as cautiously bullish. I do expect that oil prices will experience a few rounds of profit taking selling (work with protective trailing stops) but as it looks at the moment prices should remain in an uptrend with $90/bbl a possibility before the end of the year (possibly even higher depending on how low the US dollar eventually goes).
I am maintaining my view of Nat Gas at cautiously bullish with a lot of emphasis on the word cautiously even as the fundamentals continue to be bearish on all counts. Colder than normal weather is now engulfing parts of the North East with prices not only breaching the key technical support level of $4/mmbtu but blowing through this level and remaining above it.
Currently most risk assets are in negative territory as shown in the EMI Price Board table below.
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Current Expected Trading Range |
Expected Trading Range | |||
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11/10/10 |
Change |
Low |
High End | |
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From |
End Support |
Resistance | ||
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6:20 AM |
Yesterday | |||
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Dec WTI |
$86.40 |
($0.32) |
$83.25 |
$90.00 |
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Dec Brent |
$88.02 |
($0.31) |
$83.00 |
$90.00 |
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Dec HO |
$2.4080 |
$0.0013 |
$2.3000 |
$2.5000 |
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Dec RBOB |
$2.1836 |
($0.0014) |
$1.8000 |
$2.2000 |
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Dec NYM NG |
$4.221 |
$0.011 |
$3.500 |
$4.500 |
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10 YR Treasuries |
126.44 |
(0.09) |
118.00 |
128.00 |
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Dow Futures |
11,315 |
2 |
11,000 |
11,500 |
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US Dollar Index |
77.77 |
0.186 |
75.000 |
77.000 |
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Euro/$ |
1.3786 |
(0.0057) |
1.3500 |
1.4500 |
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Yen/$ |
1.2222 |
(0.0079) |
1.1400 |
1.2600 |
Best Regards,
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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