“Where you begin doesn’t matter. Your willingness to start is what counts.”
Rhonda Britten
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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 |
|
Demand |
N |
N |
N |
CBr |
|
Inventories |
N |
N |
N |
CBr |
|
US Dollar |
CBu |
CBu |
CBu |
CBu |
|
Global Equities |
CBu |
CBu |
CBu |
CBu |
|
10 Yr Treasuries |
N |
N |
N |
N |
|
Geopolitics |
CBu |
CBu |
CBu |
CBu |
|
Technicals |
N |
N |
N |
N |
|
Market Sentiment |
N |
N |
N |
N |
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Overall View |
N |
N |
N |
N |
|
Bias |
CBr |
CBr |
CBr |
N |
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N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish | ||||
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CBr - Cautiously Bearish |
Bad news surrounded the global markets over the last 24 hours. The major bad or bearish news that has engulfed the market has been the evolving sovereign debt issues in the EU and in particular Ireland for the last few days and amplified since yesterday as the discussions have heated up in Brussels as to whether or not the Irish government will accept the EU/IMF bailout...similar to the one Greece accepted some months ago. On top of the EU debt issues is the fact that China is likely to tighten its economy as it fights inflation has contributed strongly to the massive movement out of most all global risk assets including all commodities. On top of all of the above there is now talk that the US Fed may hesitate on more easing after critics are questioning its employment mandate. The critics have come from within the US as well as the international community.
On the EU front the work continues on aid for Ireland but has stopped short of an immediate bailout package at the moment. Currently the EU is very pleased with Ireland’s austerity measures much as they were in the early stages of the Greece bailout program. The EU and even the UK currently stand ready to provide financial help if Ireland needs it. More meetings will occur to determine the Irish banking system needs. It is clear that the EU, UK and IMF are not going to let Ireland default as help will be provided... much as what occurred with Greece... if it is required by the Irish government. The markets are rightfully nervous but in the end this problem will pass over the next several weeks as the appropriate measures are taken by the various participating governments. But for the moment it will continue to keep the uncertainty level high and thus pressure on the euro until a concrete resolution is finally agreed upon and announced.
In Asia, China’s equities markets were hit with another round of selling after the Premier said the cabinet is drafting new measures to curb inflation targeted at measures to counter overly rapid price gains. So it is not whether China will act to tighten its surging economy but when and using what measures to do so. They have already tightened banking capital requirements and raised short-term interest rates by 0.25% over the last few months and the economy is still steaming along. The markets are now worried that any new measures could be more severe...like price controls that could result in a serious slowing of the economy which is a negative for oil and other commodity markets.
The evolving situations in both Ireland and China have had a significantly negative impact on global equity markets as shown in the EMI Global Equity Index table below. The Index has continued to lose ground over the last 24 hours with the Index now down by 3.2% for the week narrowing the year to date level to just 1.9% or the level the index was at in the second half of October. Pretty much most of the gains over the last month or so have now been erased. The same six bourses are still in the winners’ column year to date but obviously with much smaller gains than just a week ago. Germany has clearly held up well as the crisis in the EU has resulted in a further weakening of the euro which is a positive for Germany’s huge export driven economy. At the moment the global equity markets are bearish for oil and the broader commodity complex which is consistent with the view coming from the currency markets as the US dollar hovers near the unchanged level.
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EMI Global Equity Index | ||||
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11/17/10 |
Change |
Change |
2010 YTD | |
|
2010 |
From |
From |
Change | |
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6:20 AM |
Yesterday |
Yesterday % |
% | |
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US/Dow Jones |
11,024 |
(178) |
-1.59% |
5.7% |
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Can/S&P-TSX |
12,602 |
(133) |
-1.05% |
7.3% |
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Lon/FTSE |
5,672 |
(10) |
-0.18% |
4.8% |
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Paris/Cac 40 |
3,774 |
11 |
0.29% |
-4.1% |
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Germany/Dax |
6,683 |
20 |
0.30% |
12.2% |
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Japan/Nikkei |
9,811 |
15 |
0.15% |
-7.0% |
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HongKong/HangSeng |
23,214 |
(479) |
-2.02% |
6.1% |
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Aussie/SYDI |
4,624 |
(76) |
-1.62% |
-5.3% |
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China/Shanghai A |
2,974 |
(58) |
-1.91% |
-13.5% |
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Brazil/Bvspa |
69,192 |
(1,175) |
-1.67% |
0.9% |
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EMI Global Equity Index |
14,957 |
(206) |
-1.36% |
1.9% |
Late yesterday afternoon the API released their latest inventory assessment. The API released another strongly bullish inventory report (third week in a row) showing a surprisingly larger than expected decline in both crude oil and gasoline stocks and a small build in distillate fuel versus expectations for only a modest decline in stocks. The API reported a crude oil inventory draw of about 7.7 million barrels along with a large decline in gasoline stocks of just 1.7 million barrels while distillate fuel stocks built only marginally by about 200,000 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 flat and global equities are lower as a result of the evolving situation in the EU and China.
My projections for this week’s inventory reports are summarized in the following table. I am expecting another across the board decline in US oil stocks. I am expecting a modest decline of about 900,000 barrels of crude oil inventories based on a modest increase in refinery utilization rates of about 0.2%. If the actual numbers are in sync with my projections the year over year surplus of crude oil would narrow marginally to 27.2 million barrels while the overhang for the five year average for the same week will also narrow a bit to 39.5 million barrels. Still a sizeable surplus of crude oil in the US but the direction of stock levels remains supportive.
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Projections |
11/17/10 | |||
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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 |
(7.7) |
(0.9) |
27.2 |
39.5 |
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Gasoline |
(1.7) |
(0.5) |
0.7 |
9.2 |
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Distillate |
0.2 |
(1.9) |
(9.4) |
22.7 |
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Ref Change Level |
-2.8% |
0.2% |
3.2% |
-2.5% |
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Utilization % |
81.5% |
82.6% |
79.4% |
85.1% |
With runs expected to increase by only 0.2% and with imports slowing I am expecting a modest decrease in gasoline stocks. Gasoline stocks are expected to draw by about 500,000 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 remain the same as the previous week at around the 700,000 barrel level while the surplus versus the five-year average for the same week will be decline to about 9.2 million barrels.
Distillate fuel likely drew by about 1.9 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 still weak enough 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 now be about 9.4 million barrels below last year while the overhang versus the five-year average will drop to 22.7 million barrels. With the situation in Europe still in recovery mode after the French strike, the balances in Europe will be outside of normal for many months into the future and 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 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 and recover some of yesterday’s price declines. Just looking at the three main commodities the API reported a combined decline of 9.2 million barrels on top of last week’s 14.8 million barrel decline which is very substantial. Today’s EIA report should be very interesting but could basically go un-noticed with all of the macro issues evolving around the world.
My individual market views are detailed in the table at the beginning of the newsletter. I am moving my oil view to neutral with a bearish bias as prices breached the key technical support level of $83/bbl in Tuesday’s massive commodity sell-off. I do expect oil prices will continue to experience some additional selling as we have already seen overnight. However prices have declined strongly over the last few days and a short covering rally is possible at any time. Friday is expiration day for the December Nymex WTI contract as well as option expiration day in the US equities markets. As a result volatility will be running at above normal levels for at least the rest of the week and likely into next week’s shortened holiday week in the US (Thanksgiving Holiday...Thursday & Friday).
The market sentiment for oil as well as the broader commodity complex is being primarily driven by what new inflation fighting policy China ultimately implements. Until that news hits the media airwaves prices are likely to continue to drift lower with the occasional bout of short covering especially ahead of the holiday period next week. Being on the sidelines for oil is not a bad place to be until the dust settles around Ireland and China.
I am maintaining my view of Nat Gas as neutral as I continue to believe that the market will remain in the trading range I have been projecting of $3.75 to $4.25/mmbtu for the short term.
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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11/17/10 |
Change |
Low |
High End | |
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From |
End Support |
Resistance | ||
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6:21 AM |
Yesterday | |||
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Dec WTI |
$81.72 |
($0.62) |
$80.00 |
$90.00 |
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Jan Brent |
$84.33 |
($0.40) |
$83.00 |
$90.00 |
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Dec HO |
$2.2936 |
($0.0154) |
$2.2000 |
$2.5000 |
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Dec RBOB |
$2.1493 |
($0.0064) |
$1.8000 |
$2.2000 |
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Dec NYM NG |
$3.843 |
$0.025 |
$3.750 |
$4.250 |
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10 YR Treasuries |
124.97 |
(0.08) |
118.00 |
128.00 |
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Dow Futures |
11,010 |
26 |
10,500 |
11,500 |
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US Dollar Index |
79.295 |
(0.038) |
75.000 |
82.500 |
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Euro/$ |
1.3496 |
0.0005 |
1.3000 |
1.3800 |
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Yen/$ |
1.1989 |
(0.0019) |
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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