Oil marks positives for year on emerging market growth

“Diligence is the mother of good luck.”

Benjamin Franklin

EMI QuickView Short Term Market Overview

Impact on Energy Prices

Price Drivers

Crude

Gasoline

HO/Diesel

Nat Gas

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

Overall View

N

N

N

N

Bias

N

N

N

N

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

CBr - Cautiously Bearish

Uncertainty is still the primary reason the global financial and commodity markets remain in an uneasy state in spite of positive signs coming from U.S. macroeconomic data. The global markets struggled throughout the month of November over major issues that were viewed by investor/traders as potential negatives to equities and commodities. The so called wall of worry added several levels over the course of the month. The main issues that impacted values in November are still looming over the markets...QE2, potential currency wars, rising tensions on the Korean peninsula, EU debt issues and the potential for contagion, China aggressively fighting inflation, high unemployment in the developed world, impact of the change in the political make-up of the U.S. Congress, potential tax increases in the United States with all of these issues likely to slow the recovery in both the developed and emerging market economies over the next year or so.

Market participants have been mostly dealing with these issues by approaching all markets from a very short term horizon or with a trading mentality rather than a buy and hold approach. At the first sign of any negatives hitting the media airwaves it is quickly followed by a de-risking of just about all asset classes with cash flowing into the U.S. dollar. In spite of the modestly weak fundamentals of the U.S. dollar, its value has steadily appreciated since early November as it still remains the world’s safe haven as its fundamentals are viewed as not as bad as some other currencies at the moment...like the euro. I expect the markets to be in trading mode rather than buy and hold mode for the foreseeable future or until it is clear that the majority of the uncertainty described above has turned into certainty and stability.

With one month left in the year, many of the markets we follow have done surprisingly well as shown in the EMI Investment Leader Board table below. Only two investment areas are still in negative territory for the year to date... Nat Gas due to its robust supply situation and the euro due to the huge amount of uncertainty surrounding this region of the world. Uncertainty has not only played a role in limiting market gains it had a lot to do with driving the top dog on the leader board... precious metals with silver leading all investments with a year to date gain of 67.5% with one month still to go. Gold is up by a respectable 26.5% through the first eleven months of the year. The precious metals are clearly favored safe investments for investors/traders seeking refuge from the bond-default fears in the EU and also from concerns over a falling dollar.

EMI Investment Leader Board

2010 Performance to Date

12/1/10

31-Dec

Change

% Change

2010

2009

For YTD

YTD

Spot WTI

$84.11

$79.36

$4.75

5.99%

Spot HO

$2.3169

$2.1156

$0.2013

9.52%

Spot RBOB

$2.2652

$2.0529

$0.2123

10.34%

Spot NG

$4.180

$5.572

($1.392)

-24.98%

Corn

$530.00

$414.50

$115.50

27.86%

Wheat

$650.25

$541.50

$108.75

20.08%

Soybeans

$1,257.75

$1,048.50

$209.25

19.96%

Copper

382.30

332.75

49.55

14.89%

Gold

1,385.00

1,095.20

289.80

26.46%

Silver

28.19

16.82

11.36

67.55%

EMI Global Index

14847

14681

166

1.13%

DJI

11105

10428

677

6.49%

S&P

1191

1111

80

7.20%

Nasdaq

2134

1860

274

14.71%

Dollar Index

80.84

78.30

2.54

3.24%

Euro/USD

1.3112

1.4334

(0.1222)

-8.53%

Yen/USD

1.1938

1.0740

0.1198

11.15%

The next surprisingly outperformer has been the agricultural space with corn leading the way higher with a year to date gain of 27.9%. This commodity group has been the beneficiary of a combination of strong demand coming from the emerging markets as well as a plethora of bad weather problems in many of the major crop growing areas around the world. Many analysts are forecasting further increases in the agricultural space through 2011 as demand is likely to outstrip supply.

The energy complex is still mixed with Nat Gas prices struggling as supply simply outperforms versus demand. The hurricane season was a non-event with no interruptions in supply while industrial consumption of Nat Gas continues to only recover at a very slow pace as the US economic recovery is still underperforming versus historical recoveries from recessions. On the other hand the oil complex has been able to move into positive territory for the year as it is an international commodity that has been driven more by consumption growth coming from the emerging markets which have more than offset the almost non-existent growth in the developed or OECD countries. About 90% of oil consumption growth in 2010 has come from the developing world. Within the complex, refined products have led prices to the upside with gasoline the biggest winner so far this year showing a gain of 10.3%. In spite of the high unemployment level in the US, gasoline consumption was relatively strong during the summer driving season. On the distillate front which is currently higher by almost 10% for the year supply has been an issue in diesel driven Europe as a result of the French strike coupled with shortages of diesel fuel in China. In addition for the first time in several years it seems that U.S. and global oil inventories are finally in a destocking pattern that should result in supply, demand and inventory levels moving in the direction of normal historical levels over the next six months or so. Market participants are starting to view oil fundamentals much more positively than they have for the last two years.

On the financial front global equity markets have continued to underperform with sub-par gains (especially compared to last year). As I have been discussing in the newsletter only five of the ten bourses in the EMI Index are in positive territory for the year. Germany remains the leader on the international front while the US Nasdaq is approaching a 15% gain for the year to date. Uncertainty really hits the equity markets very hard as it scares away many investors especially after the major collapse in equity values in 2008. That all said many equity markets are still positive for the year just not as positive as they were in 2009.

In the currency markets all of the talk of the US holding down its currency to gain a competitive advantage does not prove out as the US dollar Index (versus six major currencies) has appreciated by 3.2% for the year (so far) in spite of weak US fundamentals and the onset of QE2. The US dollar remains the best of the worst as the euro has lost almost 9% of its value this year as a result of a variety of sovereign and bank debt issues with Ireland the latest to surface.

Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report after three weeks in a row of very bullish reports. The API showed a modest decline in crude oil and builds in both gasoline stocks and distillate fuel inventories. The API reported a crude oil inventory draw of about 1.1 million barrels even with refinery utilization rates decreasing by 1.7%. They also showed a build in gasoline stocks of about 1.0 million barrels while distillate fuel stocks increased 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 positive territory mostly due to a reversal in the US dollar which has weakened overnight coupled with a bit of a short covering rally in the global equity market.

Projections

12/1/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(1.1)

(1.0)

17.7

31.3

Gasoline

1.0

0.5

(4.0)

8.0

Distillate

0.2

(1.0)

(8.4)

21.8

Ref Change Level

-1.7%

0.2%

6.0%

-0.5%

Utilization %

81.9%

85.7%

79.7%

86.2%

My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report for US oil stocks. I am expecting a modest decline of about 1.0 million 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 17.7 million barrels while the overhang for the five year average for the same week will also narrow a bit to 31.3 million barrels . The overhang is finally dissipating in the US as the direction of stock levels remains supportive for prices.

With runs expected to increase by only 0.2% and with imports slowing, I am expecting a modest increase in gasoline stocks. Gasoline stocks are expected to build by about 0.5 million barrels even 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 deficit is projected to widen to around the 4.0 million barrel level while the surplus versus the five year average for the same week will widen to about 8.0 million barrels. Gasoline inventories have staged a decent recovery (recovery defined as destocking) as the overwhelming surplus situation that persisted throughout the entire summer driving season has virtually been eliminated with the overhang versus the five-year average very manageable at this point in time.

Distillate fuel likely drew by about 1.0 million barrels as economy sensitive diesel fuel implied demand continues to remain steady and as the start of the winter heating season finally gets underway. The latest 6 to 10 day and 8 to 14 day NOAA temperature reports are still showing a large portion of the eastern half of the US likely to be engulfed in colder than normal temperatures for the first half of December. The current forecasts are colder than what was projected about a week or so ago and this has given the heating oil bulls a bit of support. With the temperature forecasts projected to be colder than normal we could very well see HO net withdrawals starting to accelerate in the not too distant future. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 8.4 million barrels below last year while the overhang versus the five year average will drop to 21.8 million barrels.

As usual, do not overreact to the API data as the EIA data will be available in a few hours. If the EIA report is within the projection I would expect the market to view the results as neutral to modestly bullish as total commercial stocks of crude oil and refined products combined are likely to have decreased for yet another week. However, whether or not the market reacts at all to the inventory report will be dependent on what is going on with the macro issues as well as a variety of important macroeconomic data that will be released today including the latest manufacturing data.

My individual market views are detailed in the table at the beginning of the newsletter. I am maintaining my oil view at neutral and also keeping my bias at neutral as uncertainty dominates the oil markets as well as all risk asset classes.

I am maintaining my view of Nat Gas as neutral as I continue to believe that the market will remain in the trading range.

Currently, most risk assets are in positive territory as shown in the EMI Price Board table below. The main driver for oil prices this morning is a combination of a weakening U.S. dollar, rising equity values and very positive purchasing managers index of manufacturing activity (directly related to energy consumption) coming out of China.

Current Expected Trading Range

Expected Trading Range

12/1/10

Change

Low

High End

From

End Support

Resistance

7:03 AM

Yesterday

Jan WTI

$85.33

$1.22

$80.00

$90.00

Jan Brent

$87.23

$1.31

$83.00

$90.00

Jan HO

$2.3629

$0.0385

$2.2000

$2.5000

Jan RBOB

$2.2361

$0.0493

$1.8000

$2.3000

Jan NYM NG

$4.234

$0.054

$4.000

$4.650

10 YR Treasuries

124.48

(0.56)

118.00

128.00

Dow Futures

11,111

115

10,500

11,500

US Dollar Index

80.84

(0.431)

75.000

82.500

Euro/$

1.3112

0.0089

1.3000

1.3800

Yen/$

1.1938

(0.0021)

1.1400

1.2600

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.

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.

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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.

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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