“There is more hunger in the world for love and appreciation than for bread.”

Mother Theresa

Most of the economic data from the United States and China was positive on Tuesday and that coupled with rising equity values and a depreciating U.S. dollar sent oil to higher levels. In fact all of the commodities in the oil complex are now trading in the upper half of their respective trading ranges. In fact oil prices are now trading at a higher level than where they were just prior to the Dubai World sell-off. The same is not yet true for U.S. equities (but true for the broader EMI Global equity Index- see discussion below) and the dollar although both asset classes are very near the levels they were trading at prior to the Dubai announcement. For the moment we can safely say the Dubai sell-off from last week is pretty much yesterday’s news as restructuring talks seem to be progressing. As we pointed out in Tuesday’s newsletter the externals are likely to be the primary oil price catalysts for the majority of this week.

Natural Gas is not faring as well as oil as prices continue to deteriorate and are now trading well below the $5/MMBTU and are approaching the level where the December Nymex contract was trading at just prior to its expiration. The overhang of Nat Gas is larger than it has ever been in history and with normal winter weather only just arriving and industrial demand only slowly evolving the surplus of Nat Gas is likely to be a negative on prices for many months into the future. On the supply side I mentioned the other day that the United States just recently received a very large cargo of LNG from the Middle East with more expected. With Russian Nat Gas priced very favorably for European markets (pricing bases on a lagging nine-month crude oil price formula) it is unlikely that Europe will be competing for much if any of the LNG this year and as such a major portion of it is likely to head to the States. With on land inventories already at record high levels the last thing the US needs is another supply of Nat Gas. 

On Thursday the EIA will release the latest snapshot of Nat Gas inventories. The industry is entering the heart of the winter season with 3,835 BCF already in storage facilities around the United States. Total capacity of the U.S. Nat Gas storage system is estimated by the EIA to be 3,889 BCF leaving room for only 53 BCF before hitting the “All Full Level”. The industry has never had this much Nat Gas in storage. The early estimates for this week’s report are currently calling for a small build of 1 BCF to a modest net withdrawal of about 15 BCF.

If the number comes in anywhere within the expectations it will have a negligible impact on the current overhang. In fact the economics of storing Nat Gas is still very economically viable as the Nat Gas forward curve is in a steep contango all the way through February of 2011. This is a very atypical forward curve as NG normally enters a backwardation pattern during the first 3 to 5 months of the year, not the case so far this year. With a forecast for colder than normal temperatures for the rest of the year already well embedded into the current market sentiment the fact that the forward curve remains in a steep contango suggests the market is already discounting any supply led price run-up due to winter weather. I still remain neutral to Nat Gas with a downside bias and still believe prices will continue to trade with a $4/mmbtu handle for the foreseeable future. 

Today the EIA will release the latest snapshot of oil fundamentals. My latest projections along with the latest data released by the API late Tuesday afternoon are shown in the following table. The API data was full of surprises as usual. The API reported an across the board build in inventories coupled with a 1% drop in refinery utilization rates. They reported a crude oil build of about 2.9 million barrels or four times greater than the projections. The big build was a surprise since they also reported a big drop of about 1.2 million barrels per day in crude oil imports which likely more than offset the reduced refiner demand for crude oil this week. If the EIA data is in line with the API data the year over year surplus will come in at a little over 20 million barrels while the overhang versus the five-year average for the same week would be close to 24 million barrels. 

Even with a 1% reduction in refinery utilization rates both gasoline and distillate fuel stocks built strongly. Gasoline inventories grew by about 3.4 million barrels suggesting that implied demand was likely way down on the week and/or imports of gasoline surged. If the EIA data is in sync with the API report gasoline stocks will show a surplus versus last year of over 14 million barrels with the five-year average overhang for the same week growing to over 12 million barrels. With a strong seasonal pattern for building gasoline inventories through at least the middle of the first quarter we may be back into the mode of a glut in progress for gasoline. 

Distillate stocks also built when most of the projections (including mine) were looking for a modest decline. The API reported a build of about 1.1 million barrels which would result in a year over year overhang of about 43 million barrels if the EIA data is in sync with the API report. The distillate stock build was not nearly as large as the gasoline build and if the EIA data comes in similarly it will be supportive for our long HO/ short RBOB spread.

Overall the API report was simply bearish and if the EIA data confirms the API results the fundamentals will continue to play the role of capping out oil prices in the short to medium term, irrespective of how the externals trade.

The equity markets surged around the world starting with strong manufacturing numbers out of China followed by supportive economic data for both manufacturing and housing in the United States as well as news that Dubai was progressing in talks to restructure their debt load. The EMI Global Equity Index table shown below is now up almost 4% on the week with the year to data gain at the highest level so far this year at 50.8%. On a global basis the EMI Index is now above where it was prior to the Dubai meltdown last week. Brazil is continuing to surge leading the group higher with a year to date gain of 82.2%. China is now in a distant second place with a year to date gain of 76.3%. With the exception of just a few markets most of the bourses in the Index have increased by over 2% in the last 24 hours. Equities are currently very supportive for oil prices.

For the next 24 hours oil and Nat Gas prices will be impacted by a combination of fundamentals (inventory reports) and the direction of the financials. By Friday morning all eyes will be focused the monthly U.S. non-farm payroll number and the unemployment rate. It will set the stage for the next move, one way or the other, for the end of the week and likely with a spillover into next week. Unless the data on Friday is significantly different from the expectations I expect oil prices will likely to continue to trade within the trading range that it has been in since October. If so the upcoming OPEC meeting on Dec. 22 in Angola will be quick and easy as OPEC will likely just rollover their existing agreement and let compliance unofficially slowly decline (meaning an unofficial increase in production) as it has been since the middle of the year.

The dollar continued to decline over the last 24 hours against most major currencies. Australia raised interest rates for the third time in as many months and it is indicative of what is likely to happen in other non-dollar denominated countries that are exhibiting a much faster economic recovery than the United States. As I have discussed on numerous occasions interest rates between various countries set the ultimate stage for where each of their currencies trade in relationship to the U.S. dollar. With the US economy growing only very slowly the interest rate discrepancy (with the US rates at a disadvantage to others) will only widen over time and continue to result in a weak dollar environment (barring any major global intervention to support the dollar).

My individual market views are detailed in the table at the beginning of the newsletter. I expect the next few days to exhibit a high level of volatility with wide trading ranges and price direction reversals at any time basis the outcome of any of the economic or fundamentals data that will hit the airwaves starting this morning.

Currently prices are lower for energies and mixed for the externals.

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.  

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. 

Check out the EMI’s 2009 Energy Training Calendar Energy Management Institute offers a full range of advanced learning courses for energy professionals. Visit for our current course listing. EMI courses are available nationwide.

• Gold near record but waiting on jobs
• Indicators confirm strong stock market rally
• SEC charges New Jersey investment adviser in offering fraud
• Hurricane Earl, the grinch that stole Labor Day
• Regulators issue final rules for forex
• Energy group petitions CFTC for relief
• Bearish mood sets in for cattle, hogs