Back to Market Commentary by Product Group

February 25, 2010 8:30am CDT


Quote of the Day

“Laughter is by definition healthy.”
Doris Lessing

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	N
Inventories	CBr	CBr	CBr	CBr
US Dollar	CBr	CBr	CBr	CBr
Global Equities	CBr	CBr	CBr	CBr
Geopolitics	CBu	CBu	CBu	CBu
Technicals	CBu	CBu	CBu	CBr
Market Sentiment	CBr	CBr	CBr	CBr
Overall View	CBr	CBr	CBr	CBr
Bias	CBr	CBr	CBr	CBr
N - Neutral    Bu - Bullish    Br- Bearish  CBu - Cautiously Bullish
CBr - Cautiously Bearish

The markets liked what US Central Bank Chairman Ben Bernanke had to say in day one of his testimony to Congress. Basically the most important part of his testimony that the market was focused on was short term interest rates… which he said will remain at extremely low levels as the economy basically still has a long and difficult road to recovery. He discussed many other aspects of the economy but the single most important support for higher equities, a lower dollar and higher oil and commodity prices is simply extremely low interest rtes. Until rates begin to rise and/or the market perceives a rate increase is imminent the externals will remain supportive for oil prices. In a nutshell Bernanke continued to refer to the high level of unemployment and the scarcity of job openings as a major reason why unemployment will be around for years not months which would translate to the fact that the Fed is not going to be very quick in pulling the trigger on interest rates increases.
Barring any major surprise like an acceleration of the economic recovery (highly unlikely) I do not see an interest rate increase anytime before the US mid–term November elections and for that matter anytime in 2010. I think the earliest we will see rate increases is during the first half of 2011…assuming the economic recovery continues and does not revert back to a slowdown. A slowing of the recovery is certainly not an unrealistic scenario as we are already seeing a slowing of the recovery in the EU’s main growth engine Germany… which saw its latest GDP numbers come in flat. Bernanke has another day of testimony tomorrow when all of the same questions will once again be asked in a slightly different manner with Bernanke likely to remain very consistent with his answers from today. In summary Bernanke got the financials back on track which resulted in support for oil prices on a day when the fundamentals were not overly supportive.
The EIA released their latest snapshot of oil inventories which is summarized in the following table along with comparisons to last year and the five year average for the same week. As has been the case all too frequently the API data released on Tuesday afternoon was out of sync with the more widely followed EIA data. In summary I would categorize the EIA report as biased to the bearish side. Crude oil built more than expected while distillate stocks declined noticeably less than forecast. Gasoline did surprise the market with an unexpected decline. However, gasoline stocks are well supplied versus both last year and the five year average.

Oil Inventory		2/25/10
Mil of Bbls
	Current	Change from	Change from	Change from
	Inv.	Last Week	Last Year	5 Year
Total Crd & Prod	1,046.9	1.4	11.4	46.8
Crude Oil	337.5	3.0	(13.8)	15.9
Gasoline	231.2	(0.9)	15.8	7.8
Distillate	152.7	(0.6)	11.0	24.7
Refinery %	81.2%	1.4%	-0.2%	-4.2%
Demand
Total	19283	191	50	(1570)
Gasoline	9064	543	54	9
Distillate	3662	(125)	(326)	(744)
Jet Fuel	1235	10	(211)	(343)

Crude oil stocks increased by 3 million barrels or about 30% greater than the expectations. The gains were mostly centered in PADD 3 or the USGC and PADD 5 the USWC. On a positive note (for the WTI/Brent spread) both PADD 2 and Cushing crude oil stocks declined for the ninth week in a row with P2 stocks down 9 million barrels and Cushing inventories lower by about 5 million barrels over the 9 weeks. Since the middle of December 2009, the WTI/Brent spread has been trading in a tight trading range of about $1 to $1.80/bbl (premium to WTI). The market liked Wednesday’s data and pushed the spread to slightly above the upper range resistance level by the close. The spread is now positioned to move to higher ground if the breakout above the $1.80/bbl is confirmed over the next few trading sessions. Back to the total crude oil inventory build…it may be even more bearish than at first glance as stocks built strongly during a period when refinery runs surged by 1.4% strongly increasing refiner demand for crude oil.
Speaking of surging refinery utilization rate the total run level is now at 81.2% or just 0.2% below last year and only a tad over 4% above the five year average. With total refined products implied demand still 7.5% below the five year average I am not certain as to why the refining sector is so aggressive in increasing run rates. It certainly can’t be a result of the refiners being overly optimistic over refinery margins as the widely followed 3-2-1 crack spread has declined by almost $1/bbl in the last two trading sessions.
Refined product inventories both declined this week. Gasoline stocks fell by about 900,000 barrels versus an expectation for a build of close to 2 million barrels. That is the good news for gasoline. The negative news is the year over year surplus is still around 16 million barrels while the overhang versus the five year average for the same week is close to 8 million barrels and the gasoline building season is still not yet over.
Distillate fuel stocks were a disappointment for the third week in a row as stocks declined only about half as much as projected. Once again even with winter weather heating oil stocks increased on the week with the entire decline in distillate fuel solely a result of a decline in diesel fuel. With Spring just 23 days away and with the latest NWS forecast for the main heating oil consuming region of the US (the Northeast) calling for normal to above normal temperatures the likelihood of the surplus in distillate fuel dissipating any time soon is remote at best. On a bright note diesel fuel stocks have been declining steadily suggesting that the economic recovery is continuing in the US since the majority of diesel fuel consumption is in the commercial transportation sector (trucks and rail).
Needless to say after the inventory report gasoline prices have no motivation to begin to adjust versus heating oil prices. In fact since the data was released gasoline prices have appreciated further versus heating oil. On the other hand gasoline has lost value versus crude oil more as a result of the huge increase in refinery runs rather than the relationship of inventories for both crude oil and gasoline.
The following table summarizes the week to week changes for all of the major commodities in the oil complex at each level of the supply chain. With the exception of gasoline everything else in the complex was bearish on the week. I am categorizing gasoline as bullish based on the surprise stock draw this week. However, I am not sure this draw will be repeatable. With refinery run rates over 80%... gasoline production is growing and implied demand is not going to grow very quickly with high unemployment levels and the highest prices in over a year. I do expect distillate and jet to remain biased to the bearish side also based on higher than needed refinery run rates. Overall I categorize this week’s inventory report as bearish. The increase in oil prices on Wednesday was more related to Bernanke’s remarks, especially those related to a low interest rate environment remaining in place.

Week to Week Change - Oil Fundamentals
	Thousands of Barrels per Day
	Crude**	Gasoline	Distillate	Jet
Domestic Production	23	435	158	68
Imports	536	137	53	38
Exports	0	See Note	See Note	See Note
Inv Build/(Draw)	433	(128)	(84)	139
Implied Demand	335	543	(125)	10
EMI View	Bearish	Bullish	Bearish	Bearish
** Crude Demand is actually Refinery Crude Input
Note: Product Exports are total for all products			0

Today the EIA will release the latest snapshot of Nat Gas inventories. The industry is expecting a net withdrawal of about 170 BCF. If the actual report is in sync with the projections it would strongly exceed the five year average build of 132 BCF for the same week in question. With the way heating oil inventories performed this week (see above) it would not be a total surprise if the net withdrawal comes in below the expectations. Nat gas prices are weak and remain solidly below the $5/mmbtu level and barring any major fundamental or weather surprise are likely to continue to trade with a $4 handle for the short term.
The global equity markets are back on the defensive (table shown below) with China’s Shanghai A shares showing the largest gain in the last twenty four hours. The US gained ground yesterday and remain in the number one spot in the Index. However, early futures market trading are suggesting a down day for US equity markets (so far) which is bearish for oil prices.

EMI Global Equity Index
	2/25/10	Change	Change	2010 YTD
	2010	From	From	Change
	6:05 AM	Yesterday	Yesterday %	%
US/Dow Jones	10,374	92	0.89%	-0.5%
Can/S&P-TSX	11,522	(5)	-0.04%	-1.9%
Lon/FTSE	5,343	28	0.52%	-1.3%
Paris/Cac 40	3,706	(10)	-0.27%	-5.9%
Germany/Dax	5,628	13	0.23%	-5.5%
Japan/Nikkei	10,199	(153)	-1.48%	-3.3%
HongKong/HangSeng	20,468	(155)	-0.75%	-6.4%
Aussie/SYDI	4,666	(65)	-1.37%	-4.4%
China/Shanghai A	3,169	42	1.33%	-7.8%
Brazil/Bvspa	65,795	(314)	-0.47%	-4.1%
EMI Global Equity Index	14,087	(53)	-0.1%	-4.0%

         
 My individual market views remain the same and are detailed in the table at the beginning of the report. I know I am still cautiously bearish but prices could still rise if the dollar continues to weaken. The dollar weakened on Wednesday but not by very much. We are in a major push and pull strategy between which of the two major OECD regions are more bearish the EU or the US. Bernanke said interest rates will remain exceptionally low …which is bearish for the dollar but the EU recovery seems to be slowing and then there is Greece which is bearish for the euro. We may be in for a period of the US dollar trading in a tight range over the next few months which would force oil and commodity traders to focus more on the fundamentals and technicals of the individual commodities. For the moment the fundamentals are not overly supportive for oil while the technicals are starting to look toppy.
Currently everything in the EMI Price Board is starting the day in negative territory except for the US dollar which is firming. Investor/traders remain concerned over the evolving situation in Greece and for the moment it has resulted in the euro getting hit with another round of selling.  Caution remains the keyword as price reversals can happen at any time on little new information.

Current Expected Trading Range			Expected Trading Range
	2/25/10	Change	Low	High End
		From	End Support	Resistance
	6:05 AM	Yesterday
Apr WTI	$79.51	($0.49)	$76.00	$79.34
Apr Brent	$77.70	($0.39)	$75.00	$78.00
Mar HO	$2.0341	($0.0080)	$1.9700	$2.0600
Mar RBOB	$2.0800	($0.0189)	$1.9900	$2.1000
Apr NG	$4.806	($0.053)	$4.560	$5.000
Dow Futures	10,312	(43)	10,000	10,800
US Dollar Index	80.995	0.080	78.850	81.000
Euro/$	1.3489	(0.0036)	1.3450	1.3775
Yen/$	1.1205	0.0111	1.0600	1.1600

Best regards

Dominick A. Chirichella