Energy Information Agency said

The Energy Report
EIA Away!
Wed, Apr 9 2008, 12:56 GMT
by Phil Flynn
Alaron

What a nice day for day-trading. Oil was locked in a tight technical trading range and gave day-traders some well defined ranges as the market awaited today’s oil inventory report. With the news front being relatively quiet, (Iran claiming they were installing thousands of new uranium-enriching centrifuges dose not cut the mustard for news these days) the most telling action about the mood and the concern of the market was the way heating oil rallied (distillates) and RBOB (gasoline) fell.

The market is telling you that the focus of this market is becoming the global tight supply of distillate. Cold weather across the globe and production of new, lower sulfur diesel is conspiring to tighten supply globally and is becoming a major focal point of the market action.

While the energies waited the weekly inventory report, the Energy Information Agency came out with its short term energy outlook. These are what the EIA said are the highlights. The EIA says that crude oil West Texas Intermediate (WTI) crude oil prices, which averaged $72.32 per barrel in 2007, are projected to average $101 per barrel in 2008 and $92.50 per barrel in 2009.

That is a dramatic jump for the EIA which seems to raise their projections to a lower price than the market is trading. Usually I think the EIA is low with their price projections but this year I think they are high.

The EIA said the projected higher costs for crude oil will contribute to higher petroleum product prices. (Which has been a major cause up until this point). The EIA says that motor gasoline prices are projected to average $3.36 per gallon at the pump in 2008, up 55 cents from last year.

They said diesel prices are projected to show even larger increases in 2008, averaging $3.62 per gallon, or 74 cents above the 2007 average price.(This is also, as I said, the market's focus in the short term. This is where the market is most driven by supply concerns).

As for the upcoming summer driving season the EIA says that the monthly average gasoline price is projected to peak at about $3.60 per gallon this spring, while monthly diesel prices are expected to Average about $3.90 per gallon in March and April. The EIA is holding their breath on this one as they acknowledge that weekly diesel prices have already crossed the $4.00 per gallon threshold in many regions of the country.

Yet at the same time the EIA is dramatically raising price projections they are also lowering demand expectations. According to the EIA U.S. consumption of liquid fuels and other petroleum is expected to decline in 2008 by about 85,000 barrels per day (bbl/d) as a result of the economic slow-down and high petroleum prices. (Alan Greenspan has declared that we are in a recession. Why shouldn’t the EIA?) The EIA said that after accounting for increased ethanol use, U.S. petroleum consumption is projected to fall by 210,000 barrels a day in 2008.The EIA said they expect U.S. real gross domestic product (GDP) to decline in the first half of the year and then start growing again, with annual growth in 2008 at 1.2%. The slowest annual rate since 2001.

They then expect a modest economic recovery in 2009, combined with lower petroleum prices, is projected to boost total U.S. liquid fuels and other petroleum consumption by about 200,000 barrels per day.

Henry Hub oil I think the EIA projections are high but for gas I think they are low. The EIA says Henry Hub natural gas spot price averaged $7.17 per thousand cubic feet in 2007 and is expected to average $8.59 in 2008 and $8.32 per in 2009.The EIA says that higher prices this year and next reflect continued strong demand and high oil prices, and the need to replenish more stocks this year than last year. (So much for the record gas storage going into the season.)

For the big picture the EIA said that the global oil market remains fundamentally tight entering the second quarter, despite a slowdown in U.S. oil consumption and growing risks to global economic growth. The combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices.The EIA also tries to address speculators by saying the flow of investment money into commodities has contributed to crude oil price volatility.Yet the EIA says supplies are rising. The EIA said inventories are improving in the Organization for Economic Cooperation and Development Countries, but given the lack of surplus capacity and geopolitical concerns in Nigeria, Venezuela, and Iraq, a higher level of commercial inventories is desirable. (No mention of Iran? Maybe new centrifuges are not the threat they used to be.)

The EIA also rightly says that the magnitude, breadth, and duration of any global economic slowdown will certainly influence market conditions over the near term. The EIA expects non-OPEC production to increase in the second half of the year and that OPEC is expected to also increase capacity.The EIA also says that they expect world oil consumption to grow by1.2 million barrels per day in 2008. 1 million barrels a day of that growth will come from non OECD counties. On the other hand OECD consumption is expected to climb a mere 90,000 barrels per day.

And this is important for many traders. The EIA says that higher oil prices and slower economic growth have dampened consumption in the United States, but available partial data indicate global oil consumption is still increasing because of continued growth in China, India, Russia, and the Middle East.

This goes back to the question of oil decoupling. Can oil demand growth outside the US keep oil prices rising even if the world’s largest consumer slows down? I still say that if the US economic slowdown is severe there is no way to support these higher prices.

And why is the market not worried about Iran. Is it possible that $108 dollar oil has already priced in an Iranian showdown. No, I don’t think so but it sure is pricing in more than just simple supply and demand.

The dream may soon become a reality. For years oil companies have dreamed of building a pipeline from Alaska to the lower 48 to send gas and oil from where it is ample to where it is needed. The project was never embarked upon because of the immense cost and falling oil and gas prices. That is until now. Conoco Phillips and BP announced a joint venture to spend $30 billion dollars to build that pipeline. That of course never would have happened unless oil companies were making handsome profits. Now if we could only get the rights to drill in ANWAR perhaps we could start getting energy prices to a more reasonable level.

The big mover for today will be the weekly inventory report! Crude supply has risen 11 out of the last 12 weeks and we probably would have been 12 out 12 if it were not for the fog in the Houston Shipping Channel. Crude is expected to rise by 2.5 million barrels, gasoline is expected to fall by 2.5 million barrels and the all important distillates are expected to rise.

Don’t forget to sign up for your free trial of alaronenergies.com. Just call me at 800-935-6487 or email me at pflynn@alaron.com to open your account! Check me out on the Fox Business Network!

Sell May crude at 11180 - stop 11250.

We're short May RBOB from apprx 27850 - lower stop to 27700!

We're short May heating oil from apprx 31000 - stop 31500.

We're long May natural gas from apprx 940 - raise stop 955!!!

Have a GREAT day!


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