Morning Petrospective – August 24, 2010       

il prices tried to move higher on Monday, as investors were buying oil futures early Monday morning, in sympathy with stronger equities quotes on Asian exchanges. The buying never became aggressive, though, because the dollar was stronger against the euro from the start of the day.

And the stronger US dollar and weaker euro combination was reinforced as the day wore on by sagging equities quotes. By 4 PM, the DJIA had fallen 39.21 points to end at 10,174.41. The stock market index made its lows at the end of its trading day, but it had weakened enough to help oil prices finish in the red when they closed.

As the oil market’s favorite outside influences – equities and currencies – fail to provide leadership higher, they act to convince large numbers of investors either to sell or stay away. We need to remember that a number of the investment funds only initiate positions on the long side; when they sell, it is to liquidate existing long holdings. When these funds do not receive buy signals, which have come in a number of cases exclusively from higher equities, a stronger euro or economic data consistent with one of those two results, they do nothing. Of course, that is assuming their existing position is flat. When the long-only funds get sell signals when they are already long, they kick out existing longs and then sit and wait for a buy signal.

The existence of these long-only funds can be problematic when we get an environment that spews out daily buy signals (see August, 2007 to July, 2008, or $78 to $147). These funds seem to have an inexhaustible amount of money and buying that they can bring to the market. But, in periods during which the environment spits out a succession of uninterrupted sell signals (see second half 2008, or $147 to $34), these funds regurgitate like fraternity boys during initiation.

Clearly, it helps during bullish periods if there is actually some serious demand for oil (as seemingly was the case in the first half of 2008), or during declines if demand is falling (as truly was the case in the second half of 2008). Right now, we have possibly the worst fundamental variables ever entered into a supply-demand equation, a staggering economy and a US dollar that seems prepared to take back a large amount of ground against the euro, after having coughed up 10.7% in the two months started in mid-May. Every week, the economic recovery (that seemed well on its way back to health) looks like it has the economic equivalent of a lasting, lingering Lyme disease, a miserable malady mentioned for its vicious, virulent, vise-like grip on sufferers, who just can’t seem to shake it. This economy seems to be getting better, then something goes wrong again. This has been the pattern for months now.

Nowhere is this more evident than in gasoline, which led prices lower on Monday. Demand is reportedly up 3.5% against a year ago, based on DOE four-week averages, but it has not been anywhere near enough to prevent stocks from growing during the summer. The last DOE report for the spring showed four-week gasoline demand at 9.237 million bpd, up 0.83%. Inventories were 8.7 million barrels (4.16%) higher than a year ago and 8.8 million barrels (4.21%) higher than two years ago (at the end of spring). In the latest report, gasoline inventories were 13.5 million barrels (6.43%) higher than a year ago and a whopping 26.7 million barrels (11.5%) higher than they had been two years earlier. Four-week demand had climbed to 9.451 million bpd (up 3.5%), but it was not enough to help. Of course, part of the problem is that refineries have had a chance to catch up with maintenance and are now running at higher levels than normal for this time of year. Refiners have had to decide whether they want the surplus in crude or refined products and, in an attempt to balance the problem, they have ended up with both. The problem starts with not wanting to lose hard-won term contracts accumulated over decades – barrels we will need in the future, again.

With a stronger dollar and weaker stock market, the long investors have nowhere to hide and have been liquidating long positions recently. They waited for a few days at the start of August before they started selling, and producers and commission houses were selling short then. But, after a week or so of watching prices drop, the funds decided they had to sell.

     FMX Newswire       

FMX Newswire is an overnight news summary designed to meet the needs of professional energy traders. The content is to-the point, professional grade and not widely reported in the mainstream media. All sources are professional respected firms and newspapers.

Platts oil

• China's commercial crude inventory stood at 29.2 million mt at the end of July, up 1.3% from June.
• China's stocks of oil products, comprising gasoline, gasoil and kerosene, totaled 16.21 million mt at end July, down 6.1% from end June.
• Hurricane Danielle, which remains at Category One and continues to strengthen, is expected to become a major hurricane by late Tuesday: NHC.
• UK's Cairn Energy reports a net profit of $57 million in the first half of 2010 compared with a net loss of $21 million a year ago.
• Korea's KNOC says it may improve its $2.9 bil offer for UK's Dana Petroleum in certain circumstances, including rival bid or new information.

Bentek Energy

• Gulf Coast Production Analytic Report - Louisiana Offshore Down 173 MMcf/d in Evening Cycle
• Industrial End Users Analytic Report - Another Day of Declined Industrial Demand
• Supply/Demand Balance Analytic Report - Danielle Upgraded to a Category 2 Hurricane
• Texas Observer – Texas Electricity Demand Sets New Record Ahead of Incoming Front

Bloomberg 

• Oil Falls a Fifth Day on Concern Over U.S. Supply Gains, Slowing Recovery
• Heating Oil and Diesel Rising to 27-Year High in Survey
• Korea National Says $2.9 Billion Hostile Offer Fully Reflects Dana's Value
• Conoco, Origin Target Year-End Decision on $31 Billion Australian Project
• Hurricane Danielle Gains Strength in Atlantic; May Avoid Gulf of Mexico
• Rig Survivor Blames BP's `Screwed-Up Plan' for Gulf Oil Blowout

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