Morning Petrospective – May 12, 2011

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t may be over. All of it, everything. The Mississippi River flooding was a red herring, a freak of Nature that diverted attention away from the major influences in this market. Those influences are, and have been for two or three years now, the Federal Reserve’s policy on interest rates and the impact they have on the US dollar. With QE2 (Quantitative Easing II) ending, the major policy that has shaped oil prices is winding down. The leading factor behind a weaker dollar is ending and the bull markets in stocks and commodities are all at risk here. Gasoline prices led oil prices lower today.

Gasoline prices were down 25 cents a gallon and crude oil prices were down about $5.00 a barrel. The DJIA was down 150 points and the dollar was significantly stronger. The dollar rally was the biggest factor pushing oil and commodities prices lower. And, behind that weakness, we believe that the end of QE2 is the biggest factor. As long as the Fed does not come up with a third round of quantitative easing (QE3), the major reason for oil price strength will be gone. That applies to a number of commodities, gold and silver among them, and probably also applies to equities. And yesterday’s weakness could be a sign that the economy is weak and may actually need a third round of quantitative easing. That strikes us as politically inopportune.

A number of market observers pinned the huge decline on an unexpected build (1.275 million barrels) in gasoline inventories. They also noted a fresh decline in the four-week demand average for gasoline reported by the DOE. It is now at 8.995 million bpd, down 2.40% - and this latest figure is actually lower than the one seen a week ago. That is highly unusual for gasoline demand averages moving forward in May. We may have higher inventories and poorer demand, but these figures are not going to have the impact on prices that the end of quantitative easing will.

It turned out that the Mississippi River flooding was not nearly as dangerous or calamitous as it might have been, and that gave traders an opening to sell with a sense of greater immunity. This week’s build in gasoline inventories was psychologically important because it ended a stretch of consecutive draws in those stocks. Demand has been unimpressive for most of the year, but the stock build seems to have given it new meaning. Total oil demand, averaged over the last four weeks, is now down 0.45%. A week ago, it was up 1.41% and it was up 3.3% two weeks ago.

    China’s inflation rate was reported at more than 5%, and that has many analysts expecting the Chinese Central Bank to increase interest rates, reserve requirements or both. In any event, some sort of tightening seems likely. The US Producer Price Index was nearly 6% in March and is believed to have reached 6.5% in April, according to Capital Economics. It could reach 8% later this year, CE fears.

The widening of the US trade deficit to $48.2 billion, a new nine-month high, in April (from $45.4 billion in February) came from higher oil prices. The non-petroleum deficit dropped from $20 billion to $16.9 billion in April.

The dollar was yesterday’s biggest market influence, despite flooding along the Mississippi River and a DOE report that showed the first build in gasoline stocks in a number of weeks.

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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.

Bentek Energy

  • Texas Observer – HSC to HH Spread Maintains Flows to Supply Southeast Demand.
  • Supply Demand Balance Analytic Report – Sharp Demand Declines Continue to Offset Offshore Production Losses.
  • Industrial End Users Analytic Report – Another Drop in Industrial Demand.
  • Power Burn Analytic Report – Power Burn Expected to Decline 1.7 Bcf/d over the Weekend.

Platts

  • Exelon agrees to buy 720-MW gas -fired plant in Texas from Sequent Wolf Hollow for $305 million.
  • Euro gasoline cracks overtake diesel cracks following flooding concerns in US.
  • Coal to dominate over natgas as fuel for power generation in Southeast Asia, says energy consultant WoodMac
  • US approves 2nd deepwater exploration plan since Macondo moratorium.

Bloomberg

  • Flooding Prompts Louisiana, Mississippi Governors to Warn State Residents.
  • GDF Suez Wants to Double Number of Clients in Italy by 2015, Tribune Says.
  • Woodside Petroleum Appoints Ex-ExxonMobil Executive Peter Coleman as CEO.
  • Down-Under Hypocrites Bet All on China’s Boom: William Pesek.

Technical Recap

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