The Energy Report for Thursday, June 23, 2011

Slow Ride

Take it easy as growth seems to be slowing everywhere you look. The day after the Fed seemed to suggest that interest rates would stay low forever and lowered the outlook in the US economy to a disappointing 2.9 percent for 2011 down from 3.9% projection at the beginning of this year, the HSBC China Manufacturing Purchasing Managers Index seems to suggest that weaker demand and softer than expected growth will not just be a U.S. phenomenon. The preliminary manufacturing index saw activity fall to an 11 month low to a just barley expansive reading of 50.1. This of course does not bode well for energy demand expectation as it suggests that the steps that the Chinese government has taken to slow the economy may be working too well especially against a backdrop of a softening US economy and the Euro zone in turmoil. Add to that the end of QE 2 and inflation pressures should start to ease in China but now the question is, can China engineer a soft landing. The truth is that the slowdown in manufacturing was not just driven on the domestic side but on the export side as the slow ride on the global economic recovery is biting into the demand for Chinese goods. This obviously has the potential to be very bearish for oil. Now do you see why I have been targeting the $85.00 area a barrel for oil for some time?

Yesterday oil got caught up in those old fashion supply and demand fundamentals. Gasoline seemed not to care about QE-1 or QE-2 but really about supplies in the East Coast of the country as imports plunged, raising concerns about tight East Coast supply. The Energy Information Agency arm of the Department of Energy seemed to suggest that gasoline supplies while above average, overall in the country they are below average in the East Coast. This fact and the rising fears of supply tightness gave rise to fears of tightening supply.

First things first though, crude supplies were bullish based upon market expectations as the EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 1.7 million barrels from the previous week. Still 363.8 million barrels it puts U.S. crude inventories are above the average range for this time of year. Yet the word that motor gasoline inventories fell by 0.5 million barrels last week as oil and products plunged suggested that turmoil in Libya coupled with refinery issues out East could tightened supply and make things expensive. Barbara Powell of Bloomberg News pointed out that gasoline stockpiles in U.S. East Coast, or Padd 1 region, not only 4.1 percent below year-earlier levels reformulated gas on top of that refineries in New Jersey and New Brunswick with a total capacity of about 550,000 barrels have been shut adding to the tightness.

As David Bird from Dow Jones news wires pointed out, "front-month Nymex reformulated gasoline blendstock futures settled at a premium to heating oil Wednesday for the first time since May 31, after EIA reported an expected drop in gasoline inventories. Stocks dropped by 464,000 barrels in the week ended June 17, while analysts had forecast an 800,000-barrel rise. Gasoline for July-delivery jumped 9.07 cents, or 3.2%--the biggest gains since early May--to settle at $2.9733 a gallon, the most since June 14. Heating oil rose 2.3%--the most since May 25--to $2.9549 a gallon. That put gasoline at a premium of $1.84 gallon to heating oil, after an average 6.50-cent discount in the first three weeks of the month. Gasoline demand is up 0.9% in the latest 4 weeks, while distillate demand (diesel/heating oil) is down 5.7%, EIA data show."

The EIA showed that distillate fuel inventories increased by 1.2 million barrels last week and are in the upper limit of the average range for this time of year. Propane/propylene inventories increased by 1.8 million barrels last week and are below the lower limit of the average range. Total commercial petroleum inventories increased by 3.1 million barrels last week.

Another Japan earthquake gave us a big drop in copper and only adds to the slow down fears.
Late Breaking from Dow! The International Energy Agency, which represents major
energy consuming countries, said Thursday its Executive Director Nobuo Tanaka
will hold an unexpected and "urgent" press conference in Paris at 1300 GMT.

A spokesman for the IEA declined to comment on the reason for the conference.

Analysts have recently been speculating that the IEA could be preparing to
take action to reduce the oil price by coordinating the release of
publicly-held oil stocks held by its member countries in case of emergency
shortages.

The continued shut down of around 1.5 million barrels a day of oil supplies
by the Libyan civil war continues to cause problems for the oil markets,
although have been falling in recent days following weak economic data and the
promise from Saudi Arabia to increase its crude production by around 1 million
barrels a day.

What is the best way to position? Call Phil Flynn to find out the possibilities at 800-935-6487 or by emailing me at pflynn@pfgbest.com.