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The Schork Report 4/19/6


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#1 TTHQ Staff

TTHQ Staff

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Posted 19 April 2006 - 02:56 PM

 

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Tomorrow the market is expecting the EIA to report the second injection of the 2006 refill-season into underground storage, 50 Bcf. This compares with last years 50 Bcf injection and the five-year average injection of 44 Bcf. Thus, a draw in-line with expectations will serve to maintain the year-on-year surplus at around 420 Bcf and the surplus to the five-year average at 670 Bcf. The current disposition of underground storage is 1.71 Tcf. We typically do not see this amount of gas in the ground until around the second or third week of May.

In other words, storage is about five weeks ahead of normal seasonal parameters.Bearish near term storage economics notwithstanding, this market can only fall as far as its nearest substitute.

Yesterday we said we would change our bias into bullish on a close above 7.650. So be it. There is a long-term trendline that extends back to the May’06 life-of-contract high at 11.266. The trend today is marked in between 8.140 and 8.170, thus strength today above that area signals a new round of bullish enthusiasm and cautions for a push towards intra-day resistance between 8.309 and 8.417.
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Regarding today’s DOEs and the market is expecting a build for last week of around 2.5 MMbbls. Last week the DOE reported the eighth build in the last nine weeks.

Crude stocks are near an eight year high, 346 MMbbls, which equates to a 40.9 MMbbl surplus to the five-year average. However, the time is nigh for that surplus to be enlisted. More than 550 Mbbl/d of Katrina/Rita effected downstream capacity is scheduled for full ramp up by the end of this month. This will dovetail with the winding down of turnarounds. What’s more, we have a hydra of looming summer demand plus hurricane speculation, domestic up-and-downstream reliability issues, new EPA blendstock mandates and rising geo-political tensions.

Thus, a bid will continue to be fostered in this market. Now that we have posted a new all-time peak in the spot, the questions holds, how much higher can we go? The obvious answer is… much. After all, "all-time high" or not, the front-month May’06 contract is contangoed to every contract out through the Oct’08! Heck, the May’06 is trading around a $3 discount to the Cal’07 strip for crying out loud!
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Tanker rates for all classes continued to tread water last week. VLCC transport ex West Africa (WA) for USGC discharge is now trading at a post Katrina/Rita low of around worldscale (ws) 70, down 5 points week-on-week.

An oversupply of tonnage, spurred by the combination of lagging Nigerian production, plus heavier than normal Far East and U.S. turnarounds continues to the weigh the market down. A surplus of Arab Gulf (AG) tonnage and holiday-abridged fatigue served to soften the market last week. Thus, weakness here trickles to other freight markets. What’s more, another major contributor to the overall bearishness of the current market is the overhang in U.S. crude stocks.
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As far as the DOEs are concerned, the market is looking for a draw of around 2.5 MMbbls as a follow up to the last few massive draws. Last year for this date we saw a 1.46 Mbbl draw. So a report in-line with expectations will serve to push the year-on-year deficit to over 6.0 MMbbls, one month ago mogas stocks enjoyed a 4.3 MMbbl surplus. Post DOE strength this morning above 225.45 clears a track towards intra-week resistance between 227.81 and 230.41. A close up here sets the table for a run at the September 29th high at 237.00. Otherwise, weakness below unchanged (222.39) should see support beginning at yesterday’s pivot area low, 219.55 and the three-day pivot area low at 214.18. Failure to hold support here cautions to a retrace into last Thursday’s pivot area from 209.92 to 208.18.
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The market is expecting a draw of around 1.5 MMbbls for today’s DOEs, which is potentially troublesome given that we normally start to see stocks build this week. What’s more, temperatures in the East last week were about 20% warmer than normal, and 15% warmer week-on-week. At any rate, despite the strength down on the NYMEX, wet barrels in New York Harbor traded at a premium to the prompt screen for a fourth straight week. Post DOE strength today above unchanged (205.08) should provide enough momentum for a push to the May’06 life-of-contract high at 206.39. Above here we should see resistance in between 207.61 and 211.56. Otherwise, weakness below 202.55 should find support at the bottom of the three-day pivot area at 200.25. Failure to hold the line here alerts to a corrective retrace towards 196.74.
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Last week fuel oil finally found a bid after continued strength in the NYMEX liquids complex. Nevertheless, the LSFO/WTI crack continues to lengthen. By last Friday the crack had moved out to minus $18.69 per barrel. On the week it averaged minus $18.79 per barrel, up 4% week-on-week. Meanwhile, gas at the gate in New York continues to work in the other direction thanks to shoulder-month temps and increased fuel switching from industrials. Accordingly, gas went out last Friday at a discount to fuel oil (0.7%) for the fifth time in the last six weeks. In fact, on the week fuel oil in the Harbor traded at a discount to delivered 0.3LP, 0.3HP and 0.7LP. Like we say, gas can only go as low as its nearest substitute!
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According to the DOE’s Summer Fuels Short-Term Energy Outlook (STEO), electric power sector demand for coal is projected to increase by 0.7 percent in 2006 and by another 1.8 percent in 2007. Power sector demand for coal continues to increase in response to higher substitute Btu prices. U.S. coal production is projected to grow by 1.2 percent in 2006 and by 0.9 percent in 2007. The price of coal to the power sector is projected to rise throughout the forecast period, although at a slower rate than in 2005. In the electric power sector, coal prices are projected to rise by an average 4.0 percent in 2006 and by an additional 2.7 percent in 2007, increasing from $1.54 per million Btu in 2005 to $1.64 per million Btu in 2007.
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NAT-GAS… Front-month gas closed above $7 for the fourth time in five weeks last Friday. Weakness this week below our critical point of reference at 6.660 sets the table for a push towards the March 08th low (continuous) at 6.450 and towards longer term support from the May 27th continuous low at 6.030 to the 6.000 psych-support. Otherwise, strength above 7.428 will likely encounter resistance from 7.860 to the 14-week pivot moving average at 7.914, and then again at the $8 psych-barrier. Above here bulls will shoot for the high from the week ended February 10th at 8.400.

CRUDE OIL… NYMEX WTI caught a bid for a fifth straight week with the front-month closing last Friday at its highest level since the week following Katrina’s landfall. As we look ahead to the new week the skew obviously remains to the upside with considerable technical support beneath unchanged (69.32) in the K’06. Bears will have to overcome support beginning at the top of last Friday’s pivot range, 69.11 and lasting until the bottom of the three-week pivot range at 66.53. In between the bears will look to close out the February 07th/10th gap from 67.75 to 67.60. Sellers below here will then likely encounter support in between the 14 and 30-week pivot moving averages from 64.57 to 62.47. On the other side the bulls will obviously be gunning for all-time front-month peak at 70.85. Above here there is little in the way of resistance until we make an approach towards the mid $70s from 72.55 to 74.18.

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