 | Tomorrow the market is expecting the EIA to report the eleventh injection of the 2006 refill-season into underground storage, another (well) below average 61 Bcf. This compares with last years 92 Bcf injection and the five-year average of 96 Bcf. Thus, a draw in-line with expectations will serve to narrow both the year-onyear surplus to around 400 Bcf and the surplus to the five-year average to only 600 Bcf.
Last week we ushered in summer. However, given the recent rains in the Northeast it hardly feels like “beach weather”. Any way, cooling-demand in the Northern hemisphere is about to kick into high gear. In our discussion yesterday we erred (as one of our clients pointed out) when we said “… this season’s cooling demand to date pales in comparison to last summer’s record heat…” That is not entirely correct. Whereas temps in the Northeast this year are considerably cooler, recall, according to the Regional Climate Center at Cornell University, the 2005 June-July timestep for the entire Northeast was one of the hottest in recorded history, cooling demand this season (May through the fourth week of June) for the entire U.S. is running about
| 8.8% higher. Thus, our “pales” comparison should have been reserved for the Northeast, or better still, this July’s forecast compared with July 2005.
Be that as it may, this clarification does not dilute our thesis, i.e. the fundamentals in vacuo fail to explain the speculators bullish skew in gas.
The Jul’06 futures go off the board today. As far as trading is concerned, a failure to support yesterday’s 6.260 pivot area low in the Aug’06 should find a path towards Monday’s 70-week low at 6.160. Weakness here can then push towards the $6 psych-support. Keep in mind, the NYMEX Aug’06 contract has not traded with a $5-handle since January 18th 2005. Otherwise, a rebound above the 3-day pivot area high at 6.320 should generate enough momentum to close this week’s gap at 6.360. Bids above last Friday’s 6.480 high print can then allow bulls to focus on the June 22/23 rd gap between 6.480 and 6.570. |  | The market cognoscenti are expecting the DOE to report a draw in oil stocks of around 1.5 MMbbls. Last week Uncle Sam surprised the market with an unexpected 1.39 MMbbl build. However, last week’s movement, similar to the prior week accrued out west in PADD V. In other words, crude oil stocks east of the Rockies fell 2.4 MMbbls in last Wednesday’s report. Not surprisingly, the bulk of that movement occurred in PADD III (GoM), where refiners are scurrying to cash in on enormously wide margins. For example, the spot 1/1 RBOB crack has averaged $23.69 per barrel month-to-date, while the 3/2/1 “refiners crack” has averaged $20.23. Despite strong apparent demand (utilization and runs are operating at post Katrina highs), oil stocks last week climbed to 347.1 MMbbls… an eight-year high! Thus, a reported draw today in-line with the consensus is hardly worrisome.
What is worrisome however is the closure of the Calcasieu ship channel. This waterway connects Lake Charles to the Gulf of Mexico. It has been shut since last week following a spill at Citgo’s facility there. Closure of this channel to vessel traffic is also affecting Calcasieu Refining’s 32 Mbbl/d facility as well as ConocoPhilips 252 Mbbl/d Westlake facility. | All told about 1 out of 26 barrels of U.S. refining capacity is now vulnerable to reduced runs through the clean up. Indeed, according to a published report yesterday, both ConocoPhillips and Citgo have since requested barrels from the SPR to compensate for shut out inbound crude supplies. The Coast Guard estimates the channel will remain shut-in for another two to four days. Meanwhile, the bulls failed in their first attempt above the 50-day pivot moving average (72.43) yesterday. Failure to do so again today in post DOE trading cautions to further corrective trade down into Monday’s pivot range between 71.58 and 71.15. Further selling below the 14-day pivot average, 70.51 clears a track into last Wednesday’s range from 70.15 to 69.78. A close below the 14-day reaffirms our bearish bias. Alternatively, a rebound back above the 50-day pivot alerts to further bullish trade. A close above this level will push us out of our bearish bias. A close here sets the table for a push against resistance in between a long-term trendline at 73.10 and the high from the week of June 09th at 73.40. Buyers here then create a platform for the bulls to mount an assault on the 75.35 front-month alltime peak and the Aug’06 life-of-contract high at 76.85. |  | | Freight rates for shipping crude oil firmed for a third straight week with West African tonnage into the U.S. trading above worldscale 100. U.S. refinery demand is strong. Per last week’s EIA numbers imports for crude oil, finished products and blendstocks continue to surge, thus lending further support to freight markets. Over the last four weeks crude oil imports averaged 10.8 MMbbl/d, 856 Mbbl/d (8.6%) above the five-year normal. As such, freight should continue to firm through the summer into fall. Five and six-month deferred IMAREX forward freight agreements are trading as ws 185. |  | | As far as the DOEs are concerned, the market is looking for a build of around 0.5 MMbbls. Since the end of turnarounds mogas stocks have climbed 12.85 MMbbls, which is about twice what we normally see at this point. As such a 10.8 MMbbl year-on-year deficit has since narrowed to 2.5 MMbbls. A build in-line with this consensus will further narrow the year-on-year deficit by another 200 Mbbls. Post DOE buyers above yesterday’s 221.50 high print will be aiming at the Jul’06 contract’s 223.00 life of contract high. Penetration here clears a track towards intra-day resistance around 227.06. Alternatively, failure to hold yesterday’s 215.60 pivot area low alerts to further corrective trade towards 213.09 and the 30-day pivot moving average, 210.19. |  | | Regarding today’s DOEs, the market is expecting a 1.5 MMbbl build in distillates. Current diesel fuel inventories stand at 74.64 MMbbls with forward cover of 23.3 days. Post DOE sellers below the 14-day pivot moving average, 195.60 alerts to follow through weakness into last Wednesday’s pivot range between 193.21 and 192.20. Penetration here could then find a path towards support in between the year-to-date mean at 190.20 and last week’s 188.70 low. A close below the 14-day reaffirms our bearish bias. Otherwise, a rebound over yesterday’s 197.5 pivot area high cautions to renewed strength towards the 50-day pivot moving average at 200.65 and the top of the June 17 th pivot area at 202.25. A close today above this range will force us out of our bearish bias. |  | | Fuel oil values came off for a fifth straight week as the focus increasingly turns to cheaper (read: nat-gas) Btus. Consequently, the LSFO/WTI crack remained at a historically wide margin. As of last Friday the crack was marked around minus $21.81 per barrel and averaged minus $20.80 on the week. Meanwhile, gas at the gate in New York came off on a lack of weather-driven demand coupled with the correction on the NYMEX. Gas finished the week at a discount to fuel oil (0.7LP, 0.3HP and 0.3LP) in the Harbor for a twelfth straight week. |  | | According to the DOE’s May 2006 Short-Term Energy Outlook (STEO), electric power sector demand for coal is now projected to be flat in 2006 as below normal heating demand this winter and lower expected cooling demand this summer (relative to last year) is expected to result in a decline in 2006 coal demand in the aggregate. Coal demand however is expected to keep pace in response higher price alternative Btu markets. The price of coal to the power sector is projected to rise throughout the forecast period, albeit at a slower rate than in 2005. Coal prices are projected to rise by an average 4.5% in 2006 and by an additional 2.5% in 2007, increasing from $1.54 per million Btu in 2005 to $1.65 per million Btu in 2007. |  | NAT-GAS… NYMEX nat-gas gave back nearly all of the prior week’s “strength” as trader’s apparently decided that having an extra two-and-a-half week’s worth of last summer’s record gas-fired load on hand isn’t bullish after all. As far as this week is concerned… sellers below last week’s 6.170 low (N06) can target the $6 psych-support. Penetration here alerts to a potential test of the May 26 th 5.750 low print before Wednesday’s expiry. Otherwise, a rebound above last week’s gap at 6.370 (N06) cautions to further strength towards the year-to-date mean at 6.673. Penetration here then clears a track towards the 14-week pivot moving average at 6.861. Likewise, closure of last week’s gap at 6.570 (Q06) can target the 14-week, as well as the June 16 th /19 th gap from 7.200 to 7.300.
CRUDE OIL… WTI caught a bid last week for the first time in three. Now it remains to be seen whether the bulls can keep the press on. Bids above last week’s 71.30 high print alert to bullish trade towards a near-term trendline at 73.10 and the high from the week of June 09 th at 73.40. A close above here sets the table for the bulls to mount an assault on the 75.35 front-month all-time peak and the Aug’06 life-of-contract high at 76.85. Alternatively, a failure to hold last week’s 69.93 pivot area low stalls bullish momentum and alerts to further weakness towards this pit’s year-to-date mean at 68.86 and the low from the week of May 26 th at 67.55. Penetration here alerts to further weakness towards the next ratchet of support in the mid $60s, specifically the March 24 th /28 th gap from 66.55 to 66.00 and the 30-week pivot moving average at 65.54. | |  | 
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