The Energy Report for Tuesday, April 8, 2008
Oh, Porvoo! Will winter ever end and will we be able to replenish tight distillate supply? Worldwide concerns about tight supplies of distillate drove energies and commodities higher yet again. Oil prices that stayed steady on Sunday night started to drive higher early Monday when concerns were raised about a major diesel refinery. Add on to that a little cold weather, OPEC indifference and fog in the Houston shipping channel and you have what you might call a bullish blow off day.
The start of the rally can be traced directly to concerns about Porvoo Refinery that is owned by Neste Oil. The refinery is located in Finland about 20 kilometers outside of Helsinki. The plant is producer of low sulfur diesel and gasoil and has a production capacity of 11,000.00 tons of oil per year. A fire had broken out at the refinery on Friday and the company said the damage to its production lines may cost the company about 40 million euros in lost production and repairs.
Yet more of a concern to a tight diesel market is that Neste Oil says the diesel production line will remain shut through April and May. At the about the same time that the company made the announcement and the news hit the wire, heating oil started to make its move. Even when Neste tried to assure the market that planned deliveries would not be affected the loss of any production for the diesel hungry world was not convinced.
Or as todays Wall Street Journal reported, Finnish refiner Neste Oil said a Finnish refinery that is a major producer of gasoil will remain shut longer than anticipated after a fire that broke out two weeks ago. Gasoil is predominantly used as a heating fuel and as a fuel for certain forms of transport, such as trains and ships. European gasoil prices on the ICE climbed to over $1000 a metric ton on the news
Some refineries that normally focus on gasoline are focusing on maxing out distillates. World-wide, due to the cold winter and strong demand, distillate fuels are tight. This seems to be the most fundamentally bullish part of the entire energy complex. So talk of another blast of cold to the Northeast didnt help calm the market.
Some say that OPEC talks also helped fuel the rally. OPEC continues to say the market is well supplied, Of course actions speak louder than words and reports that OPEC is reducing production to meet lower demand was probably more supportive.
Get ready for a summer driving season setback. US gasoline demand may decline for the first time in at least a decade and have the first summertime decline in over twenty years. So says the Energy Information Agencies' top dog and chief energy forecaster, Guy Caruso. Mr. Caruso says that he expects that US gasoline demand will fall by 85,000 barrels this summer compared to last year. Mr. Caruso says that although the percentage drop is very small, the drop would be the first in the season in almost twenty years. I think this is significant because its clear evidence that the consumers are feeling these high price more now than they have in the last twenty years. It also is a sign that we are getting close to a major price correction. The evidence is mounting that high oil prices are becoming more and more unsustainable.
And it is not just consumers feeling the pinch, it is businesses as well. No I am not talking about the airlines that have gone out if business, although I could. I am talking about the ominous warning we saw from Alcoa. The Wall street Journal reports that, Alcoa posted a 54% drop in profit despite fetching higher prices for its aluminum. Increasing energy and environmental costs are expected to offset future gains from higher sales prices for aluminum and alumina. Alcoa also said it doesnt expect a recovery in the US to begin until year end. This is worrisome. I dont care when prices rise because of strong demand growth, yet when high priced commodities hamper growth the end is getting nearer. Commodities need a major correction to help ease these concerns. Demand destruction is starting to creep in and that should bring the market down. Yet near term the tightness of supply of distillates and a weak dollar and strong fund interest can continue to drive us higher. Long term the trend is unsustainable but short term oil could test the high.
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Stopped on short May crude from apprx 10770 at apprx 10850. Sell May crude at 11180 - stop 11250.
We're short May RBOB from apprx 27850 - stop 28000.
We're short May heating oil from apprx 31000 - stop 31500.
We're long May natural gas from apprx 940 - raise stop 950!
Have a GREAT day!