[DAILY PETROSPECTIVE] May 11, 2010

Early Evening Market Review for Tuesday

Tuesday was a very strange day in oil. Oil prices were higher in early trading,
even with equities lower and the US dollar rallying. No one we spoke with
could offer us anything as a decent reason for this advance other than it being
as the result of a technical rally, with prices rallying after last week’s big decline.
Then, equities rallied. But, even as they worked into positive territory, oil
prices were in the opposite lane, going south, passing them by. So, almost all
day long, oil and equities had a negative correlation.
They got back together at the end of the day. Once everything was said and
done, both finished with minor losses on the day. It appears that a weaker euro
may have helped both markets into negative territory.
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Tuesday’s activity is additional evidence that it is going to take time for the various markets to sort
themselves out. From our perspective, we are keen to learn one critical element: Are oil markets following
equities and economic data, with investors the dominant groupo behind price moves? Or, have oil markets
returned to their more traditional role as commodities – as opposed to being an “asset class” – that respond to
factors like supply and demand? The answer to this multi-faceted question will make the difference for us
between a bull market keen to test the old high at $87.15 or a bear market that could return oil to a more
logical value.
Of course, long before the oil complex ever returns to any pure reflection of supply and demand, Opec will
try to stand in the way of declining prices. It seems that $65 a barrel is Opec’s new Maginot Line. It is likely to
share a good deal in common with that historical defensive position. Opec will invest it with everything it has.
And, if supplies are too much for demand, and we have a fundamental market, Opec is as likely to hold prices
there as they were in 2008. But the cartel will certainly try.
All of this is getting ahead of ourselves. Even though investors have been spanked hard – twice – for trying
to turn oil futures into a stable “investment,” we have no clear
sign, yet, that investors have decided to return to their previous
approach. That approach saw them invest in integrated oil API Report
companies with crude in the ground rather than futures and Crude Stocks up 0.362 mln bbls
options on crude oil, itself. Investors may have woken up to the Distillate up 0.098
Gasoline dn 0.906
fact that oil futures can be a vicious investment. It is just too
Utilization dn 2.5% to 84.9%
early to tell right now.
This week’s API report showed an unexpected drawdown in
gasoline stocks, which were down 0.906 million barrels. Crude oil stocks were up 0.362 million barrels and
distillate stocks were up 0.094 million bbls, both well beneath expectations. Refinery utilization was down
2.5% to 84.9% and crude oil imports dropped 1.412 million bpd to 8.388 million bpd, making it a bullish report
all around. Gasoline demand came in at 9.392 million bpd. Distillate demand came in at 4.458 million bpd. If
Wednesday morning’s DOE report shows similar results, it will be seen as being bullish.

Crude Oil Daily Technical Chart

**Note: Full report to be released tomorrow morning**

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