Energy Report: Say Hello to the Japanese Yen

February 15, 2010 06:00 PM

By Phil Flynn, Alaron

Say goodbye to the Euro and hello to the Japanese yen. China may be raising reserve requirements to slow demand but today it is strong economic data out of Japan that seems to be giving oil a bit of a lift. Last week oil shuttered when China increased reserves on banks for a second time in a month. Yet that seems to be a bit of a distant memory this morning after strong data out of Japan.

Bloomberg news reported that crude oil rose after gains in Asian equities and growth in Japan's economy increased confidence that a global economic recovery will lead to higher fuel demand. Better than expected demand expectations for oil came from the fact that Japan, the world's third-biggest oil consuming country, yesterday reported 4.6 percent growth in gross domestic product for the three months ended Dec. 31, surpassing the 3.5 percent median estimate of economists surveyed by Bloomberg. This strong data saved oil from its bearish fate as the carry traders may look to the yen as an alternative currency to play with. The situation in Europe is looking even more uncertain as the debt problems surrounding Portugal, Ireland, Italy and Greece and that makes the yen a more attractive alternative.

Oil has a lot to prove with seasonal demand peaking as we enter the long slow march out of winter. The Energy Information Agency reported that the U.S. average price for regular gasoline fell for the fourth week in a row, dropping less than a penny to reach $2.65 per gallon, which was still $0.73 above last year. On the East Coast the price decreased almost two cents to $2.67 per gallon. The Midwest average increased by over a penny to $2.57 per gallon, and Rocky Mountain prices rose by less than half a cent to $2.62 per gallon. Gulf Coast average prices fell almost 3 cents to $2.52 per gallon and remained the lowest regional prices in the Nation. The West Coast average dropped close to 2 cents to $2.90 per gallon and the price in California decreased over a penny to $2.96 per gallon.

Diesel prices also dropped for the fourth consecutive week, with the national average falling over one cent to $2.77 per gallon, which was still $0.55 above a year ago. Diesel prices fell in all regions of the country, as the East Coast dropped over one cent to $2.82 per gallon. The Midwest saw the smallest regional decrease of less than a penny to $2.72 per gallon, while Gulf Coast and Rocky Mountain prices each fell one and a half cents to $2.73 and $2.78 per gallon, respectively. West Coast prices decreased almost two cents to $2.86 per gallon, while the average in California slipped three cents to $2.92 per gallon.
As far as price projections for heating oil the EIA says that depends on the weather and the prices of crude. The EIA says that by far the largest component in the price of heating oil is the price of crude oil. As a rule of thumb, every $1 per barrel change in the price of crude oil will result in 2.4 cents per gallon change in the price of heating oil. Therefore, the more accurate the crude oil price projections are, the more accurate retail heating oil price forecasts will likely be.

However, crude oil prices are highly uncertain, as shown by the measure of implied volatility EIA calculates from the market value of options on contracts for future delivery of crude oil. For example, although the October 2009 edition of the Outlook forecast, the average February 2010 price of West Texas Intermediate (WTI) crude oil to be $71 per barrel, the implied volatility indicated a 5 percent chance that the price could ultimately settle outside the $42 to $114 per barrel range.

We think that oil is headed closer to the lower end of the range near 42. Still it may take some time. Today oil is getting a bounce and considering that we are past mid month, traders will start focusing more on the April contract.  That strength in the dollar should be a bearish force in oil for the weeks and months to come. In the meantime the ranges will continue to be wide.


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Republished with permission from Alaron's Energy Report Daily. 
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