Market Review for Wednesday           

ESTERDAY was a big day for inventories.  The DOE released its weekly figures, and the Commerce Department released data for business inventories in November.  They fell by more than expected, dropping by 0.7% to a seasonally adjusted $1.485 trillion.  The data suggests that businesses were liquidating inventories as demand for goods drops in the current environment.  Year on year, inventories were up 3.3% while sales were down 8.9%.

The DOE numbers showed a much bigger build in distillate stocks than expected (up 6.346 million barrels) on lower demand (off 664,000 bpd) and higher production (up 116,000 bpd).  Gasoline inventories increased (2.068 mln bbls) and crude oil inventories were higher, although by less than expected (up 1.144 mln bbls).  That was the result of lower crude imports and higher utilization.  It was the first time in seven years that utilization increased in the first full week of January. 

Oil prices sold off on the inventory builds.  And traders were also looking at retail sales, which dropped 2.7% in December for their sixth consecutive decline.  November sales were also revised down 2.1%, from an initial loss of 1.8%, while October retail sales were further revised down 3.4%, from its previous figure of down 2.9%.

Crude oil prices rallied from the day’s lows to settle with reduced losses by the final bell.  And gasoline prices actually ended the day in positive territory after an initial selloff after yesterday’s DOE report.  It seems to have been a case of the market fading its opening, which is something we have seen repeatedly on report days.  Fundamental traders react to the report; in this case, they were selling – and then the best selling is over.  The buyers tend to be professional traders and locals, and they then often push prices in the opposite direction in an attempt to uncover stops or automatic orders  in the opposite direction.

Technicals

Heating oil prices led the complex mostly lower yesterday, after an unexpectedly large increase in distillate inventories. Gasoline prices, on the other hand, were higher yesterday, and they remain the strongest segment of the oil complex. Crude oil prices were lower through most of yesterday’s session, but they rallied late in the day on short-covering and bargain-hunting.

: Gasoline prices ended higher yesterday.  Below:  The crack spread reached its highest level since September 12th.

February crude oil now has buy-stops over $39.50, $40.80, $42.70, $43.63, $49.09, $50.47, $54.62, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, $71.80, $76.25, $79.17, $84.83, and $85.13. Sell-stops are under $35.50, $35.35, $33.30 and $32.20. February heating oil has buy-stops over 154.00, 155.10, 160.25, 164.78, 166.88, 172.71, 176.68, 178.52, 183.02, 189.06, 192.12, 193.45, 199.20, and 209.40. Sell stops are under 141.90, 136.06, 127.85, 126.50, 124.26, 120.00 and 116.80. February RBOB has buy-stops over 119.01, 120.00, 124.05, 128.06, 132.80, 135.07, 144.21, 153.33, 158.00, 158.90, and 160.77. Sell-stops are under 109.20, 105.50, 96.69, 89.78, 85.45, 83.52, 79.50, 77.60, 76.30, 71.20 and 67.30. Football: The bears gained five yards yesterday, making it third and 7 to go, here, today. They are grinding it out.

Technical Support & Resistance

Feb crude oil                    Support:                $37.20-$37.53, $36.10-$36.25, $35.50-$35.75, $35.35-$35.40, $33.30-$33.45.                                                 Resistance:           $39.35-$39.50, $40.70-$40.80, $42.55-$42.70, $43.55-$43.65, $49.00-$49.30. Dollars per barrel. Feb heating oil                Support:                145.30-145.40, 143.85-144.00, 141.90-142.10, 135.90-136.06, 127.85-128.00.                   Resistance:           154.00, 154.55-154.67, 155.00-155.20, 160.00-160.25, 165.10-165.21, 166.75-166.88. Cents per gallon. Feb Rbob             Support:                109.20-109.35, 105.50-105.70, 100.00-100.25, 96.65-96.80, 89.75-89.85, 85.65.                                 Resistance:           118.85-119.01, 120.00-120.10, 123.90-124.05, 127.90-128.06, 132.65-132.80. Cents per gallon.

Oil Inventory Reports

   This week’s DOE report showed a surprising increase in refinery utilization, and that helped to boost distillate output, which was up 116,000 bpd.  Distillate demand fell an unexpectedly large 664,000 bpd, and the combination of higher supply and lower demand helped to generate a large and unexpected build in distillate stocks (6.346 million bbls).  Crude oil stocks were higher, but lower imports (down 756,000 bpd) and higher utilization rates kept the increase below expectations.  Gasoline stocks were up more than 2 mln bbls, but the year-on-year deficit increased to 8.0 mln bbls.

   Distillate stocks are now 11.4 million bbls, or 8.58%, higher than a year ago.  Heating oil inventories are 0.9 mln bbls, or 2.26%, higher than they were at this stage in 2008.  Gasoline stocks are 8.0 million bbls, or 3.61%, lower.  Crude oil stocks are now 37.8 million bbls, or 13.09%, higher than a year ago.  Residual stocks are 4.5 mln bbls (11.48%) lower than a year ago, jet fuel stocks are 2.0 mln bbls (5.00%) lower than a year ago.  Utilization is 1.9% lower than a year ago and is 4.54% below the seven-year average and 6.48% below the four-year, pre-hurricane average.

                                                                    DOE Weekly Inventory Statistics

Source: US Department of Energy’s Energy Information Administration

Open Interest Analysis

      Crude oil open interest grew by 34,759 contracts on Tuesday, when prices were higher.  That looks like strong, new buying, which is something we have seen when prices have advanced.  There is buying in this market, quietly.

      Heating oil open interest fell by 224 contracts on Tuesday, when prices were higher.  That looks like short covering and is bearish. 

      RBOB open interest grew by 2,066 contracts on Tuesday, when prices were higher.  That looks like fresh buying, which would be supportive. 

      Natural gas open interest rose by 9,760 contracts on Tuesday, when prices dropped.  That looks like selling and is bearish.

Tuesday’s Open Interest Changes:

Crude 1,246,827  up 34,759        Heat 229,106   dn 224       RBOB 196,328  up 2,066        Nat gas 705,973   up 9,760    

CFTC Commitments of Traders  (for the period ended Tuesday, Dec 22nd)  

As of Dec 22nd:              Long                   Short:

Crude oil                   235,246               158,588                           -contracts held by speculators:  1.48 to 1 long

                                           588,650               655,186                               held by the trade

                                             81,263                 91,385                               held by small specs and hedgers.

Spreads….up 1,969 contracts   The ratio went from 1.51-to-one long to 1.48-to-one long in this report.

   Large speculators added 10,500 long contracts and covered 1,610 shorts over the week under review.  Commercials added 16,695 longs and 18,400 shorts.  Small specs and hedgers added 16,810 longs and 27,215 shorts.  Open interest grew by 45,974 contracts as prices rallied $9.55/barrel.  All three categories were adding long positions in this report, but only large speculators did not also add shorts.  The other two categories, including large and small commercial hedgers, were both adding shorts – more shorts – than the number of longs they added over this period. 

   The average large speculator has 2,643 long contracts (78 accounts), or 122 less contracts on average on 11 more accounts, and 1,687 short (94), or an average 132 contracts more on two more accounts.  Commercials held 7,547 longs (78) and 7,618 shorts (86). Reportable positions held 4,764 longs (238), and 4,606 short contracts (244).  There was one less short account in the commercial category, and that increased the average long position by 476 contracts. 

Heating oil                 24,326                 17,086                           - contracts held by speculators:  1.42 to 1 long

                                           142,511               158,165                              held by the trade.

                                             32,934                 24,520                               held by small specs and hedgers.

Spreads….up 3,965 contracts.    The ratio of large speculative longs to shorts went from 1.26-to-one to 1.42-to-one in 1 week.

       Large speculators liquidated 224 longs and covered 1.994 shorts.  Commercial accounts liquidated 7,643 longs and covered 1,597 shorts.  Small speculators and hedgers added 2,561 longs and covered 1,715 shorts.  Open interest fell by 1,341 contracts as prices rallied 32.02 cents. That looks like net, short covering, which would be bearish.  January contracts expired.

       The average large speculative long is holding 1,216 contracts (20), while the average short has 610 contracts (28).  The average commercial long is holding 2,192 contracts (65) compared to the average short holding of 2,433 contracts (65).  The average reportable position is 1,672 long (115) while the average short holding is 1,792 (112). There were four new long and short reportable accounts (each) and they diluted average holdings by 71 and 73 contracts (long and short respectively).

Rbob Gasoline          57,678                   4,246                          -contracts held by speculators:  13.58 to 1 long

                                           104,865               163,263                             held by the trade.

                                              15,897                 10,931                              held by small specs and hedgers.

Spreads…up 1,323 contracts   The ratio of large speculative longs to shorts went from 7.96-to-one to 13.58-to-one in a week.

     Large speculative holdings fell by 740 longs and fell by 1,838 shorts over the latest week. Commercial holdings fell by 2,344 longs and rose by 197 shorts.  Small speculators and hedgers’ positions grew by 225 longs and fell by 1,218 shorts.  Open interest fell by 1,536 contracts as prices rallied 25.64 cents.  That looks like net, short-covering, which we get from large and small speculators.  Only small specs and hedgers added longs during this period, which is very surprising, given the large change in prices.  It tells us that day-traders helped to press quotes higher during this period. 

   The average holdings are 1,341 contracts for each large speculative long (43) and 250 for each large speculative short (17).  The average commercial long now has 1,477 contracts long (71) and 1,944 short (84). Average reportable holdings are 1,394 long (127) against 1,517 short (120).  There were nine less long accounts and three less short accounts in the reportable category, increasing the average long holdings by 19 contracts and decreasing average short positions by 32 contracts.

Naturalgas                77,702               225,003                           -contracts held by speculators:  2.90 to 1 short

                                           292,777               183,917                               held by the trade.

                                             73,439                 34,998                           held by small specs and hedgers.

Spreads…dn 2,655 contracts    The ratio of large speculative shorts to longs went from 3.04-to-one to 2.90-to-one in 2 weeks.

  Large speculative holdings added 5,375 longs and 7,862 shorts over the latest week. Commercial accounts added 8,480  longs and added 8,282 shorts, and small speculators and hedgers added 3,667 longs and added 1,378 shorts.  Open interest grew by 14,867 contracts as prices rallied $0.124/mmBtu.  That suggests new buying, although it was not much movement higher.

   The average large speculator has 1,439 contracts (54) while each large speculative short is holding 3,629 shorts (62).  The average commercial long now has 3,904 contracts long (75) and 3,171 short (58). Average reportable holdings are 3,464 long (177) long and 4,124 short (158).  There were three fewer long accounts and five fewer short accounts in the reportable category, which cut the average long holding by 24 contracts and increased the average short holding by 59 contracts.  There were 147 fewer contracts being held by commercials on the addition of two new accounts.  The shorts have deeper pockets.

Natural Gas & Utility Generation

Natural gas prices were down another 21 cents yesterday as the market’s momentum pulled quotes beneath $5.00/mmBtu.  It was another new low point since September 27^th, 2006, when prices touched a low of $4.07.  New technical selling pushed prices lower, and yesterday’s retail sales and business inventory figures helped to convince fundamental traders that the deepening recession will eat more deeply into demand.

This developing trend lower now seems to have both fundamental and technical factors pushing it.  The charts (see next page) look grim.  There is heavy and thick resistance overhead, and support down to $4.07 has not been tested in roughly 27 months.  That makes numbers above that level less likely to stop the decline in prices.  Prices will stop somewhere, but they seem almost certain to reach their objective down to $4.789/mmBtu.

At this stage, the economy has effectively won the tug-of-war with winter temperatures.  It seems that the imminent arrival of the season’s coldest readings only made traders think about the unlikelihood of deeper dips in temperatures as the winter continues.  The market reaction was that these readings are the worst we are likely to experience this winter; after January ends, there is typically a gradual warming into spring.  This market is clearly betting on ample supplies getting us though until spring.

Cash natural gas prices were lower yesterday, as cash traders struggled to realign physical prices with much lower futures.  From a cash market perspective, Tuesday’s huge decline seems to have caught traders by surprise.  It certainly changed the outlook for prices and reset the numbers at which pipelines are likely to trade. 

In cash trading yesterday, Henry Hub prices were at $5.30-$5.54, down $0.16-$0.23 (DJN).  SoCal prices were at $4.55-$4.65, down $0.17-$0.22 on the day.  El Paso Permian prices were down $0.15-$0.30 at $4.20-$4.35.  Katy prices were down $0.21-$0.25 at $4.60-$5.05.  Waha prices were down $0.19-$0.32 at $4.41-$4.50.  Transco 6 was down $5.00 and up $2.50 to $9.00-$21.00/mmBtu. 

Palo Verde prices were last quoted at $36.50-$38.30/mwh.  Northeastern prices last traded at $88.00-$130.00.  Entergy was last at $53.00-$55.00.  Ercot was last at $44.25-$45.00/mwh. 

Tuesday’s decline effectively settled any lingering question over this market’s direction and intention.  No matter how cold it gets – and it’s getting pretty cold – traders voted on Tuesday for prices to move lower.  If there was any doubt that Tuesday’s selloff represented a sea-change in how we view this market, yesterday’s break and settle beneath $5.00 must certainly have dispelled it.  Now, it’s a matter of how low we may go; any rally is a rear-guard action.

Estimates for this week’s EIA report have come in with draws between 89 and 125 bcf, according to Bloomberg.  The average came in with a draw of 104 bcf.  Dow Jones’ survey came out with an average estimate of 102 bcf lower.  Last year, using similar dates, there was a drawdown of 91 bcf.  For the same Friday, it was a draw of 59 bcf.    

Support is at $4.94-$4.96, $4.72-$4.75, $4.52-$4.55, $4.39-$4.41, $4.21-$4.23, $4.07-$4.10 and $3.96-$3.99.  Resistance is at $5.22-$5.24, $5.55-$5.57, $5.62-$5.63, $5.99-$6.00, $6.15-$6.18, $6.23-$6.24, $6.34-$6.37, $6.65-$6.69, $6.90-$6.94, $7.01-$7.04, $7.28-$7.31, $7.34-$7.36, $7.48-$7.50, $7.74-$7.76, $7.93-$7.94, and $8.04-$8.08. 

Natural gas prices kept moving lower yesterday, printing new lows since September 27^th, 2006.

Dollars per million Btu

EIA Weekly Storage Figures

Last week’s EIA report showed a draw of 47 bcf on expectations for draws of 77-79 bcf.  Stocks are now 31 bcf lower than a year ago, compared to a deficit of 69 bcf a week ago, a deficit of 35 bcf two weeks ago and a deficit of 41 bcf three weeks ago.  Stocks are now 1.11% lower than a year ago.  They are 87 bcf and 3.17% above the five-year average.

Last year, on the corresponding date, there was a draw of 91 bcf.  Estimates ranged between draws of 89 and 125 bcf, with the average estimates coming in around 102-104 bcf. 

EIA Report

News & Views