Market Review for Thursday    

RUDE oil prices dropped again yesterday, falling to within striking distance of its critical double bottom support at $32.40-$32.70.  Yesterday’s low of $33.55 was just a short step away from this major support.  Yesterday’s close was the weakest of 2009, and the lowest since December 19^th, 2008.    

Ironically, this low comes just a day before Congress is expected to pass the reconciled version of the nearly $800 billion stimulus bill.  Just a week ago, traders were talking about passage of this bill as a potential market savior.  Now, it seems to have fallen short on at least some critical metrics.  Crude oil prices have now fallen by more than 17% over the last five trading days.

During the last week, we have had fresh estimates for oil demand which now forecast the biggest decline in consumption in more than a quarter of a century.  We have had a merciless unemployment report showing a decline in January of nearly 600,000 jobs, and we have had yet another increase in crude oil stocks, leaving inventories at their highest levels in 15 years, and creating the biggest surplus against the previous year since 1990.  These factors have worked together to press crude prices right back against their spine of support.  Another weak trading day today could see prices break to new lows for this leg lower. 

Granted, there were positive signs this week.  They just were not the dominant look on the face of the economy.  Retail sales were up 1.0% month over month, and demand seems to be stabilizing in energy.  Gasoline’s four-week average aggregate is now 0.1% higher than a year ago, although it was just about this time a year ago that demand started falling, which means that we are now comparing apples to apples, or weaker demand to weaker demand statistics.  Technically, refined products do not look as weak as crude oil does; that does little to mitigate what could be a critical day or two ahead for crude oil prices.

Technicals

           Crude oil prices sold off again yesterday, finishing at their lowest level for 2009.  The last time prices finished (settled) this low was on December 19^th, when the January contract expired.  The last time crude oil prices got as low as they got yesterday was on January 20^th, when he February contract expired.  It will not take much selling today to press quotes down below the major support at $32.40-$32.70, and with sell-stops beneath those figures, there is a chance that prices could break $30 if they break $32.40.  Heating oil has support at 129.65-129.80. 

Dollars per barrel

Above:  Crude is poised to test major support.  Below:  The ratio of crude to gas is under pressure again.

Ratio

March crude oil now has buy-stops over $36.25, $38.47, $42.68, $43.44-$43.60, $47.49, $48.59, $49.09, $50.47, $54.62, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, $71.80, $76.25, $79.17, and $84.83.  Sell-stops are under $33.55, $32.40 & $30.00.  March heating oil has buy-stops over 134.20, 140.85, 142.32, 144.00, 148.65, 152.85, 154.00, 154.67, 155.10, 160.25, 164.80, 166.90, 172.71, 176.70, 178.52, 183.02, 189.06, and 192.12.  Sell stops are under 129.65, 127.85, 126.50, 124.26, 120.00 & 116.80.  March RBOB has buy-stops over 133.75, 135.07, 144.21, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 124.80, 121.50, 112.00, 109.00, 105.30, 103.95, 96.69, 89.78, 85.45, 83.52, 79.50, 77.60, 76.30, 71.20 & 67.30.

Football: The bears gained 20 yards yesterday on first down.  That gives the bears another set of downs. 

Technical Support & Resistance

Oil Inventory Reports

      Refinery utilization declined in this week’s set of figures, despite the specific odds for this week.  The decline helped to give us yet another fairly large increase in crude oil stocks, which are now as high as they have been at any time since the mid-1990’s.  Distillate and gasoline stocks were both lower in this report.  Heating oil stocks dropped 2.1 mln bbls, while jet fuel and residual stocks both increased slightly.  Crude oil imports dropped in this latest report, but that only reduced the amount that went into storage slightly; the decline in crude oil imports helped to give us a build of roughly that much less than seen over the last two weeks (roughly 2 mln bbls). 

   Distillate stocks are now 14.2 million bbls, or 11.15%, higher than a year ago.  Heating oil inventories are 0.5 mln bbls, or 1.35%, higher than they were a year ago.  Gasoline stocks are 14.1 million bbls, or 6.08%, lower.  Crude oil stocks are now 53.5 million bbls, or 18.00%, higher than a year ago.  Residual stocks are 3.9 mln bbls (10.00%) lower than a year ago, jet fuel stocks are 0.3 mln bbls (0.73%) lower than a year ago.  Utilization is 2.7% lower than a year ago and is 6.13% below the seven-year average and 7.48% 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 4,472 contracts on Wednesday, when prices were lower.  That looks like new selling and is bearish. 

      Heating oil open interest fell by 2,930 contracts on Wednesday, when prices were higher.  That looks like short-covering and would be bearish. 

      RBOB open interest rose by 1,507 contracts on Wednesday, when prices were higher.  That looks like new buying and is supportive.

      Natural gas open interest fell by 4,671 contracts on Wednesday, when prices were lower, which suggests long liquidation.

Wednesday’s Open Interest Changes:

Crude 1,242,062  up 4,472        Heat 250,555   dn 2,930       RBOB 189,101  up 1,507       Nat gas 702,934   dn 4,671    

CFTC Commitments of Traders  (for the period ended Tuesday, Jan 27th)  

As of Jan 27th:               Long                   Short:

Crude oil                   226,101               174,449                           -contracts held by speculators:  1.30 to 1 long

                                           635,238               676,012                               held by the trade

                                             84,481                 95,359                               held by small specs and hedgers.

Spreads….dn 3,852 contracts   The ratio went from 1.26-to-one long to 1.30-to-one long in the last report.

   Large speculators added 677 long contracts and covered 4,841 shorts over the week under review.  Commercials added 1,289 longs and added 3,647 shorts.  Small specs and hedgers liquidated 2,442 longs and added 718 shorts.  Open interest fell by 4,328 contracts as prices rallied $0.74/barrel.  That looks like short-covering and is bearish.  Large speculators covered the most, with commercials buying fresh long positions.

   The average large speculator has 3,055 long contracts (74 accounts), or 89 more contracts on average on 2 less accounts, and 1,710 short (102 accounts), or an average of 48 contracts less on the same number of accounts.  Commercials held 8,358 longs (76) or 125 more longs on average on one less account, and 8,244 shorts (82), or 57 less shorts on one more account. Reportable positions held 4,922 longs (236) or 74 more contracts on four less accounts, and 4,855 short held by 237 accounts, or 99 more contracts on average over six fewer accounts.  The two sides are as close to balanced as we have seen in a while. 

Heating oil                 24,705                 16,945                           - contracts held by speculators:  1.46 to 1 long

                                           154,034               171,203                              held by the trade.

                                             37,146                 27,737                               held by small specs and hedgers.

Spreads….dn 2,207 contracts.    The ratio of large speculative longs to shorts went from 1.26-to-one to 1.46-to-one in a week.

       Large speculators added 1,560 longs and covered 1,355 shorts.  Commercial accounts added 403 longs and added 2,202 shorts.  Small speculators and hedgers liquidated 725 longs and added 391 shorts.  Open interest fell by 969 contracts as prices dropped 0.13 cents. That looks like light long liquidation, by small specs and hedgers, which would be supportive. 

       The average large speculative long is holding 1,300 contracts (19), while the average short has 547 contracts (31).  The average commercial long is holding 2,567 contracts (60) compared to the average short holding of 2,718 contracts (63).  The average reportable position is 1,901 long (111) while the average short holding is 1,986 (111). Reportable holdings grew by 110 longs and 90 shorts as seven long and six short accounts were closed, bringing each category to 111 accounts.

Rbob Gasoline          50,832                   3,671                          -contracts held by speculators:  13.85 to 1 long

                                           105,636               157,252                             held by the trade.

                                              15,758                 11,303                              held by small specs and hedgers.

Spreads…dn 2,781 contracts   The ratio of large speculative longs to shorts went from 19.78-to-one to 13.85-to-one in a week.

     Large speculative holdings fell by 2,180 longs and grew by 27 shorts over the latest week. Commercial holdings fell by 8,417 longs and fell by 10,758 shorts.  Small speculators and hedgers’ positions fell by 1,706 longs and dropped by 1,572 shorts.  Open interest fell by 15,084 contracts as prices dropped 3.46 cents.  That looks like net long liquidation and is supportive.  All three categories were liquidating fairly heavily.  Commercial accounts sold the most.  The only new positions were on the short side in large speculative accounts.  Commercials and small specs & hedgers were covering shorts, as well.

   The average holdings are 1,037 contracts for each large speculative long (49) and 204 for each large speculative short (18).  The average commercial long now has 1,428 contracts long (74) and 1,829 short (86). Average reportable holdings are 1,218 long (140) against 1,388 short (126).  There were two less long accounts and 10 less short accounts in the reportable category, which cut average long holdings by 243 contracts and decreased the average short holding by 173 contracts.  Large speculative longs are now holding only five times as many contracts each as the large speculative shorts are holding, here.

Naturalgas                72,185               217,658                           -contracts held by speculators:  3.02 to 1 short

                                           288,370               180,250                               held by the trade.

                                             79,624                 42,271                           held by small specs and hedgers.

Spreads…dn 17,218 contracts    The ratio of large speculative shorts to longs went from 2.80-to-one to 3.02-to-one in a week.

  Large speculative holdings liquidated 1,803 longs and covered 2,151 shorts over the latest week. Commercial accounts liquidated 11,442  longs and covered 7,991 shorts, and small speculators and hedgers added 4,763 longs and added 1,660 shorts.  Open interest fell by 25,700 contracts as prices dropped $0.139/mmBtu.  That looks like heavy long liquidation and would be supportive.  It was surely a factor of the February contract expiration, which occurred last week.

   The average large speculator has 1,536 contracts (47) while each large speculative short is holding 3,298 shorts (66).  The average commercial long now has 3,845 contracts long (75) and 3,219 short (56). Average reportable holdings are 3,466 long (173) long and 4,083 short (156).  Large speculative accounts had their average long holding increased by 113 contracts on five fewer accounts while the average short holding was up 66 contracts on two fewer accounts.  Reportable positions were down by 34 contracts on seven fewer long accounts and up 57 contracts spread over nine fewer short accounts.    

Natural Gas & Utility Generation

Natural gas prices dropped almost a nickel yesterday as traders reacted to a smaller-than-expected pull from underground storage.  This week’s EIA underground storage report showed a draw of 159 bcf, which was right in line with our seven-year average for the week, but it was slightly less than the 165 bcf that had been the average of surveys conducted by Dow Jones and Bloomberg.

This week’s report leaves storage numbers above year-ago and five-year average figures for this time of year.  Because of lost industrial demand, storage withdrawals have typically fallen short of expectations this winter, and this report seems to have fallen into that general category.  With the coldest temperatures almost certainly behind us, now, that pattern seems unlikely to change before the end of this year’s heating season. 

Gas traders were also selling yesterday in sympathy with weaker oil prices.  This has been a week of lost opportunities and weak economic news and interpretations.  Although the demand forecasts specifically made for oil use in 2009 did not address natural gas consumption, it was impossible for natural gas traders to look at reductions in oil use forecasts without seeing lower gas demand this year written between the lines.  The weak economic factors affecting oil use are certain to affect gas use, too.

Cash natural gas prices were mixed to fractionally lower yesterday in a quiet session dominated by traders trying to push physical quotes into line with futures from Wednesday.  Temperatures were still on the warmer side in the Northeast, but colder weather is expected to return over the second half of this month. 

In cash trading yesterday, Henry Hub prices were at $4.55-$4.77, up $0.05 and down $0.08 (DJN).  SoCal prices were at $3.85-$3.95, down $0.02-$0.07 on the day.  El Paso Permian prices were down $0.01-$0.03 at $3.41-$3.49.  Katy prices were down $0.02-$0.03 at $4.00-$4.25.  Waha prices were down $0.01-$0.03 at $3.40-$3.50.  Transco 6 was up $0.33-$0.46 to $5.75-$6.01/mmBtu as traders looked ahead to colder readings coming in by early next week.

Palo Verde prices were last quoted at $32.25-$35.75/mwh.  Northeastern prices last traded at $40.25-$55.50.  Entergy was last at $37.50-$38.50.  Ercot was last at $32.00-$34.20/mwh. 

There is still decent interest in the coming weather, although we are getting to the point of diminishing returns in this market.  Cold weather in the second half of February is not what it is capable of being in January.  Temperatures will be getting cold again, after this brief period of unusually warm readings, but the cold patterns are looking less severe and are less certain than they were just a couple of weeks ago.

There is still no real sign of spring, despite some briefly mild temperatures in the Northeast.  We all know that it is coming, but not really any time, soon.  It feels like winter is ending, but there are still a full five weeks on the calendar before the vernal equinox.  We are not yet two-thirds of the way through winter proper, despite the length of cold we have endured.

Support is at $4.35-$4.38, $4.28, $4.21-$4.23, $4.07-$4.10, $3.96-$3.99, $3.82-$3.84 and $3.68-$3.71.  Resistance is at $4.63-$4.65, $4.85-$4.88, $5.01-$5.03, $5.22-$5.24, $5.55-$5.57, $5.62-$5.64, $5.99-$6.00, $6.15-$6.18, $6.23-$6.24, $6.34-$6.37, $6.65-$6.69, $6.90-$6.94, and $7.01-$7.04. 

Natural gas prices declined again lightly yesterday.

Dollars per million Btu

EIA Weekly Storage Figures

This week’s EIA report showed a draw of 159 bcf on expectations for draws of 165 bcf.  Stocks are now 44 bcf lower than a year ago, compared to a deficit of 60 bcf a week ago, a deficit of 34 bcf two weeks ago and a deficit of 20 bcf three weeks ago.  Stocks are now 2.23% lower than a year ago.  They are 24 bcf and 1.20% above the five-year average.

The seven-year average of similar Friday’s was for a drawdown this week of 160.6 bcf.  The five-year average was a draw of 158.4 bcf.  Last year, there was a draw of 120 bcf, and the year before there was a draw of 259 bcf.

EIA Report

News & Views

In trading on Globex, March crude oil prices were up $0.20 to $34.18/barrel at 7:30 AM EST, this morning.  March heating oil prices were down 0.18 cents to 1.3200/gallon.  March RBOB prices were down 1.60 cents at $1.2423.  March natural gas was down $0.003 to $4.482/mmBtu. 

Crude oil prices were slightly higher in trading on Globex overnight, with Asian equities bouncing higher on expectations that China could announce stimulus measures for individual industries, soon.  In any event, there was some mild optimism this morning.

Opec reduced its demand estimate for 2009 by 530,000 bpd, and now sees a 0.7% decline in 2009 consumption (down 580,000 bpd) to 85.13 million bpd.  Last month, it estimated a decline in demand of just 0.2%.   

Shell declared force majeure on deliveries from its Bonny Light terminal in Nigeria, due to civil unrest, again.  The terminal had only been operating for about four or five weeks after being shut for eight months.  Unrest in Nigeria has been a bullish feature in oil markets every year between January and May for as long as we can remember, and has been a regular factor in the March seasonal.

Crude oil prices finished at their lowest level since December 19^th, yesterday, and they are now right on top of major support.  A break beneath $32.40 could lead to a test of $30/bbl.

Heating oil prices held above major support yesterday, which is now at 129.65-129.80.  A break under that support would lead to a test of support at 119.14-120.00, seen just before Christmas.

Saudi Arabia is expected to bring the large Khurais field into production by the third quarter, and the addition of this 1.2 million bpd worth of output will push the kingdom’s spare capacity to 4.5 million bpd by then.  Khurais actually started its productive life in the 1960’s, but was mothballed in the 1990’s before being revitalized for production over the last couple of years.  Having a large and potentially useful spare capacity is part of Saudi Arabia’s strategy to help manage oil prices and supplies. 

Opec ministers next meet in Vienna on March 15^th, when they will hold one of their normally scheduled semi-annual meetings.  Some producers within the cartel are already talking about the likely need to make additional cuts in production to help increase prices to levels Opec feels would better represent its interests.  While $35/bbl may be a quarter of the price seen last June and July, it is still actually high by historical standards, with there having been only a handful of days traded above that figure prior to 2004.  Ninety-nine percent of the prices seen between 1980 and 2004 were below $35/bbl.  Those few days that traded higher than that during the period were associated with major supply disruptions, specifically the Iranian hostage crisis or the Iraqi invasion of Kuwait in 1990.

Crude oil prices have a major battle over support at $32.40 coming.

An Illustrated Look at Energy Market Factors

A Look at Gasoline Supply & Demand

Thirteen-week average gasoline demand is now at 8.894 million bpd, down 3.22% against a year ago.  Thirteen-week average supply is at 9.873 million bpd, down 1.83%.  Thirteen-week implied demand is at 9.659 million bpd, down 0.22%.

A Look at Distillate Supply & Demand

Thirteen-week average distillate demand is now at 4.059 million bpd, down 6.72% against a year ago.  Thirteen-week average supply is at 4.616 million bpd, up 3.31%.  Thirteen-week implied demand is at 4.471 million bpd, down 1.48%.

A Look at Refinery Utilization

Utilization is 2.7% lower than a year ago and is 6.13% below the seven-year average and 7.48% below the four-year, pre-hurricane average.  As the chart above illustrates, refineries have run at lower levels only after major hurricanes.

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