Market Review for Friday & the Weekend       

ARCH crude oil prices rallied substantially on Friday as traders bought March and sold deferred months, starting further away and working back to April, which was down the least but was still lower.  With it being the last three-day weekend for a while, traders were covering shorts aggressively, and the biggest concentration of shorts was in the expiring March crude oil contract. 

The bullish story is not well-articulated right now.  In fact, one would have been put to a real test to come up with a bullish story on Thursday afternoon.  But, prior to this past three-day weekend, the bullish story, vague as it is, was enough to generate very heavy short-covering.  From a technical point of view, it could not have come at a better time.  Last week’s low was $33.55/bbl, just 85 cents above the low reached on January 20^th, when the February crude oil contract expired.  That low ($32.70) completed the second leg of a double bottom (with the first leg at $32.40 on December 19^th, when the January contract expired).  If prices advance from these levels, Friday’s rally after a test of the lows will give us a triple bottom type formation on the charts.

Friday may have been the battle for the critical support.  Still, this week could see the battle rejoined.  The bears still have the initiative as we start this abbreviated week, and there was no real reason for traders to have been buying the March contract on Friday; there was no sudden new demand or lost supply.  The bears have the fundamentals and proximity to the lows on their side.  But the bears need to do something, while the bulls need to prevent something (new lows) from happening.

Technicals

           Friday’s steep rally in the March crude oil contract was unexpected and sudden, and it seems to have been an unintended result of an attempt to break prices down below major support at $32.40-$32.70.  It seems that the bears just ran out of ammunition at the worst possible moment.  They probably were not really ready to fight a full-pitched battle over the critical support on Friday.  And, once it became clear that the battle for $32.40 would determine whether prices would fall to test $30.00 (which, if broken would send prices cascading into the $20’s), we saw heavy short-covering.

Cents per gallon

Above:  One has to return to 2004 for lower prices.  Below:  Gasoline prices settled 9.37 cents under heating oil on Friday.

Cents per gallon

March crude oil now has buy-stops over $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 128.80, 127.85, 126.50, 124.26, 120.00 & 116.80.  March RBOB has buy-stops over 126.25, 133.75, 135.07, 144.21, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 114.00, 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 were sacked hard on Friday, losing 35 yards on first down, which makes it second and 45 to go. 

Technical Support & Resistance

Oil Inventory Reports

      For this week’s DOE report, we have had seven straight years of distillate draws this week, giving us an average drawdown of 3.386 million barrels.  Crude oil stocks have increased in six of the last seven years, for a six-year average build of 3.017 mln bbls.  Gasoline stocks have increased in four of the last seven years, for a four-year average build of 0.900 mln bbls.  Refinery utilization averaged 87.51% over the last seven years. 

   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 39,227 contracts on Thursday, when prices were lower.  That looks like heavy, new selling and is bearish. 

      Heating oil open interest fell by 606 contracts on Thursday, when prices were lower.  That looks like long liquidation and is supportive.   

      RBOB open interest fell by 708 contracts on Thursday, when prices were lower.  That looks like long liquidation and is supportive.

      Natural gas open interest rose by 23,161 contracts on Thursday, when prices were lower, which suggests new selling, which would be bearish. 

Thursday’s Open Interest Changes:

Crude 1,281,289  up 29,227        Heat 249,949   dn 606       RBOB 188,393  dn 708       Nat gas 726,095   up 23,161      

CFTC Commitments of Traders  (for the period ended Tuesday, Feb 10th)  

As of Feb 10th:               Long                   Short:

Crude oil                   239,563               222,985                           -contracts held by speculators:  1.07 to 1 long

                                           623,432               640,457                               held by the trade

                                             70,928                 70,481                               held by small specs and hedgers.

Spreads….up 1,486 contracts   The ratio went from 1.30-to-one long to 1.07-to-one long in the last report.

   Large speculators added 4,839 long contracts and added 17,537 shorts over the week under review.  Commercials liquidated 15,100 longs and covered 24,730 shorts.  Small specs and hedgers liquidated 7,877 longs and covered 10,945 shorts.  Open interest fell by 16,652 contracts as prices dropped $3.23/barrel.  That looks like long liquidation and is supportive.  Commercial accounts and small speculators and hedgers were liquidating long positions while large speculators were selling short.

   The average large speculator has 2,692 long contracts (89 accounts), or 363 fewer contracts on average on 15 more accounts, and 2,186 short (102 accounts), or an average of 476 contracts more on the same number of accounts.  Commercials held 8,097 longs (77) or 261 less longs on average on one more account, and 7,624 shorts (84), or 620 less shorts on two more accounts. Reportable positions held 4,685 longs (249) or 237 fewer contracts on 13 more accounts, and 4,595 short held by 254 accounts, or 260 less contracts on average on 17 more accounts.  The two sides are very close to balanced. 

Heating oil                 28,265                 17,874                           - contracts held by speculators:  1.58 to 1 long

                                           159,073               173,602                              held by the trade.

                                             34,293                 30,155                               held by small specs and hedgers.

Spreads….dn 1,383 contracts.    The ratio of large speculative longs to shorts went from 1.26-to-one to 1.58-to-one in 3 weeks.

       Large speculators added 1,471 longs and covered 303 shorts.  Commercial accounts added 7,651 longs and added 6,818 shorts.  Small speculators and hedgers added 751 longs and added 3,358 shorts.  Open interest rose by 8,490 contracts as prices dropped 2.40 cents. That looks like fairly heavy new selling and is bearish.

       The average large speculative long is holding 1,009 contracts (28), while the average short has 638 contracts (28).  The average commercial long is holding 2,566 contracts (62) compared to the average short holding of 2,756 contracts (63).  The average reportable position is 1,890 long (116) while the average short holding is 1,976 (113). Large speculative longs dropped by 291 contracts on nine more accounts while the average short increased by 91 contracts on three fewer accounts. 

Rbob Gasoline          52,061                   4,597                          -contracts held by speculators:  11.32 to 1 long

                                           107,507               158,158                             held by the trade.

                                              15,948                 12,761                              held by small specs and hedgers.

Spreads…dn 2,095 contracts   The ratio of large speculative longs to shorts went from 19.78-to-one to 11.32-to-one in 3 weeks.

     Large speculative holdings grew by 2,198 longs and fell by 150 shorts over the latest week. Commercial holdings grew by 5,203 longs and grew by 7,581 shorts.  Small speculators and hedgers’ positions grew by 1,355 longs and were up by 1,325 shorts.  Open interest grew by 6,661 contracts as prices rallied 7.69 cents.  That looks like net new buying, which would be supportive.  All three categories were buying during the week under review.  Large speculators covered shorts on a net basis, commercials sold more new shorts than the new longs they bought and small specs & hedgers were buying and selling evenly.

   The average holdings are 1,062 contracts for each large speculative long (49) and 230 for each large speculative short (20).  The average commercial long now has 1,433 contracts long (75) and 1,906 short (83). Average reportable holdings are 1,226 long (140) against 1,421 short (123).  Large speculative accounts increased their average long holdings by 25 contracts and their average short holdings by 26 contracts, with the same number of long accounts and two new short accounts.  There was one more commercial long account (up 5 contracts) and three less short accounts (average short up by 77 contracts). 

Naturalgas                70,068               212,750                           -contracts held by speculators:  3.04 to 1 short

                                           285,959               181,713                               held by the trade.

                                             78,477                 40,041                           held by small specs and hedgers.

Spreads…up 20,008 contracts    The ratio of large speculative shorts to longs went from 2.80-to-one to 3.04-to-one in 3 weeks.

  Large speculative holdings liquidated 4,903 longs and covered 7,000 shorts over the latest week. Commercial accounts liquidated 736  longs and added 5,505 shorts, and small speculators and hedgers added 1,164 longs and covered 2,980 shorts.  Open interest rose by 15,533 contracts as prices rallied $0.030/mmBtu.  That looks like heavy new buying, but there was not much corresponding movement higher.  It is theoretically bullish, but it is a lot of muscle for not much movement.

   The average large speculator has 1,460 contracts (48) while each large speculative short is holding 2,503 shorts (85).  The average commercial long now has 3,714 contracts long (77) and 3,029 short (60). Average reportable holdings are 3,382 long (186) long and 3,709 short (180).  Large speculative accounts had their average long holding fall by 76 contracts on one new account, while the average short holding fell by 795 contracts on 19 new accounts.  Reportable positions were down by 84 contracts on 13 new long accounts and short positions fell by an average of 374 contracts on 24 new short accounts. 

Natural Gas & Utility Generation

Natural gas prices were off 3.3 cents on Friday, as gas traders realigned their holdings going into the three-day weekend.  Gas traders were not concerned with the movement in the expiring March crude oil futures, but they were reportedly influenced by weakness in US equities prices.  There was none of the short-covering (that was seen in crude oil) in stock or equities markets on Friday.

Natural gas prices are now in a seasonal and cyclical limbo.  We know that there are still almost five weeks left in the calendar winter.  That’s more than a third of the official winter season left.  But we also know that the heart of winter (which ends with January) is behind us and any cold weather in front of us is going to be less dramatic than the weather behind us.  It will be increasingly difficult for temperatures to extend all the way to southern California or Florida or Texas.  We will certainly get cold readings in the upper Midwest and in the Northeast, but they are unlikely to be as severe or as long-lasting. 

The NWS is calling for moderate readings over the immediate term, but it is expecting colder readings later in the month.  Some forecasters quoted by Dow Jones are predicting “below-normal temperatures across the eastern two-thirds of the US from February 18^th to February 27^th.”  The question is whether cold readings now can spur significant pulls from storage.

Cash natural gas prices were mostly lower on Friday, which is a long-running pattern.  Cash traders have to face both an uncertain weather future and an uncertain economic future.  There is nothing glaringly bullish about either right now.  The economy is weak and is diluting what could be strong industrial or commercial demand.

In cash trading on Friday, Henry Hub prices were at $4.51-$4.68, down $0.04-$0.09 (DJN).  SoCal prices were at $3.72-$3.86, down $0.09-$0.13 on the day.  El Paso Permian prices were down $0.11-$0.16 at $3.25-$3.38.  Katy prices were down $0.19-$0.20 at $3.80-$4.06.  Waha prices were down $0.10-$0.11 at $3.29-$3.40.  Transco 6 was up $0.05 and down $0.08 to $5.80-$5.93/mmBtu.

Palo Verde prices were last quoted at $32.50-$35.00/mwh.  Northeastern prices last traded at $43.00-$55.00.  Entergy was last at $42.50-$44.00.  Ercot was last at $43.00-$43.50/mwh. 

This was a horse race not too long ago, at least up until January 13^th, a month ago.  That was the day that prices broke beneath long-term, major support at $5.21.  Since that time, traders have had one point of comparison – the low of $4.07 reached on September 27, 2006.  The day before that, prices had had a low of $4.30.  A day after, with the new expiring November contract, the low was $5.35.  The $4.07 low has always been lonesome on the charts. 

The $4.07 low is critical and a settlement beneath that would almost certainly suggest a test of prices under $4.00.  Prices got as low as $4.28 on February 2^nd, two weeks ago, and quotes rallied from there back to $4.75-$4.80.  Those levels were unsustainable, and the market has been working lower roughly since then.  We are perilously near a battle of long-lasting significance.  A failure to hold above $4.28 would press us to $4.07 and, any break underneath $4.07 would almost certainly push quotes under $4.00.  That would be a big deal.  We are not sure traders are ready for that.

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 on Friday.

Dollars per million Btu

EIA Weekly Storage Figures

Last 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 down $0.75 to $36.76/barrel at 1:30 AM EST, this morning.  March heating oil prices were down 2.52 cents to 1.2748/gallon.  March RBOB prices were down 0.37 cents at $1.2026.  March natural gas was down $0.153 to $4.299/mmBtu. 

In trading overnight, prices sold off as traders seemed determined to have the technical issue of support at $32.40 resolved decisively.  There might be a huge fight, here.

The University of Michigan's US consumer confidence index fell from 61.2 in January to 56.2 in February, and that suggests that gasoline prices, which were the bright spot in consumer sentiment, may be sapping confidence, now that they seem to have reached at least a temporary bottom.  According to Capital Economics, “the index is now close to the cycle low of 55.3 seen in November. With gasoline prices no longer falling, confidence is presumably being dragged down by sharply falling asset prices and rapidly rising unemployment.” It added that the expectations component dropped from 57.8 to a 29-year low of 49.1, which reflects a grim outlook.

Crude oil prices tested their lows on Friday, and once again they rallied sharply from the lower figures.  There may be more of a test coming this week – or the bulls can build on this.

Heating oil prices broke beneath important support at 129.65-129.80 on Friday, but they settled just slightly above the support.  Key support is at 128.80 and then at 119.83.

The economy still looks extraordinarily weak, but the 1% increase in retail sales, along with an increase of 0.1% in the four-week DOE gasoline demand aggregate, could imply that there are some very early signs of healing in the global economy.  The biggest question moving forward is whether Opec can allow moderate oil prices to nurture a recovery, or if the ministers plan to strip the money tree bare at the first signs of any green buds.  Lower prices will ultimately help Opec by fostering growth in consumers.

Distillate stocks have been lower in each of the last seven years, for a seven-year average decline of 3.386 million bbls.  Four of the draws were larger than last year’s draw of 4.5 mln bbls.  Crude oil stocks increased in six of the last seven years, for a six-year average build of 3.017 mln bbls.  The seven-year average is a build of 2.143 mln bbls.  Gasoline stocks have risen in four of the last seven years, for a four-year average build of 0.900 mln bbls.  The seven-year average is a drawdown of 0.200 mln bbls.  Crude oil imports have averaged 9.919 million bpd over the last five years.  Utilization has fallen in three years, risen in three years, and was unchanged in one of the last seven years.  The average utilization figure was 87.51%, with the four-year, pre-hurricane average at 89.32%.

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

An Illustrated Look at Energy Market Factors

A Look at Inventories

One can see from the chart above that gasoline stocks have typically peaked in the middle of the first quarter, in three of four years near 225-228 million bbls. 

Distillate stocks typically reach their yearly lows as the second quarter starts.  Highs are typically seen in the third quarter, but this year has seen an unusual build in the fourth quarter, leaving inventories well out of sync with normal.

Crude oil inventories almost always increase in the first quarter, and are often drawn down in the second and third quarters.  Inventories seem out of seasonal kilter, here, as well.  It is very rare to see crude stocks increase as much as they have into the first quarter.  They are near highs typically seen in July, when refineries are usually running all out.

A Look at Imports

Crude oil imports typically peak in the third quarter.  What is interesting is that crude oil inventories are so high despite unusually low fourth quarter imports.  Having crude oil inventories at such high levels now would suggest that we will need abnormally low (seasonal) levels of imports. 

Two Different Looks at Gasoline Charts

In the chart above, we have not yet had a breakout and prices will sail higher if and when we may actually get a breakout.

In this chart, we have already had the breakout on a slanting head-and-shoulders bottom, and we are headed higher, although not to the same heights.

Prices seem to be trying to construct a major bottom, here.

Of course, prices could move sideways or higher, instead … .  We need to keep the seasonal tendency in our thinking.

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