Market Review for Tuesday                  

HE oil complex dropped sharply yesterday, with heating oil prices leading the collapse.  March heating oil prices fell to their lowest level since September, 2004, falling below the key support established in December, 2008.  Crude oil and gasoline prices were also lower, although they did not break their December support figures.    

March heating oil broke and closed under the 119.83 low established on December 24^th.  This now leaves heating oil without any major support beneath the market.  Traders went after the sell-stops beneath 119.83, and the stops took prices down to 117.45 before shorts came in to cover.  Crude oil prices also dropped, but they stopped $2.0 shy of their major support and sell-stops.  Gasoline prices held up in comparison, and they are nowhere near their major support.  There will be sell-stops underneath 103.97. 

Part of the market’s recent volatility has been based on options expiration, with March crude oil futures expiring this Friday.  March refined products contracts expire a week from Friday. 

There did not seem to be anything specific out yesterday; instead, there was a just a deafening lack of any fresh foundation for economic growth.  Many traders had hoped and expected progress on the stimulus bill would somehow solve the economy’s worst woes and fears.  And, at this stage, it does not seem to have done that.

Traders have been taking their cues from the DOW Jones Industrial Average (DJIA), which was down almost another  300 points yesterday.  As long as equities traders see little hope for the economy, there seems to be very little hope for oil consumption.  And this week’s inventory statistics are expected to show additional increases in stock levels.

Technicals

           It is looking like Friday’s activity was the aberration, and that there was short-covering that pushed prices higher before the long, holiday weekend.  Neither of the refined products contracts was higher on Friday, and heating oil prices pulled the complex lower yesterday.  In the process, heating oil prices broke to new multi-year lows, touching their lowest point since September, 2004.  Gasoline prices still have support at 103.97 and crude oil prices have support at $32.40.  We may see a battle for that crude oil support as the week wears on.

Cents per gallon

Above:  Heating oil prices fell to new lows yesterday.  Below:  Gasoline prices settled 7.46 cents under heating oil.

Cents per gallon

March crude oil now has buy-stops over $38.49, $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 $34.45, $33.55, $32.40 & $30.00.  March heating oil has buy-stops over 130.70, 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 117.45 & 116.80.  March RBOB has buy-stops over 122.40, 126.25, 133.75, 135.07, 144.21, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 110.40, 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 went to the air yesterday, gaining 26 yards on second and 45 to go.  That makes it third and 19 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 fell by 18,262 contracts on Friday, when prices were mixed.  That looks like heavy short-covering in the March contract, which rose. 

      Heating oil open interest rose by 3,099 contracts on Friday, when prices were lower.  That looks like new selling and is bearish.     

      RBOB open interest grew by 598 contracts on Friday, when prices were lower.  That looks like new selling, which would be bearish. 

      Natural gas open interest rose by 5,519 contracts on Friday, when prices were lower, which suggests new selling, which would be bearish. 

Friday’s Open Interest Changes:

Crude 1,263,027  dn 18,262        Heat 253,048   up 3,099       RBOB 188,991  up 598       Nat gas 731,614   up 5,519     

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 plunged to new recent lows yesterday, triggering sell stops under $4.28 and leaving the major low at $4.07 as the remaining major support.  If prices break $4.07, there is little reason why they would not fall under $4.00.  Weaker equities and oil prices were the main reason why natural gas prices sold off yesterday, and once the momentum got going, it had a hard time stopping.

We have reached the point on the calendar when traders routinely start looking ahead to spring.  It is still a full month away, but traders are already looking forward to its arrival.  Temperatures will give us occasional signs that spring is coming, even if they will remain on the colder side through most of the country into March.  Still, it will not be long before we will be looking at the April contract as the expiring month, and that will have a psychological impact on trading.    

It has become an almost lethal combination.  We are running out of winter in terms of temperatures, but there is no sense of any economic spring or rebirth in the air simultaneously.  On an iconic level, we can see no end to our economic winter of despair – but we do see an end to the space-heating demand of calendar winter.  It just is not a good combination for natural gas trading.  As a result, the $3-handle seems to be beckoning.

Cash natural gas prices were mostly lower again yesterday, which is a negative sign on the first day back from a long weekend.  More often than not, the lower prices are seen on the Friday, with a rebound often seen when traders get back.  In this case, that did not happen.

In cash trading on Friday, Henry Hub prices were at $4.30-$4.44, down $0.21-$0.24 (DJN).  SoCal prices were at $3.56-$3.70, down $0.16-$0.16 on the day.  El Paso Permian prices were down $0.08-$0.13 at $3.17-$3.25.  Katy prices were down $0.00-$0.18 at $3.80-$3.88.  Waha prices were down $0.07-$0.09 at $3.20-$3.33.  Transco 6 was down $0.45-$0.53 to $5.56-$5.40/mmBtu.

Palo Verde prices were last quoted at $32.25-$34.00/mwh.  Northeastern prices last traded at $42.50-$51.50.  Entergy was last at $38.50-$39.50.  Ercot was last at $42.00-$42.75/mwh. 

Weather forecasts are for colder-than-normal readings now, but both private and government forecasts seem to be lining up in favor of above-normal readings over the final days of this month.  It seems that the warmer readings will be concentrated east of the Mississippi between Sunday and next Tuesday, and continuing through the end of February.  Clearly, we have to see these warmer readings really arrive, but they are expected, at this stage.    

The $4.07 low is still the critical support, and any settlement beneath that would almost certainly suggest a test of prices under $4.00.  Prices broke the low at $4.28 from February 2^nd, yesterday, and there is only the major support at $4.07 to prevent us practically from using a three-dollar-handle. 

Support is at $4.14-$4.16, $4.07-$4.10, $3.96-$3.99, $3.82-$3.84 and $3.68-$3.71.  Resistance is at $4.51-$4.53, $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 to new recent lows yesterday.

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 156.1 bcf.  The five-year average was a draw of 155.6 bcf.  Last year, there was a draw of 172 bcf, and the year before there was a draw of 223 bcf.

EIA Report

News & Views

In trading on Globex, March crude oil prices were up $0.32 to $35.25/barrel at 8:30 AM EST, this morning.  March heating oil prices were up 1.34 cents to 1.1998/gallon.  March RBOB prices were up 1.41 cents at $1.1259.  March natural gas was down $0.088 to $4.115/mmBtu. 

Asian equities were lower overnight, although the weakness was primarily in response to weaker US prices on Tuesday, and was not yet leading the US lower.

President Obama signed into law the $789 billion stimulus bill yesterday.  He called it the “first part” of a larger strategy to reinvigorate the economy.  He promised new initiatives to help ward off home foreclosures and stabilize the banking system, and also pledged to tackle exploding budget deficits, presumably at a later time.  The bill includes $5 billion for weatherization, which will help insulate lower-income homes, and it has $4.5 billion to help move federal buildings to green energy and retrofitted conservation measures.  It also includes $11 billion for “smart-grid” activities. 

Crude oil prices did not break Friday’s lows, which was encouraging.  Still, the battle for the support at $32.40 does not yet seem to have ended.

Heating oil prices broke beneath important support at 119.83 yesterday, ending any talk of a bullish technical picture over the immediate term. 

DOE Expectations

The table below lists the first survey results for Dow Jones Reuters and Bloomberg.  The DOE report will be released at 10:30 AM EDT on Thursday morning this week.

Category    Dow Jones    Bloomberg     Reuters

Crude           up 2.700        up 3.200          up 2.600 mln bbls

Distillate      dn 1.000        dn 1.500          dn 1.600

Gasoline      dn 0.400        up 0.300          up 0.400

Utilization   dn 0.0%         dn 0.5%           dn 0.2%

Distillate stocks have been lower in each of the last seven years, for a seven-year average decline of 3.386 million bbls.  Crude oil stocks increased in six of the last seven years, for a six-year average build of 3.017 mln bbls and a seven-year 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 and a seven-year average drawdown of 0.200 mln bbls.  Crude oil imports have averaged 9.919 million bpd over the last five years.  The average utilization figure was 87.51%, with the four-year, pre-hurricane average at 89.32%.

Crude oil prices still should have a major battle over support at $32.40 coming these next few days.

An Illustrated Look at Energy Market Factors

A Look at Jet Fuel Prices

Recommendations for Specific Market Segments