Market Review for Wednesday 

IL markets were under selling pressure for most of yesterday’s session, although they did rally towards the end of the regular session as traders covered shorts ahead of this week’s inventory statistics, starting with last night’s API figures.  In overnight trading last night, traders were talking about this week’s API figures and about the possibility or growing likelihood of fresh Opec production cuts.

Last night’s API report showed an increase in crude oil stocks of 1.6 million barrels, which seems to have caught markets by surprise.  Wire service estimates have been pointing to builds of 2.6 million barrels or more, when this morning’s DOE statistics are released.  As a result, we saw some traders realigning positions more into sympathy with last night’s API figures in trading overnight.

Before the API statistics were released, traders had been selling lightly yesterday in anticipation of fresh builds in crude stocks today.  Even though the US does not burn crude oil, stocks are considered onerous with Cushing stockpiles at record levels and crude inventories nationwide at almost 16-year highs.

Undermining everything in this market is the continuing perception that a weakening economy will lead to continuing poor demand for refined products and, by extension, for crude oil processed by refineries.  And traders were also talking about a preliminary report that showed US crude oil imports had fallen 3.1% to a “five-year low of 9.721 million bpd in 2008,” Dow Jones wrote yesterday.  The report went on to point out that imports from Saudi Arabia had fallen 7.9% from November to December, at the end of 2008, and that these year-ending imports were 18.2% lower than they had been a year earlier.  They were also the lowest “for any month since October, 2007,” the wire service noted.

Technicals

           Heating oil prices continued to weaken yesterday, and there is no natural support that has been recently tested nearby.  It may take time for prices to establish new or enduring support on the charts.  Gasoline sold off yesterday, and prices now seem poised to test important support at 103.97, which is that market’s major support.  Any break beneath that figure will leave support at 98.70, 90.10 and 78.50.  Crude oil prices are also very near major support at $32.40-$32.70.  A break beneath $32.40 could well take quotes below $30.00.

Cents per gallon

Above:  Heating oil prices fell to new lows yesterday.  Below:  Gasoline prices sold off, but are above support at 103.97.

Cents per gallon

March crude oil now has buy-stops over $36.22, $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 $34.13, $33.55, $32.40 & $30.00.  March heating oil has buy-stops over 120.27, 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 113.99 & 110.00.  March RBOB has buy-stops over 112.70, 122.40, 126.25, 133.75, 135.07, 144.21, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 105.30, 103.95, 98.70, 96.69, 90.10, 89.78, 85.45, 83.52, 79.50, 78.50, 77.60, 76.30, & 71.20.

Football: The bears gained three yards on the ground yesterday, on third and 19, and that makes it fourth and 16 to go today.

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 32,772 contracts on Tuesday, when prices were lower.  That looks like heavy long liquidation and is theoretically supportive. 

      Heating oil open interest rose by 5,850 contracts on Tuesday, when prices were lower.  That looks like new selling and is bearish.     

      RBOB open interest grew by 2,521 contracts on Tuesday, when prices were lower.  That looks like new selling, which would be bearish. 

      Natural gas open interest rose by 733 contracts on Tuesday, when prices were lower, which suggests new selling, which would be bearish. 

Tuesday’s Open Interest Changes:

Crude 1,230,255  dn 32,772        Heat 258,898   up 5,850       RBOB 191,512  up 2,521       Nat gas 732,347   up 733     

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 continued their flirtation with decidedly lower figures yesterday, with the expiring March contract falling beneath major support at $4.07, and continuing to the day’s low of $4.037 where support was found.  It is hardly buttressed support, though, and the breakdown under $4.07, even though prices could not hold there, was a sign of potentially lower levels to follow. 

Yesterday’s rally and subsequent settlement in positive territory was the result of short-covering and bargain-hunting in an oversold contract making its first real run at breaking $4.00.  The fact that prices were able to break under $4.07 was a sign that  this market is weak, and the subsequent short-covering and bargain-hunting does not strike us as being anything longer-term that we should count upon being here on another test of yesterday’s lows.

And we feel that we probably should expect another test of those lows at some point relatively soon.  The fact that prices were able to sell off beneath the major support at $4.07 strikes us as being a shot across the bow, an indication of the ease with which major support levels can be breached in this market.  The combination of apparently plentiful supply and lost industrial demand because of the recession – with temperatures getting ready to warm as a natural calendar event – suggests lower prices.

Cash natural gas prices were mostly lower again yesterday, which was to be expected after Tuesday’s decline in futures prices.  Cash prices did not fall as severely as one would have expected, given the decline in futures on Tuesday.  Still, some of the damage had already been done on Tuesday.

In cash trading yesterday, Henry Hub prices were at $4.19-$4.39, down $0.05-$0.11 (DJN).  SoCal prices were at $3.51-$3.60, down $0.05-$0.10 on the day.  El Paso Permian prices were down $0.06-$0.07 at $3.10-$3.19.  Katy prices were down $0.03-$0.03 at $3.77-$3.85.  Waha prices were down $0.01-$0.06 at $3.14-$3.32.  Transco 6 was down $0.10-$0.33 to $5.02-$5.30/mmBtu.

Palo Verde prices were last quoted at $32.25-$33.50/mwh.  Northeastern prices last traded at $40.00-$47.75.  Entergy was last at $37.50-$39.00.  Ercot was last at $30.00-$31.75/mwh. 

Dow Jones conducted a survey showing a draw of 54 bcf for today’s EIA report.  The five-year average of similar dates has an average draw of 155 bcf, so it is already looking like a disappointing report.  If it comes in as disappointingly as suggested, we should fully expect to see prices break beneath $4.00 before the week has ended.  We have a hard time imagining how large a draw we would need to see to turn prices back up.

There is nothing on the immediate horizon that suggests that this market is due for a sudden rebirth.  Yesterday’s break beneath $4.07 – on the very first attempt – tells us a great deal about the relative weakness of this market.  A bearish report today could be all it takes to push us beneath $4.00. 

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 $4.25-$4.27, $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 $1.35 to $35.97/barrel at 9:30 AM EST, this morning.  March heating oil prices were up 2.58 cents to 1.1727/gallon.  March RBOB prices were up 1.73 cents at $1.0825.  March natural gas was down $0.023 to $4.191/mmBtu. 

Traders were buying on Globex in reaction to last night’s API report, which showed a smaller build in crude oil stocks than that predicted by the major wire services.

Last night’s API report showed a build in crude oil stocks of 1.576 million barrels, a build of 1.645 million barrels in gasoline stocks and a draw of 0.875 million barrels in distillate stocks.  Implied demand in distillate came in at a very respectable figure of 4.753 million bpd.  Gasoline implied demand, using imports only, came in at 8.540 million bpd, which strikes us as being very low.  Adding in gas blending components, which must be the difference between the API and DOE reports, would give us an implied demand figure of 9.370 million bpd, which strikes us as being a little high.    

Crude oil prices settled lower yesterday, but they remain above the major support at $32.40.  We still have a battle in front of us to see whether this support can remain in place.

Heating oil prices broke beneath important support at 119.83 on Tuesday, and they continued moving lower yesterday.  There is no natural nearby support in this market.

DOE Expectations

The table below lists the final 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 3.000 mln bbls

Distillate      dn 1.000        dn 1.500          dn 1.200

Gasoline      dn 0.600        up 0.500          up 0.500

Utilization   dn 0.1%         dn 0.3%           dn 0.3%

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 still have a major battle over support at $32.40 these next few days;

Gasoline has key support at 103.97.  Heating oil has already lost its battle and is looking for new support.

An Illustrated Look at Energy Market Factors

A Look at Temperatures

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