Market Review for Thursday    

HE drawdown in crude oil stocks may be what grabbed traders’ attention yesterday.  It was unexpected, and came as the result of a rare combination of higher refinery utilization rates and lower crude oil imports.  But, yesterday’s crude oil drawdown masked a much bigger story, for our money.  That much bigger story was the increase in demand aggregates against year-earlier numbers. 

What makes the demand aggregates so compelling is the fact that every decline in oil prices since July has been predicated on weaker demand expectations.  Every piece of recessionary news has been interpreted through the lens of lower oil demand, and in that sense has been seen as being bearish.  But, what do we need to think now, now that demand seems to be edging its way back?  For us, it changes the equation.

Four-week gasoline demand came in at 8.895 million bpd, which was up 0.78% against year-earlier figures.  Four-week distillate demand was at 4.238 million bpd, up 0.26%.  Total products supplied came in at a four-week figure of 19.952 million bpd, which was down just 0.10%.  Four-week jet fuel use is still 15.56% lower, at 1.302 million bpd, but four-week residual demand is 8.21% higher at 0.672 million bpd and propane demand over the last four weeks is up 5.29% to 1.653 million bpd. 

This has been coming for a while, now, and we knew it was inevitable once we started comparing apples to apples, or weak demand to weak demand.  And, since it was a year ago that demand started to weaken, we knew that this would be the crunch time.  Still, for our money, this is, in many ways, the beginning of the end.  If the recession no longer automatically leads to lower demand, then we can longer continue to ignore everything bullish that happens on the supply side.  The fact that this transformation in demand has arrived just on the doorstep of the March seasonal for stronger prices is compelling news for us.

Technicals

           Crude oil prices continued to test major support at $32.40-$32.70 yesterday, and they finally received a burst of buying from a number of sources.  This made the charts look firm, if not strong, and it reiterated the support at the lows by failing to break them, in fact by moving well away from them.  That does not necessarily mean that the battle is over, but it was a good sign for the bulls.  Gasoline prices broke below 103.97 yesterday, which was bearish.  Heating oil prices continue to grope for support. 

Dollars per barrel

Above:  The crack spread backed up yesterday.  Below:  The gas crack led crack spreads lower yesterday.

Dollars per barrel

March crude oil now has buy-stops over $39.85, $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 121.10, 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 113.59 & 110.00.  March RBOB has buy-stops over 110.57, 112.70, 122.40, 126.25, 133.75, 135.07, 144.21, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 103.10, 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 lost 49 yards on fourth and 16 yesterday and that turns the ball over to the bulls.  It is now their first down.

Technical Support & Resistance

Oil Inventory Reports

      This was a surprising DOE report.  Crude oil stocks were actually lower, on a rare combination of higher refinery utilization rates and lower crude oil imports.  The biggest surprise, though, came from consumption figures.  Four-week average gasoline demand came in at 8.895 million bpd, which was 0.78% higher than the aggregate average seen a year earlier.  Four-week average distillate demand was 4.238 million bpd, up 0.26% on a year ago. 

   Distillate stocks are now 16.4 million bbls, or 13.18%, higher than a year ago.  Heating oil inventories are 0.5 mln bbls, or 1.41%, higher than they were a year ago.  Gasoline stocks are 13.6 million bbls, or 5.85%, lower.  Crude oil stocks are now 52.1 million bbls, or 17.45%, higher than a year ago.  Residual stocks are 2.6 mln bbls (6.68%) lower than a year ago, jet fuel stocks are 0.1 mln bbls (0.24%) higher than a year ago.  Utilization is 1.2% lower than a year ago and is 5.21% below the seven-year average and 7.02% 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 10,493 contracts on Wednesday, when prices were lower.  That looks like heavy long liquidation and is theoretically supportive.  It was almost certainly expiration-related.

      Heating oil open interest rose by 974 contracts on Wednesday, when prices were lower.  That looks like new selling and is bearish.     

      RBOB open interest grew by 2,082 contracts on Wednesday, when prices were lower.  That looks like new selling, which would be bearish. 

      Natural gas open interest rose by 1,573 contracts on Wednesday, when prices were higher, which suggests new buying, which would be supportive.  Prices were only slightly higher, though.

Wednesday’s Open Interest Changes:

Crude 1,219,762  dn 10,493        Heat 259,872   up 974       RBOB 193,594  up 2,082       Nat gas 733,920   up 1,573     

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

This week’s EIA underground storage report really opened up the surplus against a year ago and against the five-year average figure seen for this time of year.  Expectations had been for a drawdown of 54 bcf, and we only had a drawdown of 24 bcf.  And, compared to the figures traditionally seen this week, which has yielded an average draw of 155 bcf over the last five years, this was an astoundingly disappointing report. 

As a result of this dreadfully bearish report, gas prices fell to a low yesterday of just above $4.00 before fresh buying came in.  It seems to have been short-covering and bargain-hunting based on stronger oil quotes, but there was no “character” in the buying that was able to shine through to give us any hope longer-term that prices will hold above $4.00.  At this point, we would actually be surprised if prices were to hold above that level. 

It is cold again in the Northeast, after having been very cold yesterday in the Midwest.  That is a normal progression or movement of temperatures.  Still, even if we were to see a large pull from underground storage levels in next week’s report, we seem to be so far behind year-ago and multi-year levels that there is little hope that we can end this heating season without there being a sizeable surplus against normal, historical levels.  Any warming from here will just aggravate the surplus.

Cash natural gas prices were mixed yesterday, with some pipeline prices rising to acknowledge the colder temperatures that have moved east over the last 12-18 hours.  They are not expected to persist for any sustained period, and that makes their impact likely to be isolated with yesterday’s trading.  Today, traders will be looking ahead to lower weekend usage.

In cash trading yesterday, Henry Hub prices were at $4.33-$4.50, up $0.11-$0.14 (DJN).  SoCal prices were at $3.49-$3.57, down $0.01-$0.03 on the day.  El Paso Permian prices were down $0.02-$0.11 at $2.99-$3.17.  Katy prices were down $0.17 and up $0.07 at $3.60-$3.92.  Waha prices were down $0.06 and up $0.02 at $3.16-$3.26.  Transco 6 was up $0.38-$0.43 to $5.45-$5.68/mmBtu.

Palo Verde prices were last quoted at $30.20-$31.50/mwh.  Northeastern prices last traded at $43.00-$53.00.  Entergy was last at $38.00-$38.50.  Ercot was last at $31.00-$32.00/mwh. 

At this stage, despite some very cold readings outside as we go to press this morning, the outlook for temperature readings is for above-normal figures into the first week of March.  And, after this week’s EIA underground storage report, we are already on a back foot in terms of future reports.  It would take a shockingly large set of withdrawals to bring figures even back to normal historical levels.  At this time of year, with the coldest weather almost certainly behind us, sustained readings that cold just do not seem possible. 

This has been a very bearish week.  Fundamentally, we have seen a dramatic increase in the surplus storage against a year ago and against multi-year averages.  Technically, prices have broken major support and look ready to break $4.00.   

Support is at $4.07-$4.10, $3.96-$4.00, $3.82-$3.84 and $3.68-$3.71.  Resistance is at $4.25-$4.28, $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 again, yesterday.

Dollars per million Btu

EIA Weekly Storage Figures

This week’s EIA report showed a draw of 24 bcf on expectations for draws of 54 bcf.  Stocks are now 177 bcf higher than a year ago, compared to a surplus of 44 bcf a week ago, a surplus of 60 bcf two weeks ago and a surplus of 34 bcf three weeks ago.  Stocks are now 9.73% higher than a year ago.  They are 155 bcf and 8.42% 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.  This week’s report really opened up the surplus against a year ago and against the five-year average.

EIA Report

News & Views

In trading on Globex, March crude oil prices were down $1.73 to $37.75/barrel at 8:30 AM EST, this morning.  March heating oil prices were down 4.65 cents to 1.1580/gallon.  March RBOB prices were down 5.16 cents at $1.0470.  March natural gas was down $0.098 to $3.980/mmBtu. 

Despite what many felt was the best or most supportive DOE report in a very long time, we have seen selling overnight.  Oil demand has clearly stabilized, but the market was telling us overnight that there is a long road to go before stabilizing and strengthening.  The equities markets seem to be telling us that the economy has many months of grim statistics before there will be light at the end of the tunnel.

Despite those bearish observations, we do now have some bullish factors to focus on as well.  With demand starting to stabilize, it will no longer be possible, in our opinions, for traders to glibly ignore supply statistics that were once considered very bullish.  We have managed to waltz past these figures for a solid eight months with the simple observation that supplies don’t matter with demand falling.

Crude oil prices burst higher yesterday from what appears to be a triple or quadruple bottom formation.  The battle may not be over, but the bulls won an important round yesterday.

Heating oil prices rebounded yesterday, but support is still extremely tenuous, despite stronger demand for distillates in the latest DOE report. 

We can no longer just “drive by” bullish supply facts, figures or observations by claiming that weaker demand makes them unimportant.  Clearly, though, this will be a major change in the way that many or most traders approach this market, and it is not going to happen overnight.  In fact, last night’s overnight trading tells us quite clearly that traders will need to see very convincing combinations of supply and demand figures before they will be willing to buy for anything more than cover for short holdings. 

Execution, LLC, picked up on a very interesting new plan by China to make sure that it will get the energy it will need in the years ahead.  The China Development Bank has worked out a deal with Brazil where China will loan Brazil $10 billion to help develop its promising deep underwater oil and gas projects, and Brazil will repay China with oil.  Even though low demand is still the factor on everyone’s lips, China has not lost sight of the longer-term picture, which will see it crave energy in increasing amounts for years to come.  This is an extremely clever way of using scarce capital now to buy what could prove to be scarce resources in the future.

The bulls won yesterday’s round, with crude oil prices holding well above major support and advancing well, to paint what appears to be a triple or even quadruple bottom on the charts.

An Illustrated Look at Energy Market Factors

A Look at Temperatures

Despite the approaching end of the season, and in the face of forecasts for moderating temperatures,

it will be cold as we start next week. 

http://www.weather.com/

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