Market Review for Friday & Over the Weekend     

OLD prices broke back above $1,000/ounce on Friday, but oil prices and gold have not been traveling companions for a while, now.  Still, over their roughly 25 to 35-year history of trading on open markets (prior to 1974 Americans were not allowed to buy gold, and crude started freely trading in 1983), oil and gold have taken their cues from each other more often than not.  Gold is seen as a safe haven, now, but it is also seen as a store of value against inflation, which is something oil has been used for, as well.  Gold’s major moves are of more than just passing interest to oil traders.

Crude oil prices were following their newest traveling buddies, equities.  Crude prices were lower Friday morning, but they rallied when stocks (equities) rallied later in the trading session.  The March crude oil contract expired on Friday and that made for a more volatile session.

What do we take away from the week, as a whole?  Crude oil stocks were lower, for the first week since December 19^th, although we have had generally higher inventories since September 19^th.  March crude oil prices increased by $1.43 last week, largely as a result of the crude stock drawdown.   Heating oil prices fell 10.33 cents and gasoline quotes were down 13.17 cents/gallon on the week.

Still, for our money, the biggest factor was demand stabilization.  Four-week gasoline demand was up 0.78% on the year at 8.895 million bpd.  Four-week distillate demand was up 0.26% to 4.238 million bpd,.  Total products supplied were down just 0.10% at a four-week figure of 19.952 million bpd.  Stabilizing demand makes supply figures more important, moving forward.

Technicals

           Crude oil prices continued to test major support at $32.40-$32.70 last week, and they did manage to hold above it.  The problem, though, is that we cannot really say that the bulls won the technical fight; we can say that they bought themselves some more time, and it could well turn out that last week was, indeed, a turning point.  We will not know until we see prices get back above $40.00, if this is, in fact, a bottom that is going to remain in place.  Heating oil prices broke down, and they continue to grope for fresh support.

Dollars per barrel

Above:  The gas crack spread was at $6.19 Friday.  Below:  The heat crack was at $11.32 Friday, its lowest since 9-22-08.

Dollars per barrel

April crude oil now has buy-stops over $40.15, $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 $36.91, $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.  Sell stops are under 113.59, 109.80, 104.55, 95.95, 94.50, 90.50 & 81.50.  March RBOB has buy-stops over 108.35, 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 102.30, 98.70, 96.69, 90.10, 89.78, 85.45, 83.52, 79.50, 78.50, 77.60, 76.30, & 71.20.

Football: The bulls lost five yards on first and 10 on Friday, and that makes it second and 15 to go, today.

Technical Support & Resistance

Oil Inventory Reports

      This week’s DOE report should show a drawdown in distillate stocks, which has been the case in seven out of the last seven years.  The seven-year average has been a drawdown of 2.60 million barrels.  Gasoline stocks have declined in four of the past seven years, and crude oil stocks have increased in four out of the last seven years.  Utilization has increased in four of the last seven years, and crude oil imports have fallen in four out of the last five years. 

   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 21,497 contracts on Thursday, when prices were higher.  That looks like heavy short covering, which would be bearish.  The March contract expired on Friday. 

      Heating oil open interest rose by 1,246 contracts on Thursday, when prices were higher.  That looks like new buying and is supportive.  

      RBOB open interest grew by 1,919 contracts on Thursday, when prices were higher.  That looks like new buying, which would be constructive.

      Natural gas open interest rose by 17,399 contracts on Thursday, when prices were lower, which suggests new selling, which would be bearish. 

Thursday’s Open Interest Changes:

Crude 1,198,265  dn 21,497        Heat 261,118   up 1,246       RBOB 195,513  up 1,919       Nat gas 751,319   up 17,399

CFTC Commitments of Traders  (for the period ended Tuesday, Feb 17th)  

As of Feb 17th:               Long                   Short:

Crude oil                   243,728               198,712                           -contracts held by speculators:  1.23 to 1 long

                                           629,554               665,245                               held by the trade

                                             68,435                 77,760                               held by small specs and hedgers.

Spreads….dn 15,129 contracts   The ratio went from 1.07-to-one long to 1.23-to-one long in the last report.

   Large speculators added 4,165 long contracts and covered 24,273 shorts over the week under review.  Commercials added 6,122 longs and added 24,788 shorts.  Small specs and hedgers liquidated 2,493 longs and added 7,279 shorts.  Open interest fell by 7,335 contracts as prices dropped $2.62/barrel.  That looks like long liquidation, which would be supportive.  Only small specs and hedgers were liquidating longs; large specs covered a huge number of shorts and 15,000 spreads were taken off.

   The average large speculator has 2,739 long contracts (89 accounts), or 47 more contracts on average on the same number of long accounts, and 2,028 shorts (98 accounts), or an average of 158 contracts less on four fewer accounts.  Commercials held 7,869 longs (80) or 228 fewer longs on average on three more accounts, and 7,646 shorts (87), or 22 more shorts on three more accounts. Reportable positions held 4,685 longs (248) or the same number of contracts on one less account, and 4,573 shorts held by 252 accounts, or 22 fewer contracts on average on two fewer accounts.  The longs are marginally stronger, here. 

Heating oil                 30,859                 22,950                           - contracts held by speculators:  1.34 to 1 long

                                           160,263               173,427                              held by the trade.

                                             35,901                 30,646                               held by small specs and hedgers.

Spreads….up 21 contracts.    The ratio of large speculative longs to shorts went from 1.58-to-one to 1.34-to-one in a week.

       Large speculators added 2,594 longs and added 5,076 shorts.  Commercial accounts added 1,190 longs and covered 175 shorts.  Small speculators and hedgers added 1,608 longs and added 491 shorts.  Open interest rose by 5,413 contracts as prices dropped 11.50 cents. That looks like new selling, which would be bearish.  Large speculators were the best new sellers, here.

       The average large speculative long is holding 1,029 contracts (up 20 lots on 30 accounts, which is two more), while the average short has 820 contracts (plus 182 lots on 28 accts, unchanged).  The average commercial long is holding 2,504 contracts (down 62 on 64 accts, plus two) compared to the average short holding of 2,550 contracts (down 206 lots on 68 accts, up five).  The average reportable position is 1,874 long (down 16 lots on 119 accts, plus three) while the average short holding is 1,856 (down 120 lots on 123 accts, down 10).  The reportable short average fell by 120 contracts on 10 fewer accounts. 

Rbob Gasoline          52,300                   9,097                          -contracts held by speculators:  5.75 to 1 long

                                           111,307               157,486                             held by the trade.

                                              16,045                 13,069                              held by small specs and hedgers.

Spreads…dn 218 contracts   The ratio of large speculative longs to shorts went from 19.78-to-one to 5.75-to-one in 4 weeks.

     Large speculative holdings grew by 239 longs and grew by 4,500 shorts over the latest week. Commercial holdings grew by 3,800 longs and fell by 672 shorts.  Small speculators and hedgers’ positions grew by 97 longs and were up by 308 shorts.  Open interest grew by 3,918 contracts as prices dropped 13.21 cents.  That looks like net new selling, which would be negative.  Large speculators were the best sellers with the non-reportable category kicking in a few hundred contracts.  Commercials were buying and covering shorts.  Still, it was large speculative selling that drove prices lower.

   The average holdings are 1,067 contracts for each large speculative long (49) and 396 for each large speculative short (23).  The average commercial long now has 1,357 contracts long (82) and 1,831 short (86). Average reportable holdings are 1,186 long (148) against 1,342 short (133).  Large speculative accounts increased their average long holdings by 5 contracts and their average short holdings by 166 contracts, with the same number of long accounts and three new short accounts.  There were 8 more long and 10 more short reportable accounts, which added 40 to the average long and cut 79 from the average short. 

Naturalgas                69,878               210,402                           -contracts held by speculators:  3.01 to 1 short

                                           297,237               195,425                               held by the trade.

                                             79,188                 40,476                           held by small specs and hedgers.

Spreads…up 12,943 contracts    The ratio of large speculative shorts to longs went from 2.80-to-one to 3.01-to-one in 4 weeks.

  Large speculative holdings liquidated 190 longs and covered 2,348 shorts over the latest week. Commercial accounts added 11,278  longs and added 13,712 shorts, and small speculators and hedgers added 711 longs and added 435 shorts.  Open interest rose by 24,742 contracts as prices dropped $0.340/mmBtu.  That looks like heavy new selling, which would be bearish.  Commercials were the best buyers and sellers, with large speculators covering shorts as prices dropped.  They remain net short.

   The average large speculator has 1,625 contracts (43) while each large speculative short is holding 2,505 shorts (84).  The average commercial long now has 3,911 contracts long (76) and 3,152 short (62). Average reportable holdings are 3,569 long (183) long and 3,887 short (178).  Large speculative accounts had their average long holding rise by 165 contracts on five fewer accounts.  Reportable holdings were up by 187 longs and 178 shorts on three less long and two fewer short accounts.

Natural Gas & Utility Generation

It was a bad week for natural gas prices.  March prices finished the week over $4.00 – just barely.  On Friday, March futures broke beneath $4.00 and touched a low of $3.92 before bouncing back above $4.00.  Technically, we had an important breakdown on the charts last week.  Prices settled below the previous low at $4.07 on Thursday and Friday, giving us a clear breakdown.  Prices finished on Friday at their lowest level since November 15^th, 2002.

Technically, the trouble started on January 13^th, when natural gas prices broke below then-major support at $5.21 (established on December 22^nd, 2008).  It happened at what seemed to be a strange time, because temperatures were in the middle of a cold snap that would bring the coldest temperatures of the season – in the heart of a season that had started early, in November, and had not really let up as we moved through December and January.   

Last week’s break below $4.07 (the low since September 27^th, 2006) was something of a long-term process.  When prices broke $5.21 on January 13^th, we had to go back to September 27^th, 2006, when expiring contract prices went from a low the day before at $4.30 to an expiration low of $4.07.  The following day, the new expiring contract jumped to a low of $5.35.  The upshot, though, was that we had to compare every low after January 13^th, this year, to the $4.07 low.  Last week, we broke it.

Cash natural gas prices were mixed Thursday, 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 Thursday’s trading.  On Friday, traders were looking ahead to lower weekend usage.

In cash trading Thursday, 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.  Cash prices were not quoted on Friday.

Palo Verde prices were last quoted at $29.25-$31.75/mwh.  Northeastern prices last traded at $42.00-$53.75.  Entergy was last at $34.00-$38.00.  Ercot was last at $31.00-$31.50/mwh. 

We mentioned the technical damage done, above.  It was a long-term process that effectively began on January 13^th, with the breakdown below $5.21.  For roughly five weeks, we were talking every week about gas prices making fresh, new lows since the $4.07 low in September, 2006.  As prices got nearer to that number, it became clear that economic weakness, lost industrial demand and the trend in prices was pulling quotes inexorably towards that low.  We also new, for five or six weeks, that a break below $4.07 would almost certainly be followed in short order by a break under $4.00.  If the market was weak enough to break $4.07, there was little that could prevent us from seeing a three-dollar print.

The hot-button item that helped prices break under $4.07 and then $4.00 was last week’s EIA underground storage report.   

Support is at $3.92-$3.94, $3.82-$3.84, $3.67-$3.71, $3.40-$3.43, $3.33-$3.38, $3.10-$3.14, $2.88-$2.91, $2.83-$2.84, $2.74-$2.75, $2.64-$2.66 and $1.85-$1.88.  Resistance is at $4.07-$4.10, $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. 

Natural gas prices declined to their lowest level since 11-15-2002

Dollars per million Btu

EIA Weekly Storage Figures

Last 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 five-year average for this week was a draw of 145 bcf.  Last year, there was a draw of 151 bcf.  Over the last five years, draws have ranged between 107 bcf and 171 bcf.  In 2002, there was a draw of just 64 bcf, which was the lowest in years.

EIA Report

News & Views

In trading on Globex, April crude oil prices were up $0.22 to $40.25/barrel at 11:30 PM EST, last night.  March heating oil prices were up 0.33 cents to 1.2000/gallon.  March RBOB prices were down 0.19 cents at $1.0727.  March natural gas was up $0.012 to $4.018/mmBtu. 

Kuwait suspended all oil exports this morning because of inclement weather.  It currently exports 2.3 million bpd, and is expected to resume exports in the next 24 hours.

Nigeria has targeted a disproportionate amount of off-shore, deep-water production as part of its designated Opec cuts, because the government makes less on these leases than on its ground operations.  Unsurprisingly, the government is currently trying to renegotiate those royalties.  The combination of reduced output along with the possibility of higher taxes is making companies less eager to start new, deep-water drilling projects.  These capital-intensive projects make up a very large percentage of the country’s new pumping capacity.  As a result of its policies, Nigeria s not embarking on as many new drilling projects as it is capable of starting.

Crude oil prices finished lower on Friday, but they ended the week with the multiple-bottom low still intact.  It may not be over, but the bulls have gained time and have held support.

Heating oil prices were lower on Friday, but they rallied from much deeper losses earlier in the session.  There is a tentative support zone from 113.99-114.70, now.

Mexico’s oil output dropped 9% on the year in January to its lowest level since 1995.  It produced 2.69 million bpd.  Dow Jones noted ominously that “at the current pace, Mexico’s oil exports will disappear in six years.”  The wire service went on to note that this could put Mexico “at risk of a fiscal crisis” because “Oil accounts for a round a third of government revenue” there. 

Distillate inventories have declined in seven of the last seven years, for an average drawdown of 2.600 million barrels.  Gasoline stocks have declined in four of the last seven years, for a four-year average decline of 1.825 million barrels and a seven-year composite draw of 0.529 million barrels.  Crude stocks have increased in four of the last seven years, for a four-year average build of 2.150 million barrels, with a seven-year average build of 0.729 million barrels.  Crude oil imports have fallen in four of the last five years, for a four-year average decline of 400,000 bpd.  The five-year average import figure is 9.686 mln bpd.  Utilization has increased in four of the last seven years, for a four-year average increase of 0.825%.  The seven-year average utilization figure has declined by 0.286%.  The seven-year average utilization rate has been 87.23%.

With the final week of February upon us, we want to wait to see what the beginning of March brings with it.

Prices often weaken at the end of February and then start to recover as we move through March.

An Illustrated Look at Energy Market Factors

A Look at Gasoline Supply & Demand

Implied demand seems to have been stabilizing over the last few weeks (in blue) while reported demand has been flattening out and turning higher for the last two weeks.

Thirteen-week average demand is 8.890 million bpd, down 3.18%.  Thirteen-week average supply is now at 9.866 million bpd, down 1.57%.  Thirteen-week average implied demand is 9.647 million bpd, up 0.09%.

A Look at Distillate Supply & Demand

Implied 13-week demand reached a low point in autumn.  Reported demand bottomed several weeks ago.

Thirteen-week average demand is 4.082 million bpd, down 6.55%.  Thirteen-week average supply is now at 4.623 million bpd, up 3.57%.  Thirteen-week average implied demand is 4.471 million bpd, down 1.89%.

A Look at Refining

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.

Recommendations for Specific Market Segments