Market Review for Tuesday        

T was another rollercoaster session yesterday, with oil prices starting out moving lower.  As it turned out in yesterday’s trading, oil prices were primarily following equities.  And equities started out weakly before finding hope from comments made by Fed Chairman Ben Bernanke, who testified yesterday in front of the US Senate. 

Dennis Kneale from CNBC said perceptively that the Fed boss seemed “less terse, less tense …” in his testimony, and suggested that it was his projection of a quiet confidence that the economy will improve that impressed equities markets.  Mr Kneale was not alone in his observations, with other commentators applauding the subtle shift in Mr Bernanke’s body language and tone. 

Sometimes, it can be the smallest of details that defines a critical moment, like the lack of a horseshoe nail in the case of Richard III, according to Shakespeare.  While we are not suggesting that the chairman’s testimony has either turned the economy around or that it was grist for immortal playwrights, certainly it was enough to give us a rally in yesterday’s market.  Confidence crept back into equities and flowed from there into oil rings.

With weakness in equities removed as a major distraction, oil traders were able to focus on some of the more bullish factors in their own market.  They were talking about the Petrologistics report suggesting that Opec countries have reached almost full compliance, having gotten 89% of the way to their targeted output levels – by having cut more (4.3 mln bbls) than originally indicated (4.2 mln bpd).  Traders were also covering short positions ahead of last night’s API report and this morning’s DOE report.  Estimates still suggest a build in crude oil stocks, and any draw will be seen as being bullish.  Other traders might not take as much notice as we will, but the four-week demand aggregates are where our gaze will first be fixed.

Technicals

           The oil complex settled at its highs yesterday as traders covered shorts and bought in sympathy with rebounding equities quotes.  Crude oil and heating oil prices were briefly lower on the day, but losses never became very large yesterday before the buying came in.  It arrived before the morning part of the session had finished, and it continued right into the close.  Prices ended Thursday’s session near the day’s highs, but yesterday’s settlement price may have been nearer the day’s highs than any other session so far this year.  It leaves s with some positive momentum going into Asia.

Cents per gallon

Above:  Heating oil hold above support.  Below:  Heating oil prices have slipped out of contango recently.

Cents per gallon

April crude oil now has buy-stops over $41.50, $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.  Sell-stops are under $37.65, $36.91, $34.13, $33.55, $32.40 & $30.00.  March heating oil has buy-stops over 123.20, 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 116.24, 113.59, 109.80, 104.55, 95.95, 94.50, 90.50 & 81.50.  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 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 gained 15 yards on third and 31, making it fourth and 16 to go today.  The bulls will need to earn it 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 2,945 contracts on Monday, when prices were lower.  That looks like long liquidation and is supportive. 

      Heating oil open interest fell by 3,237 contracts on Monday, when prices were lower.  That looks like long liquidation, which would be supportive.

      RBOB open interest fell by 2,730 contracts on Monday, when prices were lower.  That looks like long liquidation, which would be supportive.

      Natural gas open interest fell by 3,476 contracts on Monday, when prices were higher, which suggests short covering, which would be bearish. 

Monday’s Open Interest Changes:

Crude 1,170,377  dn 2,945        Heat 257,849   dn 3,237     RBOB 193,292  dn 2,730       Nat gas 748,752   dn 3,476      

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

March natural gas prices were higher yesterday, as the momentum to the upside extended for a second consecutive day.  The March futures contract expires today, and options on March futures expired yesterday, and there was traditional end-of-month position evening and cashing-out.  The main significance of that fact is that traders were getting out of positions more than they were getting into positions or originating them.  As a result, there were traders in there buying yesterday strictly to take profits on existing short holdings established earlier (short-covering). 

With options contracts on futures expiring yesterday, a number of large speculative and commercial traders were trying to keep the expiring March futures near the major strike price of $4.00.  They settled at $4.097 on Monday, which left them slightly out of position to expire worthless yesterday.  March ended yesterday at $4.236, which was well above the even-money figures that were seen on both Monday and Tuesday at the day’s lows.  Those lows represented an attempt by traders short March $4.00 calls (or puts) to get those options to expire without any value, which would have given them (the sellers or writers of calls) a chance to keep their collected premia without paying anything out.  As it turned out, options writers ended up paying out on the $4.00 calls, but they were probably more than compensated by the rally that made the $4.00 puts worthless. 

Cash natural gas prices were mixed yesterday as cash traders started the process of ending the month of February.  Individual pipelines followed the dictates of local or regional temperature forecasts and the relative pressures being felt by longs and shorts looking to even out their positions here at the end of the month.

In cash trading yesterday, Henry Hub prices were at $4.17-$4.31, up and down $0.03 (DJN).  SoCal prices were at $3.36-$3.45, down $0.02-$0.04 on the day.  El Paso Permian prices were down $0.03-$0.04 at $2.85-$2.94.  Katy prices were down $0.02-$0.05 at $3.63-$3.75.  Waha prices were up $0.02-$0.04 at $2.96-$3.10.  Transco 6 was down $0.90-$1.28 to $5.10-$5.12/mmBtu. 

Palo Verde prices were last quoted at $29.25-$30.25/mwh.  Northeastern prices last traded at $39.50-$49.00.  Entergy was last at $30.00-$32.00.  Ercot was last at $30.10-$31.25/mwh. 

Temperature forecasts seem to be changing quickly, both within individual meteorological groups and throughout the broader discipline.  Firms disagree over the immediate future and they seem capable of changing their outlooks rather rapidly over time.  Our assumption is that the underlying air currents are having difficulty settling into reliable patterns, which is something we often see more frequently during months on the cusps of major seasonal changes on the calendar.  March certainly fits into that category, and there are conflicting forecasts for the first 10 days of the new month in front of us.  As of yesterday afternoon, the NWS was calling for near-normal readings in the Midwest and Northeast in its 8-14 day forecast.  Some private forecasters saw colder variations, Dow Jones reported yesterday.

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 $4.15-$4.16, $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 rallied again yesterday.

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 down $0.51 to $39.45/barrel at 12:30 AM EST, this morning.  March heating oil prices were down 2.07 cents to 1.1875/gallon.  March RBOB prices were down 0.47 cents at $1.0790.  March natural gas was down $0.026 to $4.210/mmBtu. 

Traders were selling oil futures last night, despite stronger equities quotes on Asian stock markets.  Once again, many traders returned to the sell side on fears that the problems with major banks will take time to resolve.

Colonial Pipeline once again has told those looking to push distillate up its pipeline from the US Gulf to the Northeast that it will allocate space because of heavy nominations.

Last night’s API report showed a tiny build in crude oil stocks of just 0.341 mln bbls, an unexpected build in distillate stocks of 1.760 mln bbls, and a drawdown in gasoline stocks of 0.898 mln bbls.  Refinery utilization dropped by 0.3%.  Implied gasoline demand came in at 9.218 mln bpd, while implied distillate demand measured in at 4.304 mln bpd.

Crude oil prices were lightly lower at one point yesterday, but they managed to finish near the session’s highs.  The bulls continue to buy themselves vital time.

Heating oil prices were lightly lower yesterday morning, but they never really threatened to fall beneath recently established support.  Prices settled near the day’s high.

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 Wednesday morning this week.

Category    Dow Jones    Bloomberg     Reuters

Crude           up 1.200        up 1.250          up 1.400 mln bbls

Distillate      dn 1.200        dn 1.200          dn 1.300

Gasoline      unchanged    unchanged      dn 0.100

Utilization   dn 0.1%         dn 0.1%           dn 0.1%

Distillate inventories have dropped in all of the last seven years, for an average drawdown of 2.600 mln bbls.  Gasoline stocks have declined in four of the last seven years, for a four-year average decline of 1.825 mln bbls and a seven-year draw of 0.529 mln bbls.  Crude stocks have increased in four of seven years, for a four-year build of 2.150 mln bbls, with a seven-year build of 0.729 mln bbls.  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 seven years, for a four-year average increase of 0.825%.  The seven-year average utilization figure has declined by 0.286% to 87.23%.

Traders will quickly look at crude oil stocks in this morning’s DOE report, where any draw would be supportive.

We still feel that the four-week aggregate demand figures are the most important numbers to be released today.

An Illustrated Look at Energy Market Factors

A Look at Long-Term Price Charts

It is difficult to construct long-term bullish scenarios from a quick glance at long-term charts.

Recommendations for Specific Market Segments