Market Review for Wednesday            

IL prices shot higher yesterday in the fifth biggest one-day gain in 2009.  Despite the four days with larger gains, this one seemed to have a much more solid feel to it, and it did not seem like a short-covering ‘flash-in-the-pan.’  That does not mean that it will follow through on its own promise, but it was certainly an auspicious looking start to a move higher, which is what it appears to be on the charts.

Tuesday night’s API report got the small build in crude oil stocks correct, but it overstated the build in distillate stocks and substantially underestimated the drawdown in gasoline stocks.  Both of those miscalculations left traders open to a need to buy in the event yesterday, when the DOE statistics showed the smaller build in distillate and the much-larger drawdown in gasoline stocks.

In fact, one now does need to worry, at least to some small degree, about the supply this summer of gasoline.  And, that is before entering into any conversation of having the right specification material in the right places.  Gasoline stocks were drawn down by 3.4 million bbls, or by 485,714 bpd last week.  That gives us an implied demand figure of 10.227 million bpd, which is incredibly strong for a weak economy in February, which is an off-month for driving demand.  The reported demand figure of 9.010 million bpd was more in keeping with the season and the economy, but was still brisk, under the circumstances.  And it helped to give us a four-week gasoline reported demand figure of 8.985 mln bpd, which would be up 1.72% against the same aggregate average seen one year ago.  That makes the year-to-year deficit of 17.6 million barrels in gasoline stocks (7.56%) more imposing a figure than it would have been in a lower-consumption environment.  This week’s DOE report was clear: Gasoline demand is making a comeback at a very unlikely time of year in a very unlikely year.  That is significant.

Technicals

           The oil complex had a very solid day yesterday on the charts.  Crude oil had its fifth largest one-day advance so far this year, and prices now seem to have left the major support at $32.40-$33.55 behind.  Of course, a successful counterattack by the bears could change that, but right now, it does seem that the bulls have bought time and achieved gains that will serve them well if they plan to launch a major offensive with the spring seasonal tendency for higher refined products prices. 

Cents per gallon

Above:  Gasoline prices have built a good foundation for a rise.  Below:  Gasoline is gaining on heating oil.

Cents per gallon

April crude oil now has buy-stops over $42.83, $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 $39.40, $37.65, $36.91, $34.13, $33.55, $32.40 & $30.00.  March heating oil has buy-stops over 125.75, 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 118.00, 116.24, 113.59, 109.80, 104.55, 95.95, 94.50, 90.50 & 81.50.  March RBOB has buy-stops over 117.75, 122.40, 126.25, 133.75, 135.07, 144.21, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 107.90, 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 25 yards on fourth and 16, yesterday, which pulled it out for them.  They have another first down.

Technical Support & Resistance

Oil Inventory Reports

      This week’s DOE report showed an unexpectedly large drawdown in gasoline stocks, which are now 7.56% lower than a year ago.  The biggest change in the gasoline market has been the increase in demand, with four-week demand now 1.72% higher than a year ago, at 8.985 million bpd.  Distillate stocks were higher, which makes it the first build in eight years, and it leaves distillate inventories 16.73% above where they were a year ago.  That is poor, given cold temperatures this season.

   Distillate stocks are now 20.3 million bbls, or 16.73%, higher than a year ago.  Heating oil inventories are 1.8 mln bbls, or 5.32%, higher than they were a year ago.  Gasoline stocks are 17.6 million bbls, or 7.56%, lower.  Crude oil stocks are now 51.5 million bbls, or 17.18%, higher than a year ago.  Residual stocks are 2.5 mln bbls (6.43%) lower than a year ago, jet fuel stocks are even with a year ago.  Utilization is 3.3% lower than a year ago and is 5.83% below the seven-year average and 7.28% 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 grew by 8,794 contracts on Tuesday, when prices were higher.  That looks like new buying, and is supportive.   

      Heating oil open interest rose by 1,274 contracts on Tuesday, when prices were higher.  That looks like new buying, which would be supportive.

      RBOB open interest fell by 5,206 contracts on Tuesday, when prices were higher.  That looks like short covering, which would be negative.

      Natural gas open interest fell by a whopping 60,501 contracts on Tuesday, when prices were higher, which suggests massive short covering, which would be bearish.  It is possible that long-term shorts were getting out, leading into expiration. 

Tuesday’s Open Interest Changes:

Crude 1,179,171  up 8,794        Heat 259,123   up 1,274     RBOB 188,086  dn 5,206       Nat gas 688,701   dn 60,501    

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 lower yesterday, as the March contract expired in a frenzy of long liquidation.  Part of yesterday’s weakness has to have been the result of so many ‘natural’ buyers exiting this market on Tuesday, in what seems to have been a tidal wave of short-covering.  On Tuesday, long-term large speculative shorts, some of whom would appear to have been short for up to two years, may have been buying back short holdings.  We say this because of the massive number of contracts apparently covered on Tuesday – more than 60,000 contracts.

We know that large speculators have been holding very large short positions for up to two years.  They have held on to these positions through two winters, a major bull market and two major hurricanes (Gustav and Ike).  That was unusual.  In any event, we do not yet know (we will not be able to tell until this Friday’s CFTC Commitments of Traders’ report is released) whether the 60,000 contracts covered included a large number of large speculators getting out of existing positions.  But, it would seem to make sense.  Someone was covering a huge number of contracts and was willing to push quotes higher to get filled in a market that has been weak for months, especially the last month.  It could have been commercial short-covering, instead, though.  In any event, we will know better tomorrow.  With that much buying gone, prices fell more easily yesterday.

Cash natural gas prices were mixed to lower yesterday.  Cash traders were still reacting to higher futures prices seen on Tuesday, but they did not have as strong a pull upwards on prices as one might normally have expected to have been the case.  There seems to have been decent selling to square books ahead of the end of this month. 

In cash trading yesterday, Henry Hub prices were at $4.16-$4.26, down $0.01-$0.05 (DJN).  SoCal prices were at $3.28-$3.40, down $0.05-$0.08 on the day.  El Paso Permian prices were down $0.02-$0.05 at $2.80-$2.92.  Katy prices were up $0.02-$0.05 at $3.68-$3.77.  Waha prices were down $0.03-$0.09 at $2.87-$3.07.  Transco 6 was down $0.22-$0.37 at $4.73-$4.90/mmBtu. 

Palo Verde prices were last quoted at $28.75-$30.00/mwh.  Northeastern prices last traded at $37.50-$44.00.  Entergy was last at $29.50-$30.00.  Ercot was last at $32.00-$33.25/mwh. 

The next big factor in this market will be today’s EIA report, which is expected to show a drawdown of 105 bcf, according to surveys conducted by Dow Jones and by Bloomberg. Last year, on the same Friday, there was a drawdown of 151 bcf.  On the same date, according to Dow Jones, there was a pull of 157 bcf.  We agree that the five-year average was a draw of 145 bcf.  Bloomberg had a range of estimates for draws between 90 and 131 bcf. 

No matter which way one slices it, it seems next to impossible that we should see anything but a bearish report this morning.  Our considered opinion is that the report will once again fall short of expectations, and the probability, based on this market’s recent history, would seem to suggest that we could be for a major disappointment. 

Support is at $3.99-$4.01, $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, and $5.99-$6.00. 

Natural gas prices sold off 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.  Expectations for today’s report center on an average draw of 105 bcf.  Bloomberg estimates range between draws of 90 and 131 bcf.

EIA Report

News & Views

In trading on Globex, April crude oil prices were up $0.50 to $43.00/barrel at 5:30 AM EST, this morning.  March heating oil prices were up 1.46 cents to 1.2523/gallon.  March RBOB prices were up 0.82 cents at $1.1749.  April natural gas was up $0.026 to $4.074/mmBtu. 

Oil futures were steady in trading overnight as Asian traders reacted to yesterday’s gains.  Most tellingly, they did not repudiate them and send prices crashing back below $40.00.  Of course, traders in New York could well decide that that is what they want to do here, when prices open on the Nymex.  We think that prices will hold at their new, higher levels, but this market has been full of disappointments recently. 

Continuing economic weakness, the plight of some household names among banks, concerns over automakers and a strong dollar are all factors that could send prices tumbling back.  The large drawdown in gasoline stocks, its growing stock deficit against a year ago and surprising resilience in consumption figures are working for the bulls.

Crude oil prices were higher yesterday and the settlement was relatively strong, near the day’s highs.  There is resistance at $42.68 and at yesterday’s high of $42.83, then at $43.44-$43.60.

Heating oil prices were higher yesterday by enough to give the support underneath a stronger look and feel, although this remains the weakest member of the complex right now.

This week’s API report showed a build in crude oil stocks of 0.341 mln bbls, a 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.

DOE demand figures changed quite a bit from last week’s figures.  Refined products supplied went from down 0.10% a week ago to down 0.83% in this week’s figures, with the four-week average coming in at 19.723 million bpd.  Four-week average gasoline demand is now up 1.72% against a year ago, coming in at 8.985 million bpd.  A week ago, aggregate gasoline consumption was up 0.76%, so this represents a big increase in the last week.  Four-week distillate demand came in at 4.171 million bpd, down 1.58% against the same aggregate a year ago.  Last week, it was up 0.26%.  Four-week jet fuel consumption was 1.303 mln bpd, down 15.39%.  Four-week residual fuel use was up 5.58% to 0.624 mln bpd.  Four-week propane consumption was down 0.71% to 1.530 mln bpd. 

A larger-than-expected stock draw, a growing deficit against a year ago, seasonal maintenance at refineries, and surprisingly strong demand are all working in favor of stronger gasoline quotes. 

An Illustrated Look at Energy Market Factors

A Look at Crude Oil Contango Levels

Last Thursday’s first-to-second month contango was at 70 cents, its lowest since being in backwardation on November 20^th.  Having said that, we must note that there has been a very consistent pattern of seeing the highest spread values just before expiration, with the lowest values coming right after expiration.

Dow Jones noted yesterday that the big increase in prices yesterday left the first-to-fourth month contango at $4.40/bbl, which is the lowest it has been since December 2^nd.  The high reached in that spread was $15.21 on January 15^th, the story noted.  While there is no hard-and-fast, simple, direct historical correlation between contango and bear markets in oil, carrying costs have been at their widest during this market’s recent weakness.  Textbooks traditionally describe backwardation as a phenomenon seen in tightly supplied markets.  Without putting too fine a point on it, it would be fair to say that contango has been more commonly associated with weaker trends in oil prices.  It is much truer in grains markets, though, historically, than in oil markets, where we have seen contango exist in upward trending markets.  The recent contango has been really sloppy, and has described weakness.  A tightening here would seem to represent a firming in the underlying market.

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