Market Review for Tuesday                  

RUDE oil prices broke and settled over the critical resistance at $48.55-$48.83, leaving only the resistance at $50.47 overhead as an impediment to a run higher.  A break and settle above $50.50 would give us a swing objective to $68.54/bbl.  Yesterday’s settlement over $59.00 was the highest settlement since December 1^st, 2008. 

Prices had trouble breaking over $50 yesterday, and they fell short of reaching that objective.  Nonetheless, we have an oil complex that seems to want to advance on any occasion that there is nothing specifically bearish happening.  When we do get bearish news, events or factors, prices sell off for a day or day and then quietly steal back towards higher levels.  This is typical spring activity.  Most events seem to get a bullish shine put on them and bearish factors cannot seem to sustain selling for very long.

If prices keep making new highs, news and wire services will start to highlight the bullish factors in this market, which are not as potentially overwhelming as the weak economy.  Opec’s decision not to cut output certainly could have been seen as a bearish factor, but prices bounced quickly after an initial reaction lower.

Yesterday’s hot-button item was the first increase in housing starts in eight months and a bump higher in producer prices, neither of which are likely to give the economy much of a shot in the arm.  Still, they are not bearish and that is a change.   

Traders were also encouraged by continuing strength on the DJIA, and that seemed to highlight a sense that the recession may be trying to bottom out.  Options on futures also expired yesterday, and the sellers of the $50 put seem to have been keen to get it to expire as near worthless as possible.  Writers of the $45 call also seem to have had an interest in yesterday’s contest, but lost their part of the battle, earlier in the session, apparently.

Technicals

           The oil complex made some key advances yesterday. With crude oil taking over the promontory above $48.85, which had stared down on every failed attempt to get above $48.00.  A further consolidation followed by a successful assault on the critical resistance at $50.45-$50.50 would confirm objectives to $68.54.  Gasoline prices also had a successful breakout yesterday, and they now seem headed towards objectives to 148.75, 161.03 and 168.85.  Heating oil prices need to break over resistance up to 130.60 to further their bullish intentions. 

Dollars per barrel

Above:  Crude oil prices are curling higher from a triple bottom.  Below:  Gasoline made new three-month highs.

Cents per gallon

April crude oil now has buy-stops over $49.82, $50.47, $54.62, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $46.53, $43.62, $42.50, $42.00, $41.00, $39.40, $37.65, $36.91, $34.13, $33.55, $32.40 & $30.00.  April heating oil has buy-stops over 128.75, 130.57-130.70, 134.20, 140.85, 142.32, 144.00, 148.65, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 119.00, 114.30, 112.50, 109.80, 104.55, 95.95, 94.50, 90.50 & 81.50.  April RBOB has buy-stops over 143.00, 144.21, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 135.10, 130.60, 124.00,  121.50, 118.25, 116.50, 107.90, 102.30, 98.70, 96.69, 90.10, 89.78, 85.45, 83.52, 79.50, and 78.50.

Football: The bears lost 18 yards on fourth and 60 to go.  It is now the bulls’ ball, first down, ten yards to go.

Technical Support & Resistance

Oil Inventory Reports

    This week’s DOE figures are likely to show another build in crude oil stocks, at least according to the historical pattern over the last seven years, in six of which we had stock builds.  Refined products stocks, on the other hand, have had stock draws in all seven years.   We have had stock builds over the last three weeks in distillate stocks, so we have to reconcile the seven-year trend with the recent one.  Gasoline stocks have been following the historical trend this year, so we have both recent and established patterns working in favor of a drawdown in gasoline inventories.  Utilization should still trend lower.

   Distillate stocks are now 30.0 million bbls, or 26.00%, higher than a year ago.  Heating oil inventories are 7.7 mln bbls, or 25.58%, higher than they were a year ago.  Gasoline stocks are 19.2 million bbls, or 8.29%, lower.  Crude oil stocks are now 47.9 million bbls, or 15.79%, higher than a year ago.  Residual stocks are 0.8 mln bbls (2.05%) lower than a year ago, jet fuel stocks are up 1.9 mln bbls, (4.79%) higher than a year ago.  Utilization is 2.3% lower than a year ago and is 4.71% below the seven-year average and 6.20% 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 7,335 contracts on Monday, when prices were higher.  That looks like short-covering and is negative, technically. 

      Heating oil open interest grew by 710 contracts on Monday, when prices were higher.  That looks like new buying, which would be supportive.

      RBOB open interest rose by 1,496 contracts on Monday, when prices were higher.  That looks like new buying and is constructive.

      Natural gas open interest grew by 2,748 contracts on Monday, when prices were lower.  That looks like new selling and is bearish.

Monday’s Open Interest Changes:

Crude 1,215,874  dn 7,335        Heat 268,527   up 710       RBOB 201,853  up 1,496        Nat gas 658,282  up 2,748        

CFTC Commitments of Traders  (for the period ended Tuesday, Mar 10th)  

As of Mar 10th:                             Long                   Short:

Crude oil                   197,055               203,070                           -contracts held by speculators:  1.03 short

                                           641,564               648,468                               held by the trade

                                             73,812                 60,893                               held by small specs and hedgers.

Spreads….up 10,580 contracts   The ratio went from 1.23-to-one long to 1.14-to-one long in the last report.

   Large speculators liquidated 17,247 long contracts and covered 11,764 shorts over the week under review.  Commercials added 27,654 longs and added 38,359 shorts.  Small specs and hedgers liquidated 2,458 longs and covered 18,646 shorts.  Open interest grew by 18,529 contracts as prices rallied $4.06/barrel.  That looks like strong new buying, which came heavily from commercial accounts.  Both large and small speculators were selling, both longs and new shorts.

   The average large speculator has 2,559 long contracts (77 accounts), or 224 less contracts on average on the same number of accounts, and 1,829 shorts (111 accounts), or an average of 179 contracts less on four more accounts.  Commercials held 7,638 longs (84) or 416 more longs on average on one less account, and 6,973 shorts (93), or 341 more shorts on one more account. Reportable positions held 4,305 longs (264) or 2 fewer contracts on five more accounts, and 4,257 shorts held by 270 accounts, or 122 more contracts on average on one more account.  The longs are being held by only marginally stronger hands.

Heating oil                 27,405                 18,068                           - contracts held by speculators:  1.52 to 1 long

                                           160,196               178,899                              held by the trade.

                                             41,419                 32,053                               held by small specs and hedgers.

Spreads….up 338 contracts.    The ratio of large speculative longs to shorts went from 1.20-to-one to 1.52-to-one in a week.

       Large speculators liquidated 753 longs and cover 3,249 shorts.  Commercial accounts liquidated 3,059 longs and added 1,785 shorts.  Small speculators and hedgers added 4,066 longs and added 1,718 shorts.  Open interest grew by 592 contracts as prices rallied 1.91 cents. That looks like light, net new buying on a price rise, which would be constructive.

       The average large speculative long is holding 1,096 contracts (down 128 lots on 25 accounts, two more accounts), while the average short has 903 contracts (up 50 lots on 20 accts, down five accounts).  The average commercial long is holding 2,762 contracts (up 41 lots on 58 accts, down two) compared to the average short holding of 2,982 contracts (up 125 lots on 60 accts, down two).  The average reportable position is 2,109 long (up 7 lots on 102 accts, down 2) while the average short holding is 2,201 (up 112 lots on 102 accts, down six).  The reportable category has lost 41 short accounts in four weeks.

Rbob Gasoline          57,181                   6,053                          -contracts held by speculators:  9.44 to 1 long

                                           110,862               164,319                             held by the trade.

                                              14,854                 12,525                              held by small specs and hedgers.

Spreads…up 3,434 contracts   The ratio of large speculative longs to shorts went from 4.26-to-one to 9.44-to-one in 2 weeks.

     Large speculative holdings grew by 427 longs and fell by 235 shorts over the latest week. Commercial holdings grew by 11,061 longs and grew by 11,025 shorts.  Small speculators and hedgers’ positions fell by 531 longs and grew by 167 shorts.  Open interest grew by 14,391 contracts as prices dropped 2.22 cents.  That looks like new selling, which would be bearish.  Commercials were buying aggressively into the advance during this seven-day period. 

   The average holdings are 986 contracts for each large speculative long (58) and 336 for each large speculative short (18).  The average commercial long now has 1,630 contracts long (68) and 2,080 short (79). Average reportable holdings are 1,252 long (144) against 1,405 short (130).  Reportable accounts decreased their average long holdings by 20 contracts and boosted their average short holdings by 13 contracts, on 14 more long accounts and nine more short accounts.  Commercial accounts upped their long holdings by 20 and their shorts by 140 on six new long accounts and the same number of short accounts.

Naturalgas                74,242               188,306                           -contracts held by speculators:  2.54 to 1 short

                                           254,721               176,621                               held by the trade.

                                             76,141                 40,177                           held by small specs and hedgers.

Spreads…dn 1,805 contracts    The ratio of large speculative shorts to longs went from 3.13-to-one to 2,54-to-one in 2 weeks.

  Large speculative holdings added 8,071 new longs and covered 5,599 shorts over the latest week. Commercial accounts liquidated 11,088 longs and added 8 shorts, and small speculators and hedgers liquidated 1,977 longs and added 597 shorts.  Open interest fell by 6,799 contracts as prices dropped $0.442/mmBtu.  That looks like long liquidation and is supportive in its own way.  Commercials liquidated just over 11,000 contracts.  Large speculators bought a good proportion of those liquidated contracts, but the motivation or movement came from commercials urgently looking to get out of losing long holdings.

   The average large speculator has 1,428 contracts (52) while each large speculative short is holding 2,414 shorts (78).  The average commercial long now has 3,184 contracts long (80) and 2,717 short (65). Average reportable holdings are 3,178 long (187) long and 3,521 short (179).  Reportable positions dropped by 114 contracts for each average long and fell by 165 contracts for each average short.  There were five more long accounts and six more short accounts in the reportable category.

Natural Gas & Utility Generation

April natural gas prices were lower yet again yesterday, in a continuing disregard of stronger equities and oil prices.  It is not as if natural gas prices had been following either equities or oil prices, but when those two have been consistently strong or weak, gas traders have tended to notice, at least after a few days.  That has not been happening very much, though, recently, and gas prices have fallen to new lows in relation to oil prices.  Yesterday, the ratio of crude to gas stood at 12.90-to-one, its largest multiple since October 9^th last autumn.  Natural gas prices are following their own tune.

Nothing really new happened yesterday.  Temperature forecasts remain mostly mild, underground storage supplies remain ample for needs – and those needs show no sign of being likely to rebound soon in response to lower prices.  That stands in marked contrast to this market’s oil homonym (gas-oline), which does seem to have had consumption stimulated by the sharp reduction in costs.  At some point, demand should improve at lower prices, at the same time that output should start to fall because of them. Until there is a sign of either of these reactions being drawn into the present, though, they remain in the future.

At some point, prices will have worked their special blend of compensation on supply and demand, but traders seem to be thinking that hot weather and hurricanes are more likely to arrive first.  And they seem pretty distant, right now.

In cash trading yesterday, Henry Hub prices were at $3.75-$3.81, down $0.04 and up $0.01 (DJN).  SoCal prices were at $2.92-$3.04, down $0.10-$0.12 on the day.  El Paso Permian prices were down $0.00-$0.08 at $2.55-$2.65.  Katy prices were down $0.01-$0.07 at $3.43-$3.55.  Waha prices were up $0.01 and down $0.08 at $2.54-$2.67.  Transco 6 was down $0.07-$0.07 at $4.11-$4.18/mmBtu. 

Palo Verde prices were last quoted at $28.25-$29.00/mwh.  Northeastern prices last traded at $31.50-$41.00.  Entergy was last at $27.00-$28.00.  Ercot was last at $28.25-$30.00/mwh. 

The pace of decline has had to slow, at least in absolute terms, strictly because drops of a half dollar or a dollar are really no longer feasible on any regular basis.  Prices seem to have found a new rhythm, which includes making new lows, rallying and then falling again.  Prices move sideways for a while, allowing sell-stops to accumulate below significant lows and then they get broken after a time.  Fundamentally, we are following the rail-tracks of the succeeding seasons, and we are now about to enter shoulder months. 

We have outlined this market’s best hopes, which are little more than the bears running out of steam, becoming overconfident or just too numerous.  Time will mend the broken fundamentals of supply and demand, as lower prices work their cyclic pressures, but we expect that time to be well into the future.  In the meantime, we simply have to wait for one of the dynamics outlined above to work their way upon prices.  This is a bear market.  After dropping almost $10/mmBtu, though, one has to know that the big moves on the downside  are behind us.  It is just a matter of time before the market’s internal dynamics burn out on the downside.  There is no sign of that being imminent.

Support is at $3.75-$3.77, $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 $3.94-$3.96, $4.03-$4.05, $4.14-$4.16, $4.25-$4.28, $4.33-$4.35, $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 were slightly lower yesterday.

Dollars per million Btu

EIA Weekly Storage Figures

Last week’s EIA report showed a draw of 112 bcf on expectations for draws of 103-104 bcf.  Stocks are now 271 bcf higher than a year ago, against a surplus of 270 bcf a week ago, a surplus of 233 bcf two weeks ago and a surplus of 177 bcf three weeks ago.  Stocks are now 19.22% higher than a year ago.  They are 197 bcf and 13.27% above the five-year average.

For this week, our five-year average was for a drawdown of 45.2 bcf.  Our seven-year average is a draw of 51.6 bcf.  Last year, we had an unrevised drawdown of 85 bcf.  The year before had a build of 17 bcf.

EIA Report

News & Views

In trading on Globex, April crude oil prices were down $0.54 at $48.62/barrel at 2:30 AM EDT, this morning.  April heating oil prices were down 0.47 cents to 1.2700/gallon.  April RBOB prices were down 1.19 cents to $1.4119.  April natural gas was up $0.019 to $3.831/mmBtu. 

Traders were selling crude oil futures last night and early this morning in reaction to the latest API report, which showed an unexpectedly large increase in crude oil inventories.  That doubles the bet on this morning’s DOE figures.  If they should somehow show less of a build or a draw, prices will surge higher, given recent strength.

Last night’s API report showed an unexpectedly large build in crude oil inventories, of 4.655 million barrels.  Distillate stocks were up 327,000 barrels and gasoline stocks gained 383,000 barrels.  Implied gasoline demand came in at 9.451 million bpd, while distillate implied demand was 4.113 million bpd.  Traders reacted to this report bearishly because the API has given us a fairly decent look ahead to the DOE numbers over the last two weeks or so.

Crude oil prices had their highest settlement since December 1^st, and all that remains between existing prices and a decisive breakout with an objective to $68.54 is a settle over $50.50.

Heating oil prices settled at their highest level since February 26^th, which is not as great a deal as other contracts.  Still, a break and settle over 130.57 would be bullish.

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 1.000        up 1.000          up 1.000 mln bbls

Distillate      up 0.700        up 1.000          up 0.700

Gasoline      dn 1.200        dn 1.550          dn 1.200

Utilization   unchanged    unchanged      up 0.1%

Over the past seven years, refinery utilization averaged 87.71%.  In the four years prior to Hurricanes Katrina and Rita, refineries ran at an average of 89.30%.  Distillate stocks have fallen in each of the last seven years, for an average draw of 1.816 million barrels.  Gasoline stocks have declined in each of the last seven years, for an average draw of 2.478 million barrels.  Crude oil stocks were higher in six of the last seven years, for a six-year average build of 2.139 million barrels.  The seven-year average is a build of 1.648 million barrels.  Crude oil imports have been lower in three of the last five years, which gives us an average decline of 227,000 bpd and an average import figure of 9.797 million bpd over five years.

Last night’s API report sets the bulls up with something of a free shot.  If we get a build in line with the API numbers, it will be bearish, but discounted.  Anything bullish, though, will really get prices to run on the upside, at least at first.

An Illustrated Look at Energy Market Factors

A Look at Longer-Term Charts

Heating oil prices had their best finish yesterday since February 26th.

Gasoline prices had their strongest settlement since November 5^th, 2008.

Crude oil prices had their strongest settle since December 1^st, 2008.

Recommendations for Specific Market Segments