Market Review for Wednesday 

HE oil markets were lower overnight, in reaction to this week’s API report, and they remained in negative territory after yesterday morning’s DOE report.  All three widely-followed inventory figures (crude, distillate & gasoline) were higher this week, and the distillate year-on-year surplus jumped by 2.3 million barrels while the gasoline year-on-year deficit dropped by 6.0 million barrels.  The crude surplus fell 600,000 barrels.

While the report was seen as being bearish, with increases in inventories and a general deterioration in the four-week demand aggregates, the oil complex was remarkably resilient yesterday, and prices gradually ate into the day-to-day losses from the release of the figures into the afternoon.  By the final bell, crude oil prices were down roughly a dollar a barrel … although the buying did not stop with the end of open-outcry trading. 

 After the bell, oil traders had their bullish spirits buoyed by equities which, in turn, were bolstered by the Fed.  By 3 PM, the DJIA was higher, reaching net gains of 20% since March 5^th, which is a remarkable recovery in a very short period of time.  The Federal Reserve will be injecting $750 billion into mortgage securities and about $300 billion in longer-term treasury bonds.  The Fed also decided to keep Fed Funds at their current target rate near zero. 

The dollar did not respond well to everything, although that could end up working out for oil buyers.  The US dollar looks very heavy on the charts, and it seems to have constructed a significant double top.  If oil prices start again to take a cue from the dollar, the more likely course, charts suggest, would be higher (for oil) from here.  Oil prices don’t have to follow the euro or equities, but they do seem to have preferred having company on their major moves over the last two years. 

Technically, crude oil prices still have major resistance at $50.47.  A break and settle above that would point to $68.54/bbl.

Technicals

           Oil prices were lower yesterday, with gasoline leading the complex lower.  Still, prices did not finish near the day’s lows – although they failed to finish near the highs, either.  And, then, of course, there was the activity on Globex early yesterday afternoon.  There is no time-out in this market.  With the gains posted through last night, the oil complex seems poised to make an assault upon the major resistance at $50.47 in crude.  Gasoline needs to keep making new highs, in this next case over 143.00.  It has objectives to 148.75, 161.03, and then 168.85.

Dollars per barrel

Above:  The crude contango has not jumped as in previous expiries.  Below:  It has remained flat for almost the full month.

Cents per gallon

April crude oil now has buy-stops over $49.87, $50.47, $54.62, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $46.92, $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 130.05, 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 123.20, 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 133.55, 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 bulls lost 10 yards yesterday on first down, making it second and 20 to go, now.

Technical Support & Resistance

Oil Inventory Reports

    This week’s DOE figures showed builds across the board and they showed demand starting to slip back, after a brief period of what appeared to be minor strengthening.  Gasoline stocks were up considerably more than expected (draws were expected) and crude oil stocks were also up by more than the consensus of estimates.  Distillate inventories increased slightly, but they increased the year-on-year surplus by 2.3 mln bbls, or by 2.53%.  With the big build in gasoline stocks, the year-on-year deficit went from 19.2 million bbls (8.29% lower) to 13.2 mln bbls (5.77%) lower. 

   Distillate stocks are now 32.3 million bbls, or 28.53%, higher than a year ago.  Heating oil inventories are 8.6 mln bbls, or 30.50%, higher than they were a year ago.  Gasoline stocks are 13.2 million bbls, or 5.77%, lower.  Crude oil stocks are now 47.3 million bbls, or 15.46%, higher than a year ago.  Residual stocks are 2.4 mln bbls (6.15%) lower than a year ago, jet fuel stocks are up 0.9 mln bbls, (2.29%) higher than a year ago.  Utilization is 1.7% lower than a year ago and is 5.61% below the seven-year average and 7.20% 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 18,761 contracts on Tuesday, when prices were higher.  That looks like heavy, pre-expiration short-covering and is negative, technically. 

      Heating oil open interest fell by 743 contracts on Tuesday, when prices were higher.  That looks like short-covering, which would be negative.

      RBOB open interest rose by 3,402 contracts on Tuesday, when prices were higher.  That looks like new buying and is constructive.

      Natural gas open interest grew by 4,250 contracts on Tuesday, when prices were lower.  That looks like new selling and is bearish.

Tuesday’s Open Interest Changes:

Crude 1,197,113  dn 18,761        Heat 267,784   dn 743       RBOB 205,255  up 3,402        Nat gas 662,532  up 4,250     

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 dropped to their lowest levels yesterday since September 25, 2002, almost six-and-a-half years ago.  Market observers felt that natural gas prices were influenced by weaker oil quotes, according to Dow Jones, but we have not seen a very tight correlation between the two markets over the recent term.  And, if there has been a strong influence, it has been almost completely restricted to moves on the downside. 

It strikes us as being just as likely that prices were falling on the same influences that have brought them this far already.  The limited amount of winter left, ample supplies (both from daily production and from underground storage supplies), and a lack of industrial demand have been consistently bearish influences in this market.  They certainly played a role yesterday.

There is no escaping yesterday’s decline in oil prices and, to the extent that that may have been a factor, their retreat certainly exposed a flank in this market.  Regardless of the more compelling reasons, yesterday’s decline was one of a number of days with natural gas prices in retreat.  With expectations for today’s EIA underground storage numbers to come in between 47 bcf and 5 bcf lower (median of 24 bcf, average of 25 bcf, according to Bloomberg), it seems unlikely that storage will decline in relation to the five-year average drawdown of 61 bcf, according to the EIA, or of 45.2 bcf, according to our reports.

Cash prices were mixed yesterday, and physical traders were reacting partially to Tuesday’s moves in futures, partially to regional temperature forecasts and then there was profit-taking on other pipelines. 

In cash trading yesterday, Henry Hub prices were at $3.72-$3.80, down $0.01-$0.03 (DJN).  SoCal prices were at $2.91-$3.00, down $0.01-$0.04 on the day.  El Paso Permian prices were up and down $0.02 at $2.53-$2.67.  Katy prices were down $0.10-$0.10 at $3.33-$3.45.  Waha prices were up $0.02-$0.03 at $2.56-$2.70.  Transco 6 was up $0.02-$0.07 at $4.13-$4.25/mmBtu. 

Palo Verde prices were last quoted at $28.40-$29.75/mwh.  Northeastern prices last traded at $31.50-$42.00.  Entergy was last at $28.00-$29.50.  Ercot was last at $28.00-$29.50/mwh. 

Dow Jones estimates that there will be a draw of 28 bcf in today’s report, which would be well below last year’s draw of 85 bcf.  As noted above, the five-year average is a draw of 61 bcf.  As a result, even a draw that comes in twice the size of expectations will leave storage figures swollen again on the surplus side.  It will be difficult for even a relatively bullish report to be actually all that bullish.

We keep asking ourselves how this bear move is going to end, and we keep coming back to the same answer.  It will end the way most plane flights do – with everyone eying the baggage racks, hands on their seat-belt buckles, ready to pop them and spring up, in fear that one might be the last one left, stuck in a window seat with no chance of getting their carry-on baggage till the elderly with canes have deplaned.  We just don’t see any other way.  We need to keep an eye on trading for signs of traders prematurely releasing their seat-belts or getting their carry-on luggage in position before the “Fasten Seat Belts” sign starts flashing for the last time.  There is no printed schedule, here, and no captain with an intercom.  We have to watch for signs.

Support is at $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 $3.85-$3.87, $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 made new 6½ year lows 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.  Estimates are for a drawdown of 24-28 bcf (Dow Jones & Bloomberg).

EIA Report

News & Views

In trading on Globex, April crude oil prices were up $2.25 at $50.39/barrel at 7:30 AM EDT, this morning.  April heating oil prices were up 7.42 cents to 1.3382/gallon.  April RBOB prices were up 4.58 cents to $1.4115.  April natural gas was up $0.004 to $3.688/mmBtu. 

Oil prices really shot higher between midnight and 8 AM this morning, while most American traders were sleeping or were away from active trading environments.  Crude picked up $1.25/bbl during this period, while heating oil gained nearly five cents a gallon and gasoline added roughly three cents. 

Asian equities were generally higher as a result of the Fed’s aggressive $1 trillion buying program of mortgage and treasury securities.  The strength was tempered by stronger Asian currencies, which make their exports more expensive in the US.  Dollar weakness was one of the very powerful factors in boosting oil prices overnight, as oil traders noted the actions of its two closest traveling companions over the last two years. 

Crude oil prices sold off yesterday, but are back with a vengeance this morning.  A breakout over $50.50 would give us an objective to $68.54.

Heating oil prices need a settlement over 130.57 today to keep the momentum higher going.  Overnight activity suggests that we can see that today. 

This week’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 API gasoline demand came in at 9.451 million bpd, while API implied distillate demand was 4.113 million bpd. 

On the DOE side of the ledger, total refined products demand, averaged over the last four weeks, came in at 19.122 million bpd, down 3.23%.  A week ago, it was down 2.15%; two weeks ago, it was down 1.34%.  Four-week gasoline demand is at 9.035 mln bpd, up 1.07%, compared to up 1.59% a week ago and up 2.17% two weeks ago.  Four-week distillate demand is now at 3.814 mln bpd, down 9.28%, compared to down 6.07% a week ago and down 4.50% two weeks ago.  Four-week jet fuel demand is now at 1.436 mln bpd, down 6.45%.  Four-week residual fuel demand is at 0.504 mln bpd, down 10.0%.  Four-week propane demand is at 1.411 mln bpd, unchanged against a year ago.  The year-on-year surplus in distillate went from 30.0 mln bbls (26.0%) to 32.3 mln bbls (28.53%).  In gasoline stocks, the deficit dropped from 19.2 mln bbls to 13.2 mln bbls (5.77%).  The crude oil surplus went from 47.9 mln bbls to 47.3 mln bbls (15.5%).

Higher equities and weaker US dollar values have helped push crude oil prices to the launching pad just beneath major resistance at $50.50.  It may be hard to break today, but it looks like an assault on that level is coming soon.

An Illustrated Look at Energy Market Factors

A Look at the Dollar-Euro

Dollar-Euro: One-Year Chart

The US dollar sold off sharply yesterday, and it seems to have built a very persuasive double top, here.  We expect the dollar to continue weakening towards the 67-69 euro cent area. 

Source:  http://www.advfn.com/p.php?pid=forexqkchart&curcode1=USD&curcode2=EUR

A Look at the DJIA

Dow Jones Industrial Average

Source: http://money.cnn.com/quote/chart/chart.html?symb=djia&sid=1643&time=2mo&Submit1=Refresh

A Look at Gasoline Supply & Demand

Implied demand is substantially above listed demand – more than normal.

Thirteen-week average demand is at 8.904 mln bpd, down 2.27% against a year ago.  Thirteen-week supply is at 9.872 mln bpd, down 0.64%.  Thirteen-week implied demand is at 9.745 mln bpd, up 1.13%.  Implied demand looks like it has bottomed and is headed higher in relation to year-ago levels.

A Look at Distillate Supply & Demand

Distillate implied demand follows listed demand much more closely in distillate than in gasoline, which is another mystery in these figures, which we have checked and rechecked.

-week average demand is at 4.074 mln bpd, down 6.20% against a year ago.  Thirteen-week supply is at 4.577 mln bpd, up 4.79%.  Thirteen-week implied demand is at 4.415 mln bpd, down 2.60%.

A Look at Refinery Fundamentals

Utilization is 1.7% lower than a year ago and is 5.61% below the seven-year average and 7.20% below the four-year, pre-hurricane average. 

Recommendations for Specific Market Segments