Market Review for Thursday    

IL markets received a sharp boost in trading overnight on Wednesday and into Thursday morning.  By the time that traders reached their offices in New York and elsewhere in the US, the oil price had already changed, dramatically higher. 

The new thinking (as of Wednesday afternoon) has the Fed and other global central bankers taking strong and aggressive measures to boost national, regional and the global economies.  Yesterday, most commodities prices were higher, and traders pointed at the Fed’s actions on Wednesday, recovering equities (not specifically yesterday, but over the last two weeks or so, in general) and a weakening US dollar as key inputs behind the strength.

Crude oil prices settled above $51.00 yesterday, and that gives us a clear technical breakout over the prior resistance at $50.47.  The breakout gives us a measured move objective to $68.54.  That comes from a measured move using the low of $32.40 to the breakout point.  We have to expect to encounter resistance at a number of levels before we reach that (if we actually do).  This ties in nicely with the March-to-May seasonal tendency for prices to advance.

 Some observers are now talking in terms of ‘the commodity sector being back in play.’  They note that monetary aggregates have ballooned dramatically in recent months as financial leaders have been forced to fight recession at the expense of potentially stoking inflation.  The markets feel differently now than they did a month ago, when crude tested the low $30’s.

We would feel premature by saying that the bear market in oil has ended completely.  Often, we see a strong rally followed by a test of major lows (or highs) six or 12 months later.  That would not surprise us here.  We could see a test of $32.00 at some future point; we just don’t see it happening over the remainder of the first half of 2009.

Technicals

           The energy complex advanced yesterday across all contracts, with even distant months in heating oil and natural gas prices up on the day.  Crude oil prices settled above $50.47, which gives us a measured move objective to $68.54.  Heating oil prices broke over 130.57 and now seems headed towards 148.60.  Gasoline reinforced its recent breaks and is well on its way to objectives to 148.75, 161.03 and 168.85.  The trends are now all clearly pointed higher.  Prices are even overbought, here, for the first time in a long time. 

Cents per gallon

Above:  Heating oil prices broke above 130.57 convincingly yesterday.  Below:  Carrying charges have improved in heat.

Cents per gallon

May crude oil now has buy-stops over $53.00, $54.62, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $49.50, $48.75, $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 138.55, 140.85, 142.32, 144.00, 148.65, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 127.95, 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 146.55, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 137.50, 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 gained 35 yards yesterday on second and 20, giving the bulls another set of downs.

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 8,669 contracts on Wednesday, when prices were lower.  That looks like long liquidation and is supportive.    

      Heating oil open interest fell by 1,230 contracts on Wednesday, when prices were lower.  That looks like long liquidation and is constructive.  It could represent profit-taking or position-paring.

      RBOB open interest rose by 306 contracts on Wednesday, when prices were lower.  That looks like new selling and is bearish.

      Natural gas open interest fell by 1,353 contracts on Wednesday, when prices were lower.  That looks like long liquidation and is supportive. 

Wednesday’s Open Interest Changes:

Crude 1,188,444  dn 8,669        Heat 266,554   dn 1,230       RBOB 204,949  dn 306        Nat gas 661,179  dn 1,353        

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 registered this market’s largest one-day gain since November 26^th, 2008.  It cam out of the blue and seems to have been a part of the bigger round of strength in a number of commodities.  There was also a slightly larger-than-expected drawdown in natural gas stocks, but yesterday’s steep advance was way beyond the scope of this week’s EIA underground storage figures.  Prices rallied a stunning 13% yesterday, just shy of half a dollar.

Yesterday’s advance is much more likely to have been tied into the very strong moves in oil and in gold.  And both of these moves were connected to Wednesday’s trillion dollar liquidity injection by the Federal Reserve.  A number of observers have focused on the monetary aspects of recent stimulus measures, and they see inflation as a growing threat.  That perception seems to have been behind much of yesterday’s broad-based buying activity in commodities contracts.

This week’s EIA report showed a drawdown of 30 bcf on estimates for a draw of 24-28 bcf, according to newswire surveys.  It was a bigger draw than expected, but we still have a surplus of 326 bcf (24.6%) against a year ago and 228 bcf (16.02%) against the five-year average.  It was hardly as bullish as the response and it is far from capable of sustaining any advance longer-term. 

Cash prices were mixed yesterday, although the trend was clearly pointed higher by the end of yesterday’s physical trading session.  We have to expect to see cash prices much stronger today.    

In cash trading yesterday, Henry Hub prices were at $3.64-$4.00, down $0.08 and up $0.20 (DJN).  SoCal prices were at $2.90-$3.00, down $0.00-$0.01 on the day.  El Paso Permian prices were down $0.05 at $2.53-$2.62.  Katy prices were down $0.02 and up $0.20 at $3.31-$3.65.  Waha prices were up $0.03-$0.05 at $2.61-$2.73.  Transco 6 was down $0.00-$0.06 at $4.07-$4.25/mmBtu. 

Palo Verde prices were last quoted at $26.35-$27.50/mwh.  Northeastern prices last traded at $38.75-$43.25.  Entergy was last at $29.50-$30.50.  Ercot was last at $27.00-$28.75/mwh. 

It is possible that natural gas could become our “canary in the coal-mine,” as it were.  Since it is the most bearish of the energy complex, and could possibly be the weakest among a large number of commodities, strength in this market would tell us that the bullish influence is overwhelming.  It would be a sign that whatever it is that is pushing commodities higher is powerful.  At the same time, weakness ought to be seen first in natural gas, giving it the ability to perform some of the traditional canary’s functions.  The fundamentals are still quite bearish in this market.

Yesterday did not fulfill our landing airplane guidelines, but that is far from being the only way possible of reaching an important bottom.  Yesterday’s sudden surge could be the end of this particular bearish move.  It is the way that the DJIA likes making long-term bottoms, which it used in the early 1980’s.  It is not a common bottom in natural gas, but that hardly makes it unlikely, and there does seem to have been a sea-change of great significance this week.  The burden of proof is with the bulls, but it will not stay that way for very long.  If we get four sessions in a row higher from here, it will be the bears that need proof.

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 $4.25-$4.28, $4.33-$4.35, $4.42-$4.43, $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 surged yesterday on massive short-covering and bargain-hunting.

Dollars per million Btu

EIA Weekly Storage Figures

This week’s EIA report showed a draw of 30 bcf on expectations for draws of 24-28 bcf.  Stocks are now 326 bcf higher than a year ago, against a surplus of 271 bcf a week ago, a surplus of 270 bcf two weeks ago and a surplus of 233 bcf three weeks ago.  Stocks are now 24.60% higher than a year ago.  They are 228 bcf and 16.02% above the five-year average.

For this week, our five-year average was for a drawdown of 45.2 bcf.  Our seven-year average was a draw of 51.6 bcf.  Last year, we had an unrevised drawdown of 85 bcf.  Estimates were for a drawdown of 24-28 bcf (Dow Jones & Bloomberg).

EIA Report

News & Views

In trading on Globex, April crude oil prices were down $1.18 at $50.43/barrel at 8:30 AM EDT, this morning.  April heating oil prices were down 1.08 cents to 1.3455/gallon.  April RBOB prices were down 2.29 cents to $1.4144.  April natural gas was down $0.015 to $4.159/mmBtu. 

Oil prices relaxed slightly in overnight trading into this morning as equities traders in Asia paused for reflection on the week’s events.  One of many conclusions being weighed was that the Fed may have felt forced into taking drastic action because it saw worse on the horizon.  We cannot say we are convinced that this will end up being an enduring story line, but it was one gaining currency overnight.

The more common interpretation is that the Fed’s actions may have tipped a number of balances.  The two most commonly cited are the global economy and monetary growth.  The fact that this has translated as well as it has into an oil story is evidence of those two interpretations.

Crude oil prices burst higher yesterday, decisively breaking and settling over $50.47.  We now have measured move objectives to $68.54/bbl

Heating oil prices settled above 130.57 yesterday, and that gives us objectives higher.  This market is now looking technically strong and resilient.

Saudi Oil Minister Ali Naimi acknowledged this week that the kingdom has cut oil production below its targeted level, but he quickly added that it does not feel obliged to cut more to make up for Opec countries that have not yet reached their targeted output levels.  He expects that total Opec output will fall this month as lagging countries within the cartel catch up on reaching their targets.  “Everybody is committed to compliance and expect compliance will be higher in March.  There is no need for Saudi Arabia to cut more.”  Opec says that its members need to cut another 800,000 bpd to reach full compliance.

Bloomberg quoted AccuWeather this week as having predicted a quieter Atlantic hurricane and tropical storm season this year than last year.  Last year was the sixth most active hurricane season on record, Bloomberg quoted Weather Underground as saying.  AccuWeather is calling for 13 named storms this year, compared to 16 seen last year.  Eight of those are seen likely to be elevated to hurricanes, with two of those seen as possibly becoming major storms.  As many as four of the tropical storms could hit US coasts.  Last year’s Hurricane Ike was the fourth most expensive storm in US history, costing roughly $18 billion to clean up.  Katrina cost $81 billion in 2005.

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 Inventories

Gasoline stocks typically peak in the first quarter and are headed lower by the end of it.

Distillate stocks are growing – at a time when they should be falling.

Crude oil stocks are still increasing – which they do tend to do at this time of year.

Crude oil stocks typically decline in the third quarter.

A Look at Imports

Distillate imports have rebounded recently, although this week’s imports were very low.

Aggregate average crude oil imports have recently reached their lowest levels in a number of years. 

A Look at the Dollar-Euro

Dollar-Euro: One-Year Chart

A spectacular decline from a double top.

A Look at Corn Prices

This is just one of the big movers over the second half of this week.  We have shown it because it is the underlying factor behind ethanol prices.

Source:  http://futures.tradingcharts.com/chart/CN/W

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