Market Review for Friday & the Weekend

RICES were lower in overnight trading on Thursday night into Friday morning.  But, by midday, crude oil prices had clawed their way back to unchanged, with refined products moving into positive territory.  Many were just trying to figure out whether commodities had entered a new phase of trading – or had returned to an old phase of trading.

It was a very important week, and one senses that it was one of those weeks that is capable of casting very long shadows well into the future.  We are not sure precisely how many corners may have been successfully traversed during the week, but it looks like at least the oil markets’ technical picture has been squared.  Other (corner-turning) candidates include the US equities (stock) market and the deflation worry (which may have been simply a trick of exchanging one problem, deflation, for its inverse problem, inflation).  Since the Fed was such a big player in last week’s events, one has to worry about the central bank’s proclivity to jump out of the fire, only to find that it has leapt feet first into the frying pan. 

The hope is that various economic and political leaders will be able to steer the world into a period of slightly better outcomes.  It is nearly impossible to differentiate policy results from cyclical ones, and timing seems to be influenced more by luck than by any design, frequently.  Despite our rather fatalist, cynical cyclicalism in that regard, things did look better at the end of last week.  Our approach pre-ordains us to see more of the seasonal tendency at work than others may, but there always are reasons why it works each year.  We are slightly more interested in the latter fact, that it does work, than in the changing set of circumstances assigned to it having worked. 

The same set of reasons is likely to be with us as we start this new week.    

Technicals

           The energy complex had one of its strongest weeks in months and the strongest collective week this year.  Certainly, the ramifications of last week’s activity would seem more likely to be with us for an extended period of time, longer than any previous week in 2009.  Crude oil prices gained $4.81/bbl and settled over $50.47.  Heating oil prices gained a stunning 18.62 cents and settled well above 130.57.  Gasoline prices gained 10.41 cents and finished at its highest level since November 4^th, 2008.  Natural gas had its strongest one-day gain since November 26^th.

Cents per gallon

Above:  Heating oil prices broke above 130.57 convincingly last week.  Below:  Gasoline prices were highest since 11-4-08.

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 138.75, 140.85, 142.32, 144.00, 148.65, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 134.00, 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 140.95, 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 lost five yards on Friday, on first down.  That makes it second down with 15 to go as we start this week.

Technical Support & Resistance

Oil Inventory Reports

    This week’s DOE figures will attract their usual amount of attention, starting first with crude oil stocks.  Traders will then be looking quickly at gasoline stocks, which rose unexpectedly last week.  That is unusual for the month of March.  We always feel that utilization sets the tone for the future of refined products stocks, so we will be looking closely at that.  Last week’s decline in utilization rates is likely to translate into lower production rates in this week’s figures.  We also feel that we have reached a point when we need to pay closer attention to year-on-year stock levels.

   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 36,695 contracts on Thursday, when prices were higher.  That looks like heavy short-covering going into Friday’s April contract expiration.  It is bearish, in theory since it is one-time buying.

      Heating oil open interest grew by 1,241 contracts on Thursday, when prices were higher.  That looks like new buying and is supportive, because new buying can be attracted by the same circumstances over a sustained period, in theory.

      RBOB open interest rose by 2,135 contracts on Thursday, when prices were higher.  That looks like new buying and is constructive.

      Natural gas open interest fell by 10,090 contracts on Thursday, when prices were higher.  That looks like short covering and is a negative development. 

Thursday’s Open Interest Changes:

Crude 1,151,749  dn 36,695        Heat 267,795   up 1,241       RBOB 207,084  up 2,135        Nat gas 651,089  dn 10,090

CFTC Commitments of Traders  (for the period ended Tuesday, Mar 17th)  

As of Mar 17th:                             Long                   Short:

Crude oil                   195,950               182,443                           -contracts held by speculators:  1.07 short

                                           660,645               677,035                               held by the trade

                                             71,933                 69,050                               held by small specs and hedgers.

Spreads….dn 29,237 contracts   The ratio went from 1.23-to-one long to 1.07-to-one long in the last three reports.

   Large speculators liquidated 1,105 long contracts and covered 20,627 shorts over the week under review.  Commercials added 19,081 longs and added 28,567 shorts.  Small specs and hedgers liquidated 1,879 longs and added 8,157 shorts.  Open interest fell by 13,140 contracts as prices rallied $2.13/barrel.  That looks like heavy short covering and is bearish.  Large speculators were, in fact, covering shorts, but 29,000 spreads were liquidated, as well.

   The average large speculator has 2,545 long contracts (77 accounts), or 14 fewer contracts on average on the same number of accounts, and 1,754 shorts (104 accounts), or an average of 75 contracts less on seven less accounts.  Commercials held 7,865 longs (84) or 227 more longs on average on the same number of accounts, and 7,440 shorts (91), or 467 more shorts on two less accounts. Reportable positions held 4,537 longs (248) or 232 more contracts on 16 fewer accounts, and 4,459 shorts held by 253 accounts, or 202 more contracts on average on 17 fewer accounts.  The longs are slightly stronger.

Heating oil                 30,655                 19,210                           - contracts held by speculators:  1.60 to 1 long

                                           165,715               187,826                              held by the trade.

                                             41,018                 30,352                               held by small specs and hedgers.

Spreads….up 2,870 contracts.    The ratio of large speculative longs to shorts went from 1.20-to-one to 1.60-to-one in 2 weeks.

       Large speculators added 3,250 longs and added 1,142 shorts.  Commercial accounts added 5,519 longs and added 8,927 shorts.  Small speculators and hedgers liquidated 4,01 longs and covered 1,701 shorts.  Open interest grew by 11,238 contracts as prices rallied 4.83 cents. That looks like net new buying on a price rise, which would be constructive.

       The average large speculative long is holding 1,179 contracts (up 83 lots on 26 accounts, two more accounts), while the average short has 873 contracts (down 30 lots on 22 accts, up two accounts).  The average commercial long is holding 2,762 contracts (flat on 60 accts, up two) compared to the average short holding of 3,130 contracts (down 148 lots on 60 accts, steady).  The average reportable position is 2,119 long (up 10 lots on 107 accts, up 5) while the average short holding is 2,261 (up 60 lots on 105 accts, up three).  The reportable category had lost 41 short accounts in four weeks, prior to this report.

Rbob Gasoline          59,127                   6,307                          -contracts held by speculators:  9.37 to 1 long

                                           117,293               175,476                             held by the trade.

                                              16,655                 11,292                              held by small specs and hedgers.

Spreads…dn 67 contracts   The ratio of large speculative longs to shorts went from 9.44-to-one to 9.37-to-one in a week.

     Large speculative holdings grew by 1,946 longs and grew by 254 shorts over the latest week. Commercial holdings grew by 6,431 longs and grew by 11,157 shorts.  Small speculators and hedgers’ positions grew by 1,801 longs and fell by 1,233 shorts.  Open interest grew by 10,111 contracts as prices rallied 7.81 cents.  That looks like new buying, which would be supportive.  Everyone was buying, with smaller traders covering more than the others.    

   The average holdings are 1,183 contracts for each large speculative long (50) and 252 for each large speculative short (25).  The average commercial long now has 1,564 contracts long (75) and 2,140 short (82). Average reportable holdings are 1,257 long (150) against 1,437 short (135).  Reportable accounts decreased their average long holdings by 5 contracts and boosted their average short holdings by 32 contracts, on six more long accounts and five more short accounts.  Commercial accounts cut their long holdings by 64 and upped their shorts by 60 on eight new long accounts and three new short accounts.

Naturalgas                74,242               188,306                           -contracts held by speculators:  2.584 to 1 short

                                           254,721               176,621                               held by the trade.

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

Spreads…dn 10,762 contracts    The ratio of large speculative shorts to longs went from 2.54-to-one to 2.58-to-one in 3 weeks.

  Large speculative holdings liquidated 1,367 longs and covered 244 shorts over the latest week. Commercial accounts added 3,016 longs and added 4,269 shorts, and small speculators and hedgers added 1,254 longs and covered 1,122 shorts.  Open interest fell by 7,859 contracts as prices rallied $0.183/mmBtu.  That looks like short-covering and is bearish.  Commercials added 3,000 new longs and more than 4,000 new shorts.  The short covering seems to have come from spread liquidation. 

   The average large speculator has 1,458 contracts (50) while each large speculative short is holding 2,474 shorts (76).  The average commercial long now has 3,105 contracts long (83) and 2,783 short (65). Average reportable holdings are 3,080 long (190) long and 3,522 short (177).  Reportable positions dropped by 98 contracts for each average long and rose by one contract for each average short.  There were three more long accounts and two less short accounts in the reportable category.  The large speculator category has two fewer long and short accounts each, and has 30 more long and 60 more short contracts on average.

Natural Gas & Utility Generation

There was decent follow-through buying in April natural gas prices on Friday, and we got a chance to look at Thursday’s volume on last week’s shockingly strong Thursday (when prices gained 49 cents/mmBtu).  Thursday’s volume was more than 230,000 contracts, which was nearly double the days on which bigger moves have been seen.  On July 2^nd, when natural gas prices saw their peak at $13.69/mmBtu, 133,510 changed hands.  And, at that stage, there were many more people trading natural gas, with open interest at 971,000 contracts, nearly one-and-a-half times as large as it is now.

Thursday’s open interest only changed by 10,000 contracts, despite the much heavier-than-normal volume.  The numbers do not really add out, given the higher open interest in early July.  There was apparently a good deal of intraday top-picking, followed by short-covering.  Judging by the volume and open interest changes, we would be inclined to believe that that process was repeated, fully, a number of different times.  Otherwise, it very little sense for so many trades without people getting out.

The repeated attempts to pick a top, apparently, tell us that traders did not believe the rally was justified by the big moves in oil markets or by last week’s EIA underground storage figures, two of reasons suggested for Thursday’s strong move higher. Short-covering has pushed prices higher here before, but the velocity of repeated attempts to sell followed by buying was new. 

In cash trading on Friday, Henry Hub prices were at $3.93-$4.13, up $0.13-$0.20 (DJN).  SoCal prices were at $2.90-$3.07, up $0.00-$0.07 on the day.  El Paso Permian prices were up $0.10-$0.18 at $2.63-$2.80.  Katy prices were up $0.32-$0.37 at $3.63-$4.02.  Waha prices were up $0.10-$0.16 at $2.71-$2.89.  Transco 6 was up $0.29-$0.40 at $4.36-$4.65/mmBtu. 

Palo Verde prices were last quoted at $29.00-$31.25/mwh.  Northeastern prices last traded at $34.50-$44.00.  Entergy was last at $31.00-$34.50.  Ercot was last at $33.00-$37.00/mwh. 

It is funny how fundamental factors like declining drilling activity can seem so far away - for so long - before moving to the forefront of traders’ attention.  We had agreed with the implied assumption that reduced drilling and exploration activity would be a factor in 2010 or 2011, rather distantly in front of us. After Thursday’s sudden advance in prices, though, traders felt compelled to cast their nets somewhat further adrift in their search for reasons why prices were up so strongly.  In that process, drilling activity has arrived as a critical fundamental factor – and it is something we need to pay closer attention to, especially if prices continue to stabilize or strengthen.

The fundamentals, at least for the current term, are not all that supportive.  The most bullish item on the horizon is nuclear maintenance.  There is nothing else immediate that is likely to turn prices higher by soaking up supplies or adding to demand.  Summer heat and the severity of tropical storms are still distant.

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 is a drawdown of 55.6 bcf.  Our seven-year average is a draw of 48.6 bcf.  Last year, we had an unrevised drawdown of 36 bcf. 

EIA Report

News & Views

In trading on Globex, May crude oil prices were up $0.61 at $52.68/barrel at 12:30 AM EDT, this morning.  April heating oil prices were up 0.66 cents to 1.3900/gallon.  April RBOB prices were up 1.15 cents to $1.4685.  April natural gas was up $0.008 to $4.235/mmBtu. 

Asian equities were stronger last night as traders on six continents await Treasury Secretary Tim Geithner’s plan to rid banks of so-called “toxic” assets.  The efficacy of this plan will be decided upon by markets immediately after its release by Treasury, and a great deal hangs in the balance, not least of all oil prices over the immediate term.  A plan that seems workable would do a great deal to revive global equity markets, commodity prices and investor and consumer confidence.  It would really be difficult to overestimate its value and ability to affect markets.

Opec’s weaker members face a growing test of loyalty and self-discipline as oil prices rise.  It is one thing to comply with quotas at $32 and another at $50 a barrel.

Crude oil prices were stronger last week, settling over $50.47 to formalize objectives to $68.54/bbl.  This is a bullish market with a triple bottom now confirmed. 

Heating oil prices finished strongly on Friday, settling at their strongest levels since January 30^th.  There are objectives to 148.62.  This is a bullish market, now.

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

Last week’s increase in gasoline stocks was unusual, and in each of the last seven years, gasoline stocks were lower this week.  The seven-year average drawdown is 2.284 million barrels.  In six of the last seven years, distillate stocks have declined, for a six-year average drawdown of 1.807 mln bbls.  The full seven-year average is a drawdown of 1.220 mln bbls.  Crude oil stocks have increased in five of the last seven years, for a five-year average build of 3.758 mln bbls.  The full seven-year average is a build of 1.913 mln bbls.  Utilization has been higher in four of the last seven years, for a four-year average gain of 0.675%.  Over the full seven years, though, the average is closer to unchanged, with an average build of a seventh of a percentage point.  The average comes in at 87.99%, with the four-year, pre-Rita average at 89.92%. 

Treasury Secretary Tim Geithner faces a real acid test of his department’s leadership that will cast shadows over the Obama Administration moving forward.  A successful plan to deal with toxic assets would earn forgiveness for every misstep taken so far – or could unravel everything done in recent weeks that may have helped set the economy on a better course.

An Illustrated Look at Energy Market Factors

A Look at the Dollar-Euro

Dollar-Euro: One-Year Chart

A spectacular decline from a double top.

Dollar-Euro: Six-Month Chart

One has to expect the dollar to test the major support around 69 euro cents.

A break below that would be quite bearish for the dollar -= which could be bullish for oil.

Recommendations for Specific Market Segments