Market Review for Monday         

QUITIES prices had their biggest one-day gain since October 28^th, gaining 6.84%.  It was certainly a strong day, adding hundreds of billions to the wealth of the nation with a move that took the Dow Jones Industrial Average (DJIA) up almost 500 points.  The gain helped oil and natural gas prices to prolong their own advances, although neither was on a par with the movement in stock prices.

We mentioned yesterday how one would not be able to overestimate the significance of Treasury Secretary Geithner’s plan, released yesterday, to fix the “toxic asset” problem faced by the nation’s banks.  He had tried a month ago to deliver his plan, but it was generally dismissed as being ‘too vague’ and short on specifics.  Yesterday’s plan seems to have addressed those deficiencies, at least in the eyes of markets. 

The plan calls for the pairing of up to $100 billion in government funds with private capital in the hope of generating $500 billion to as much a trillion in purchasing power to buy the toxic assets.  Looking at it strictly through the lens of the market reaction, it is difficult to see the plan as anything other than a success in the eyes of the markets, at least for now.  By saying that, though, we are not suggesting that we may or may not collectively view it differently at some point in the future. 

The reaction has given rise to the question, heard yesterday afternoon on CBS Radio, “Is the worst behind us, now?”  The expert answering the question said she believed that it is now behind us.  Our interest is less in the plan or in whether the answer was correct than in the reaction and the fact that the question was even being asked.  The combined one-two punch of the Fed’s injection of a trillion dollars last week and this plan to reduce or negate the bearish implications of “toxic assets” seems to have changed the nature of the questions being asked.  The psychology either has already changed or is in the process of changing.

Technicals

           Oil prices were higher yesterday, although we got the impression that someone was holding back on the reins.  We feel that we should have gotten more from oil prices, given the strong advance seen in equities.  There was something unequal in the moves.  Oil prices have certainly had a strong run, and we would not be surprised to see a sharp correction, especially in heating oil prices, which led the complex higher yesterday.  The trend is still higher, but we would be looking to buy into weakness rather than into strength. 

Dollars per barrel

Above:  The heat crack may have bottomed.  Below:  The gas crack broke an important trendline, which is worrisome.

Dollars per barrel

May crude oil now has buy-stops over $54.05, $54.62, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $51.60, $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 147.50, 148.65, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 138.25, 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 152.45, 153.33, 158.00, 158.90, & 160.77.  Sell-stops are under 145.30, 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 gained 17 yards yesterday on second down and 15 to go.  That gives us a new first down for the bulls.

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 rose by 1,072 contracts on Friday, when prices were mixed to higher.  The expiring April contract was lower, but other months were higher.  It looks like fresh buying in deferred contracts, which would be supportive.

      Heating oil open interest grew by 90 contracts on Friday, when prices were higher.  That looks like new buying and is supportive, although it is quite light new buying.

      RBOB open interest rose by 1,150 contracts on Friday, when prices were higher.  That looks like new buying and is constructive.

      Natural gas open interest fell by 4,780 contracts on Friday, when prices were higher.  That looks like short covering and is a negative development. 

Friday’s Open Interest Changes:

Crude 1,152,821  up 1,072        Heat 267,885   up 90       RBOB 208,234  up 1,150        Nat gas 646,309  dn 4,780          

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

April natural gas prices were higher again yesterday in a combination of follow-through buying and buying in sympathy with the strong advance in equities.  Natural gas traders were still trying to get their arms around last week’s strong response to the Fed’s trillion-dollar liquidity injection, and yesterday’s Wall Street reaction to the Treasury plan to auction off toxic assets lent credence to a plan that just a month ago had failed to convince anyone.  Suddenly, Treasury had a plan on toxic assets that got the blood flowing again in equities traders’ veins, and the feeling yesterday was that banks might be persuaded to lend money to businesses and consumers again, as assets begin to move from their books to those of investors who now have the government backstopping their purchases.

This does not mean there won’t be problems, not least of all how to keep a lid on inflation.  That is not today’s problem, though, and history is littered with the bones of those who died worrying about events that never came to pass.  Inflation may turn out to be one of those pointless worries, in the final analysis.  Right now, the fear of a depression is decidedly less pressing than it was a month ago.  Unemployment is almost certain to keep on rising but, if banks start lending money again, we may soon see unemployment start to stabilize and turn.  Demand for energy will increase before we get that far along in a recovery.

In cash trading yesterday, Henry Hub prices were at $4.13-$4.23, up $0.10-$0.20 (DJN).  SoCal prices were at $3.16-$3.31, up $0.24-$0.26 on the day.  El Paso Permian prices were up $0.11-$0.14 at $2.77-$2.91.  Katy prices were up $0.17 and down $0.09 at $3.80-$3.93.  Waha prices were up $0.11-$0.18 at $2.89-$3.00.  Transco 6 was up $0.24-$0.25 at $4.60-$4.90/mmBtu. 

Palo Verde prices were last quoted at $29.00-$31.25/mwh.  Northeastern prices last traded at $19.25-$46.00.  Entergy was last at $32.50-$33.50.  Ercot was last at $35.00-$36.00/mwh. 

When it rains, it pours, they say.  Helping the bullish case this week was unusually cold and blustery weather along the US East Coast, which is expected to remain in effect through the tail end of this week.  After that, milder weather is predicted, but we continue to work our way towards colder readings this year, and have, really, all the way back to November.  It definitely feels like it has been a very long, unending winter or heating season this ‘year.’  Warming patterns in the East may be “counterbalanced by below-normal temperatures (6-18 degrees below normal) in the northern and central Plains this week into next week,” Dow Jones quoted Planalytics as having predicted.  And those readings invariably seem to work their way east, we have noticed.  It may be a while before we are planting tomatoes here in southern New England. 

Even with colder readings, though, it is going to be difficult to eat into the surplus in underground storage right now.  We have enough to survive withdrawals through July, and that is unlikely to be the case, even this winter.

Support is at $4.17-$4.19, $4.10-$4.12, $4.01-$4.04, $3.88-$3.91, $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 down $0.74 at $53.06/barrel at 7:30 AM EDT, this morning.  April heating oil prices were up 0.42 cents to 1.4749/gallon.  April RBOB prices were down 1.06 cents to $1.4775.  April natural gas was down $0.005 to $4.289/mmBtu. 

Asian equities continued to advance this morning, but market observers felt that prices were getting ahead of themselves, which is definitely the feeling we are getting, as well, in the oil markets.  Prices are overbought (see page 8) and they feel like they are being stretched in movement higher.  We have had a lot of potentially bullish news, but so far, it has all been psychological.  We will need to mesh the sentiment with real-world results, at some point. 

We need to get back to nuts and bolts, and they are improving.  Existing home sales for February were well above figures estimated, at a rate of 4.72 million, up from 4.49 million units in January. Estimates had been for sales to drop to 4.45 million units.  (World Daily Markets)

Crude oil prices continued to race higher yesterday, and prices are now overbought.  We have to expect there to be a steep correction at some point, soon.    

Heating oil prices erupted higher yesterday, as economic factors combined with late-season cold weather to boost the heating fuel.  Prices seem to have gotten ahead of themselves, here.

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 1.400        up 1.100          -- -.--- mln bbls

Distillate      unchanged    dn 0.500          -- -.---

Gasoline      dn 0.100        dn 0.500          -- -.---

Utilization   unchanged    unchanged      -- -.-%

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%. 

The psychological outlook seems to have changed, and that shifts the burden over to the real world to come up with results, now.  There is bound to be a lag that will present us with buying opportunities.

An Illustrated Look at Energy Market Factors

A Look at the Dollar-Euro

Dollar-Euro: One-Year Chart

Yesterday, the dollar stayed close to the levels seen on Friday.  Oil prices advanced without any real help from the euro (dollar weakness) yesterday.  The chart above still suggests (to us) further dollar weakness ahead.

Dollar-Euro: Three-Month Chart

We still expect the dollar to test the major support around 69 euro cents.

Yesterday’s activity was surprisingly mild, especially in light of the other moves seen in a variety of markets.

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

A Look at Crude Oil Oscillators

Crude oil prices are overbought here, according to the oscillators charted out above, and they are overbought by enough for us to worry about the immediate upside potential.  Add to that the fact that yesterday’s advance was tepid, in the face of a full-blooded surge by equities, and we are concerned that we may have another rug-pulling decline in front of us.  We would not even have checked this out – had it not been for yesterday’s anemic advance.  Equities posted their fifth largest point gain, ever, according to Fox News, and yet crude oil prices could not generate more than $1.73 higher.  We were wondering what was holding the reins and pulling back on the market, and this could be it.  It is a bright yellow flag at a time when many other flags are green. 

The biggest source of hope for the bulls is the likelihood that parameters may have been redefined by this market’s recent extreme weakness, and these oscillators are based on moving averages.  It is possible that prices need to get as overbought as they were oversold at the lows in December.  If that is the case, this could be nothing more than a sign of strong momentum higher. 

The opposing point of view would tell us that we are in a major bear market and that overbought indicators like this represent a perfect place to sell.  If it had not been for yesterday’s inability to run with the bulls on Wall Street, we would dismiss this as a red herring or stray variable.  It may turn out that we end up wishing that we had never seen it.

If we do get a rug pulling, it will probably be a buying opportunity rather than the start of a new leg lower, based on a number of other factors.  Still, this tells us to keep a weather-eye open.  Chances are that this is just telling us to expect a steep correction – with the emphasis on steep.

Recommendations for Specific Market Segments