Market Review for Tuesday        

T was a much quieter day yesterday, and traders seem to have been trying to take everything on board.  Crude oil spent most of the day trading on its back foot, but it managed to rally late in the session to close in positive territory.  Refined products finished with moderate gains as traders tried to align themselves ahead of last night’s API report and this morning’s DOE report. 

We seem to have reached a temporary lull and that suggests that it will require a big shift in today’s inventory figures to get traders off the mark.  And, even though the trend is higher, that would seem to be more the case on the upside than on the downside.  Oil prices are overbought right now, and that could mean it will take a substantially bullish report to generate more buying or short-covering. 

Most observers are expecting a build in crude oil stocks in this morning’s DOE report, and last night’s American Petroleum Institute (API) report showed a larger-than-expected increase in crude stocks of 4.577 million barrels.  That is going to set the stage for this morning’s DOE report with traders now looking for a build on the upper end of expectations.  It also sets the market up for a potential surprise on the bullish side if the DOE shows a build nearer expectations.  A draw would catch the market leaning the wrong way. 

At the same time that the API report showed a big build in crude oil stocks, it also showed decent to larger-than-forecast draws in refined products inventories.  Implied demand levels came in at robust levels, and that could be setting the table on the side of more bullish expectations.  The API report now has us handicapping estimates 18 hours before the DOE report.  In any event, the DOE statistics are likely to command our full attention, for at least a little while, this morning.

Technicals

           Crude oil prices were mixed yesterday, with May higher and deferred months lower.  The overall flavor was sideways yesterday in crude.  Refined products, on the other hand, were clearly higher, and heating oil prices have advanced dramatically over the last two weeks, gaining more than 26 cents over that time.  Heating oil prices look overextended here, though, and prices are overbought enough to cause worry.  We would be looking to buy into any decent selloff that may follow.    

Dollars per barrel

Above:  Crude oil prices seem to have a triple bottom.  Below:  The crack spread has stabilized recently.

Dollars per barrel

May crude oil now has buy-stops over $54.20, $54.62, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $52.45, $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 150.26, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 145.25, 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, 153.35, 158.00, 158.90, & 160.77.  Sell-stops are under 146.60, 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, and 89.78.

Football: The bulls gained two yards yesterday on first down, making it second and eight this morning. 

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 8,938 contracts on Monday, when prices were higher.  That looks like new buying and is supportive. 

      Heating oil open interest fell by 1,027 contracts on Monday, when prices were higher.  That looks like short-covering and is a negative development.

      RBOB open interest rose by 5,330 contracts on Monday, when prices were higher.  That looks like new buying and is constructive.

      Natural gas open interest fell by 2,377 contracts on Monday, when prices were higher.  That looks like short covering and is a negative development. 

Monday’s Open Interest Changes:

Crude 1,161,759  up 8,938        Heat 266,858   dn 1,027       RBOB 213,564  up 5,330        Nat gas 643,932  dn 2,377    

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, yet again, yesterday.  Traders were following the lead of oil prices, particularly heating oil prices, it seems.  There was also talk in some quarters about the relationship of oil to gas, which has reached some pretty high figures recently.  After falling to a low of just under 6-to-one on December 24^th, 2008, oil prices have now recovered (while gas prices have weakened comparatively) to a ratio of 12.42-to-one.  That is double the low point seen in December, when a barrel of oil was worth only half as much natural gas as it is now.  The ratio probably ‘belongs’ somewhere in the middle, nearer 9-to-one.  In any event, there was buying across the board yesterday, pushing quotes higher in natural gas futures. 

We should expect volatility as a result of recent activity.  Those who got long are almost certain to get nervous along the way during the course of any advance, which will bring us profit-taking.  On the other hand, prices have been weak for so long that we should expect large numbers of shorts to look to cover positions on any decent decline.  What this all means is that it is going to be difficult to trust any move for very long, at this point.  We should expect to see plenty of counter-activity in response to dips or rallies.  Friday’s April contract expiration will add to volatility as traders square their books.

In cash trading on Monday, 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.  There were no new prices reported yesterday by Dow Jones.

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. 

Cold, blustery weather continued in the Northeast and along the Eastern Seaboard, to an extent, yesterday, lending psychological support to a market trying to realign itself within the broader economy.  While there are no fresh positive signs suggesting that the recession has loosened its grip – yet – traders are taking their cue from global equities, which have given indications that the worst may well be over, at least for now.  It will take time, agonizing months, in fact, for corporate profits and employment to catch up with any psychological improvement in this market.  So far, the only factor that has really changed is the perception that the economy might be getting better.  This is based on the Fed’s trillion dollar injection last week, Treasury’s toxic assets plan this week, and a single better-than-expected report on housing.  For this market to build appreciably on its recent gains, we may need more solid and sustained figures.  Of course, we could see some follow-through just on short-covering, but it will require new buying over time to get prices trending higher.

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 $4.34-$4.38, $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 were up again, yesterday.  The picture has changed significantly here.

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 $1.21 at $52.77/barrel at 7:30 AM EDT, this morning.  April heating oil prices were down 2.56 cents to 1.4740/gallon.  April RBOB prices were down 2.46 cents to $1.4780.  April natural gas was down $0.032 to $4.315/mmBtu. 

Traders seem to be reacting to last night’s API report, which is giving ammunition to sellers.  We would be wary of a bullish report this morning, because this market seems to need a correction.  We could see a fade day.

Last night’s API report showed a larger-than-expected increase in crude oil inventories, with a build of 4.577 million barrels.  This came partially as a result of an increase in crude oil imports of 634,000 bpd.  Distillate stocks dropped by 1.575 million barrels, which was a larger draw than estimated.  Gasoline stocks fell by 805,000 barrels.  Gasoline implied demand came in at 9.573 million bpd.  Distillate implied demand was 4.530 million bpd. 

Crude oil prices finished near their highs yesterday despite overbought pressures.  Prices will react to this morning’s DOE report, next.      

Heating oil prices continued rushing higher, and we expect to see a steep correction at some point, soon.  What a difference two weeks has made – more than 36 cents, in this case.

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 1.300        up 1.100          up 1.200 mln bbls

Distillate      up 0.200        dn 0.100          up 0.200

Gasoline      dn 0.500        dn 0.650          dn 0.600

Utilization   dn 0.1%         unchanged      dn 0.1%

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%. 

We need to be especially watchful for a ‘fade day’ if we get a bullish first reaction to this week’s DOE report.  The reverse is true, to a lesser extent, if we get a very bearish report and initial reaction.  That could bring in buying.

An Illustrated Look at Energy Market Factors

A Look at Jet Fuel Prices

Jet fuel prices are also showing signs of trying to make a bottom, here.

Recommendations for Specific Market Segments