Market Review for Thursday    

ETTER than expected economic indicators helped push crude oil prices to their highest levels since November 28th.  The figure that seems to have got the ball rolling was the Commerce Department report that GDP had fallen by 6.3% in the fourth quarter, rather than the 6.6% that was the average of estimates by analysts.  This followed on the heels of reports earlier in the week that had shown better-than-expected reports on new and existing home sales and durable goods orders.

These reports also follow last week’s decision by the Federal Reserve to inject a trillion dollars into treasury and mortgage-backed securities.  And they follow the Treasury Department’s plan to move toxic assets off banks’ balance sheets and onto those of willing investors or speculators.  The economy has some hope, again, and the inference is that it will translate into stronger economic activity – and energy use.

In the meantime, though, energy demand has been dropping lately, after a brief period of stabilizing.  And crude oil and distillate inventories have been holding at high levels or getting even higher in relation to previous years.  Gasoline inventories, which are lower than a year ago, have been eating away at the deficit in recent weeks. 

At some point, oil traders are going to need to see higher demand or a decline in inventories if this market complex is going to live up to the promise provided by this steady stream of better economic data.  At this stage all we really have is an increase in the level of hope in the economy.  That is surely a welcome development.  It just does not, on its own, increase oil demand.

At some point, we still feel that this market needs to correct before moving higher.  We do still expect higher prices, but it would be nice to see some fundamental support develop before seeing prices move much higher.    

Technicals

           The oil complex continued higher yesterday, with crude posting its highest levels since November 28^th.  Gasoline prices reached their highest levels since November 4^th.  Heating oil prices reached their highest levels since January 13^th.  Prices remain overbought, but it does not seem to be slowing them down.  Still, one has to wonder if the oil complex might not be due for the type of correction we had yesterday in natural gas futures. 

Dollars per barrel

Above:  Gasoline prices made new highs yesterday.  Below:  Heating oil has run into resistance.

Cents per gallon

May crude oil now has buy-stops over $54.66, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $52.75, $51.60, $49.50, $48.75, $46.92, $46.53, $43.62, $42.50, $42.00, $41.00, $39.40, $37.65, $36.91, and $32.40.  April heating oil has buy-stops over 150.50, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 146.10, 144.65, 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 153.72, 152.45, 153.35, 158.00, 158.90, & 160.77.  Sell-stops are under 149.20, 146.15, 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 16 yards on third and 20, making it fourth and four this morning.

Technical Support & Resistance

Oil Inventory Reports

    This week’s DOE figures showed a larger-than-forecast build in crude oil stocks.  It might have been bigger than estimated, but there was warning, from the API report, which showed an even larger build on Tuesday night.  Refined products stocks were lower than generally expected, but not by any dramatic amounts.  Utilization dropped by a tenth of a percentage point, which is effectively the least it could have declined.  Demand statistics continued to erode with gasoline demand taking another hit from levels seen in previous weeks. 

   Distillate stocks are now 32.9 million bbls, or 29.63%, higher than a year ago.  Heating oil inventories are 11.6 mln bbls, or 44.27%, higher than they were a year ago.  Gasoline stocks are 11.5 million bbls, or 5.09%, lower.  Crude oil stocks are now 48.0 million bbls, or 15.55%, higher than a year ago.  Residual stocks are 4.4 mln bbls (11.25%) lower than a year ago, jet fuel stocks are up 0.3 mln bbls, (0.77%) higher than a year ago.  Utilization is 0.2% lower than a year ago and is 5.99% below the seven-year average and 7.92% 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 grew by 26,324 contracts on Wednesday, when prices were lower.  That looks like heavy new selling, although we expect there was some new buying in there, too.

      Heating oil open interest fell by 599 contracts on Wednesday, when prices were lower.  That looks like long liquidation and is supportive. 

      RBOB open interest rose by 1,124 contracts on Wednesday, when prices were lower.  That looks like new selling and is bearish.    

      Natural gas open interest fell by 4,875 contracts on Wednesday, when prices were lower.  That looks like long liquidation and is supportive.

Wednesday’s Open Interest Changes:

Crude 1,186,564  up 26,324        Heat 265,532   dn 599       RBOB 211,414  up 1,124        Nat gas 631,308  dn 4,875     

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 dropped sharply yesterday as traders reacted to a build in this week’s underground storage figures.  Expectations had been for a drawdown of 11 bcf, but in the event the report showed a build of 3 bcf.  That took the amount of gas in storage to 1.654 tcf, which is a little less than 30% higher than a year ago and a full fifth above the five-year aggregate average. 

The numbers had not been terribly supportive before the report was released, but this report came like a gut-punch to the bulls, leaving them gasping for air.  By the time they recovered, selling was already coming into the ring from producers and locals.  Longs felt little other recourse than to kick out existing positions.  There had been some expectation that this report might have been the last or among the last of the draws for this heating season, but few expected to see a build this quickly into March.  Typically, the final draw is seen at the very end of March or even into April.

Course, the build is simply a sign that demand is not strong.  Industrial demand in the US has been decimated by successive waves of high prices, storm-raised prices, and recession.  Each time we have lost industrial demand, less of it has come back when the picture has become more favorable, again.  Prices are outstanding today, but many users left, never to return.

In cash trading yesterday, Henry Hub prices were at $3.87-$4.20, down $0.22 and up $0.03 (DJN).  SoCal prices were at $3.97-$4.17, up $0.74-$0.87 on the day.  El Paso Permian prices were up $0.04 and down $0.02 at $2.88-$3.03.  Katy prices were up $0.04-$0.07 at $3.80-$4.00.  Waha prices were up $0.01-$0.08 at $3.03-$3.10.  Transco 6 was down $0.02-$0.09 at $4.54-$4.65/mmBtu.

Palo Verde prices were last quoted at $28.50-$33.00/mwh.  Northeastern prices last traded at $27.00-$41.00.  Entergy was last at $32.00-$33.00.  Ercot was last at $31.50-$33.00/mwh. 

This market was unable to rely solely on the promise of better economic news to come.  Nor was it able to build a longer-term bullish case – yet – from falling rig counts and lower drilling and exploration.  The biggest problem may be that industrial users have not really been stimulated by lower gas prices.  While rig counts have fallen 47% since a September high point, industrial end-use seems to have languished. 

Many end-users of gas were driven away by the high prices seen last summer.  The recession seems to have done the rest.  While having an improving economic picture will doubtless help to bring back some industrial use, the amount that comes back after each episode seems to be less and less.  If some use is just gone forever, it would explain better why companies refuse to drill now, knowing that futures prices two or three years out are so substantially higher.  If one stops to think about it, the economic hope being seen right now should be encouraging drilling longer-term.  The bigger concern may be industrial use.

Support is at $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 could not stand up in the face of bearish fundamentals.

Dollars per million Btu

EIA Weekly Storage Figures

This week’s EIA report showed a build of 3 bcf on expectations for draws of 11 bcf.  Stocks are now 372 bcf higher than a year ago, against a surplus of 326 bcf a week ago, a surplus of 271 bcf two weeks ago and a surplus of 270 bcf three weeks ago.  Stocks are now 29.02% higher than a year ago.  They are 280 bcf and 20.38% above the five-year average.

For this week, our five-year average was a drawdown of 55.6 bcf.  Our seven-year average was a draw of 48.6 bcf.  Last year, we had an unrevised drawdown of 36 bcf.  Estimates for this week’s report suggested a draw of 11 bcf.

EIA Report

News & Views

In trading on Globex, May crude oil prices were down $1.2941 at $53.05/barrel at 8:30 AM EDT, this morning.  April heating oil prices were down 2.29 cents to 1.4584/gallon.  April RBOB prices were down 3.16 cents to $1.4995.  April natural gas was down $0.060 to $3.887/mmBtu. 

Oil prices dropped in trading overnight as Asian traders started to ask themselves questions about the supply and demand picture for oil.  Simply stated, there is no real justification for the recent strength in prices, which has come more or less completely from the “feel good” or maybe just “feel better” statistics coming from the government, actions by the Fed and Treasury.  While these may ultimately lead to better economic activity and stronger oil use, neither of those is here, yet.

Simply stated, oil prices have advanced on the promise of better demand in the face of actually weakening demand and rising inventories.  There is now a fresh element of hope in this market, but hope does not buy gasoline or pull crude from storage.    

Crude oil prices made new highs, their highest since November 28^th.  With crude stocks well above last year’s levels, prices seem to have gotten ahead of the fundamentals. 

Heating oil prices seem to have hit resistance.  Even so, prices were higher yesterday and they have gotten well out in front of the fundamentals. 

At the heart of this morning’s relative weakness are the figures we have reprinted below.  They tell the story of declining demand after what appeared to be an interlude of stabilizing or even improving demand statistics.  In almost every case, across the board, demand was better two or three weeks ago, which was the heart of the brief interlude of stabilizing demand – which now seems illusory. 

Total refined products demand, averaged over the last four weeks, came in at 19.112 million bpd, down 3.22%.  Three weeks ago, it was down only 1.34%.  Four-week gasoline demand is at 9.058 mln bpd, up 0.69%, compared to up 2.17% three weeks ago.  Four-week distillate demand is now at 3.799 mln bpd, down 9.03%, compared to down 4.50% three weeks ago.  Four-week jet fuel demand is now at 1.456 mln bpd, down 5.08%.  Four-week residual fuel demand is at 0.593 mln bpd, down 4.96%.  Four-week propane demand is at 1.356 mln bpd, unchanged against a year ago.  The year-on-year surplus in distillate went from 32.3 mln bbls (28.5%) to 32.9 mln bbls (29.63%).  In gasoline stocks, the deficit dropped from 13.2 mln bbls to 11.5 mln bbls (5.09%).  The crude oil surplus went from 47.3 mln bbls to 48.0 mln bbls (15.55%).

Oil traders are starting to come to grips with the fact that the improving hope for the economy has not yielded any increase in demand or decline in heavy inventories of crude oil and distillates.

An Illustrated Look at Energy Market Factors

A Look at the Dollar-Euro

Dollar-Euro: One-Year Chart

A dollar rally has brought in selling pressure to the oil and commodities markets.

Dollar-Euro: Three-Month Chart

Recent activity has helped to bring in selling in the oil markets.

A stronger dollar usually leads to weaker commodities prices.

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

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