Market Review for Friday & over the Weekend     

IL prices ended the week on an easier note as traders collectively demanded some sign of fundamental strength before being willing to bid prices higher.  Prices have reacted to a series of broader economic factors, starting with the Fed’s trillion-dollar injection almost two weeks ago.  Last week also started with the Treasury Department’s toxic assets relief plan and continued with a revised fourth quarter GDP figure that was not as bad as had been predicted.  But none of these burned a single hydrocarbon or pulled a single gallon from storage.

In a way, it is too bad that these macroeconomic factors could not have been spread out over an extended period.  And they could have had a much more supportive effect if the DOE report had shown broader or deeper stock draws or higher demand numbers.  It showed the opposite, in fact.  So, by Friday, it was just too much macroeconomic news and not enough oil fundamental news that had pushed prices higher.  The reaction from traders was akin to what might be expected from a diner who has eaten dessert for three straight meals; there was a sudden craving for meat and potatoes.  This market is short on those on the bullish side, now.

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 gaining recently, slowly eating away at the deficit. 

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.  But it falls short of being solid fundamental help.    

Technicals

           Oil prices ended the week on a weaker note, but they still finished the week with gains.  Crude oil prices gained 31 cents a barrel, heating oil prices gained 4.94 cents a gallon and gasoline prices were up 3.09 cents a gallon.  Prices were overbought after rushing higher last week.  Trends are pointed higher, although we still feel that we are now due for a period of correction.  The bears have a first down to start this week. 

Dollars per barrel

Above:  Gasoline prices have stalled lately.  Below:  Prices moved steeply higher early last week.

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 $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 147.80, 150.50, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 142.55, 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 152.00, 153.72, 152.45, 153.35, 158.00, 158.90, & 160.77.  Sell-stops are under 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 lost 20 yards on fourth and four on Friday, turning the ball over to the bears, who have a first down, here.

Technical Support & Resistance

Oil Inventory Reports

    This week’s DOE figures have a history of showing very large to huge builds in crude oil stocks, and this year we should expect that trend to continue with a vengeance.  Five of the last seven years have had builds of more than 5.4 million barrels, with three of more than 6.1 mln bbls.  Utilization has actually increased in four of the last seven years, so higher imports have been a leading contributor to the crude oil stock builds.  The five year average of crude oil imports has been 423,000 bpd, while utilization has averaged a gain of more than a full percentage point in the four years it has increased.  One year was flat. 

   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 fell by 29,144 contracts on Thursday, when prices were higher, after growing by 26,324 contracts on Wednesday, which looked like new selling, so this looks like traders getting chopped up and buying positions back.

      Heating oil open interest fell by 3,360 contracts on Thursday, when prices were higher.  That looks like short-covering, which would be negative.

      RBOB open interest fell by 2,766 contracts on Thursday, when prices were higher.  That looks like short covering and is bearish.    

      Natural gas open interest fell by 11,814 contracts on Thursday, when prices were lower.  That looks like long liquidation and is supportive.

Thursday’s Open Interest Changes:

Crude 1,157,420  dn 29,144        Heat 262,172   dn 3,360       RBOB 208,648  dn 2,766        Nat gas 619,494  dn 11,814

CFTC Commitments of Traders  (for the period ended Tuesday, Mar 24th)  

As of Mar 24th:                             Long                   Short:

Crude oil                   192,871               175,234                           -contracts held by speculators:  1.10 long

                                           639,673               662,394                               held by the trade

                                             63,882                 58,798                               held by small specs and hedgers.

Spreads….dn 4,771 contracts   The ratio went from 1.07-to-one short to 1.10-to-one long in the last report.

   Large speculators liquidated 3,079 long contracts and covered 7,209 shorts over the week under review.  Commercials liquidated 20,972 longs and covered 14,641 shorts.  Small specs and hedgers liquidated 8,051 longs and covered 10,252 shorts.  Open interest fell by 36,873 contracts as prices rallied $3.94/barrel.  That looks like heavy short covering and is bearish.  Everyone was covering shorts, partially going into expiration.  Commercials and small specs covered the most.

   The average large speculator has 2,269 long contracts (85 accounts), or 276 fewer contracts on average on eight new accounts, and 1,788 shorts (98 accounts), or an average of 34 contracts more on six less accounts.  Commercials held 7,707 longs (83) or 158 less longs on average on one less account, and 7,527 shorts (88), or 87 more shorts on three less accounts. Reportable positions held 4,368 longs (251) or 169 fewer contracts on three more accounts, and 4,514 shorts held by 244 accounts, or 55 more contracts on average on nine fewer accounts.  The shorts are now the stronger of the two.

Heating oil                 33,212                 14,131                           - contracts held by speculators:  2.35 to 1 long

                                           161,682               193,527                              held by the trade.

                                             42,444                 29,680                               held by small specs and hedgers.

Spreads….dn 1,603 contracts.    The ratio of large speculative longs to shorts went from 1.20-to-one to 2.35-to-one in 3 weeks.

       Large speculators added 2,557 longs and covered 5,079 shorts.  Commercial accounts liquidated 4,033 longs and added 5,701 shorts.  Small speculators and hedgers added 1,426 new longs and covered 672 shorts.  Open interest fell by 1,653 contracts as prices rallied 22.49 cents. That looks like net short-covering on an extremely large gain.

       The average large speculative long is holding 1,230 contracts (up 51 lots on 27 accounts, one more account), while the average short has 831 contracts (down 42 lots on 17 accts, dn five accounts).  The average commercial long is holding 2,608 contracts (dn 154 contracts on 62 accts, up two) compared to the average short holding of 3,225 contracts (up 95 lots on 60 accts, steady).  The average reportable position is 2,071 long (dn 48 lots on 108 accts, up 1) while the average short holding is 2,413 (up 152 lots on 98 accts, dn 7).  The reportable category has lost 48 short accounts in six weeks, now.

Rbob Gasoline          64,052                   6,178                          -contracts held by speculators:  10.37 to 1 long

                                           116,880               180.111                             held by the trade.

                                              16,695                 11,338                              held by small specs and hedgers.

Spreads…up 483 contracts   The ratio of large speculative longs to shorts went from 9.37-to-one to 10.37-to-one in a week.

     Large speculative holdings grew by 4,925 longs and fell by 129 shorts over the latest week. Commercial holdings fell by 413 longs and grew by 4,635 shorts.  Small speculators and hedgers’ positions grew by 40 longs and grew by 46 shorts.  Open interest grew by 5,035 contracts as prices rallied 7.88 cents.  That looks like good, new buying, which would be supportive.  Large speculators were the only ones really buying, with commercials selling to them.

   The average holdings are 1,165 contracts for each large speculative long (55) and 309 for each large speculative short (20).  The average commercial long now has 1,538 contracts long (76) and 2,070 short (87). Average reportable holdings are 1,291 long (150) against 1,496 short (133).  Large speculators added five new long accounts (down 18 contracts on average) and cut five short accounts (up 57 lots on average).  Reportable accounts were steady in terms of longs and down two short accounts.  The average long position increased by 34 contracts and the average short increased by 59 contracts.

Naturalgas                73,597               194,615                           -contracts held by speculators:  2.64 to 1 short

                                           253,059               181,915                               held by the trade.

                                             82,097                 32,223                           held by small specs and hedgers.

Spreads…dn 27,095 contracts    The ratio of large speculative shorts to longs went from 2.54-to-one to 2.64-to-one in 4 weeks.

  Large speculative holdings added 722 longs and added 6,553 shorts over the latest week. Commercial accounts liquidated 4,678 longs and added 1,025 shorts, and small speculators and hedgers added 4,702 longs and covered 6,832 shorts.  Open interest fell by 26,349 contracts as prices rallied $0.535/mmBtu.  That looks like short-covering and is bearish.  Once again, though, the short covering seems to have come from spread liquidation.  Commission house short-covering was substantial.

   The average large speculator has 1,206 contracts (61) while each large speculative short is holding 2,820 shorts (69).  The average commercial long now has 3,124 contracts long (81) and 2,799 short (65). Average reportable holdings are 2,716 long (204) long and 3,412 short (177).  Reportable positions had 14 new long accounts added and the shorts stayed the same.  The average reportable long holding declined by 364 lots on dilution and the average short dropped by 110 as existing holders covered an average of 110 contracts each.  Speculative averages fell by 252 longs and increased by 346 shorts. 

Natural Gas & Utility Generation

April natural gas contracts expired with fresh, heavy losses as the contract settled down 31.6 cents.  For the week, April natural gas declined 59.6 cents.  In the process, prices finished on Friday at their lowest level since September 17^th, 2002, six and a half years ago. 

Prices had rallied strongly on March 19^th, a day after the Federal Reserve had announced its plan to inject a trillion dollars into mortgage and treasury instruments.  That helped push a number of commodities prices higher over two days, and natural gas prices strengthened on a bigger-than-expected drawdown in EIA underground storage levels.  After that, though, prices worked sideways in what now seems to have been a failed attempt to move higher. 

Last week’s sudden rejection of higher prices came on news that there had been a build in underground storage figures, despite estimates calling for a draw of 11 bcf.  Market observers had wondered if last week’s anticipated drawdown might not turn out to be the last of the withdrawal season, but last week’s EIA report moved that calculus suddenly forward. 

Now, the question is whether withdrawal season has, in fact, ended.  The assumption accompanying fresh, low prices is that it has ended. 

In cash trading on Friday, Henry Hub prices were at $3.65-$3.78, down $0.22-$0.42 (DJN).  SoCal prices were at $2.95-$3.16, down $1.01-$1.02 on the day.  El Paso Permian prices were down $0.22-$0.23 at $2.65-$2.81.  Katy prices were down $0.40-$0.40 at $3.40-$3.60.  Waha prices were down $0.20-$0.27 at $2.77-$2.90.  Transco 6 was down $0.47-$0.50 at $4.07-$4.15/mmBtu.  Cash prices were catching ‘up’ with Thursday’s collapse in futures and low weekend use.

Palo Verde prices were last quoted at $29.00-$33.00/mwh.  Northeastern prices last traded at $40.50-$41.75.  Entergy was last at $30.50-$31.50.  Ercot was last at $27.25-$31.75/mwh. 

Cash quotes were hit by the double whammy of the normally weaker weekend and the need to react to Thursday’s steep decline in futures.  As a result, some quotes were down by as much as a dollar.  Many have two-dollar handles.  Temperatures were also forecast to be mild over the weekend and into early this week. 

We may still have a late snow storm or another bout of cold weather in April, but the winter is effectively over, now.  It was a very long one, lasting a full five months.  Temperatures were colder than normal in November and did not let up through most of March.  Even so, inventories were never under pressure and prices started to break down in the middle of the coldest weather of the season in January.  They have never really had a chance to bottom.  They tried ten days ago, but now they have broken to new, recent lows, and there is no real, certainly no recent, support underneath. 

Support is at $3.60-$3.62, $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 broke down through support to register new six-year lows on Friday.

Dollars per million Btu

EIA Weekly Storage Figures

Last 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 is a drawdown of 10.0 bcf.  Our seven-year average is a draw of 11.4 bcf.  Last year, we had an unrevised drawdown of 29 bcf.  We have had builds as large as 58 bcf and draws of as much as 65 bcf this week.

EIA Report

News & Views

In trading on Globex, May crude oil prices were down $1.00 at $51.38/barrel at 9:30 PM EDT, last night.  April heating oil prices were down 1.69 cents to 1.4159/gallon.  April RBOB prices were down 2.00 cents to $1.4679.  April natural gas was up $0.021 to $3.758/mmBtu. 

Oil prices dropped in early overnight trading in response to a firmer US dollar and weaker Asian equities markets.  It is an interesting relationship that seems to come and go irregularly, but both equities and currencies can influence the trading in oil markets.  Institutional traders seem to take special interest in these factors, and oil is seen as a hedge against a weaker dollar and inflation.  It has also traditionally been seen as a balance to equities, but recently the relationship has turned from being inverse to corresponding.  The dollar and oil had a strong inverse relationship from the summer of 2007 into the end of 2008.  Then, they seem to have separated, until about two or three weeks ago, when it became a factor again.  It seems to be an active factor as we start this new week.   

Crude oil prices sold off on Friday, after having advanced to new, recent highs last week.  Prices probably should correct further before going higher. 

Heating oil prices sold off after hitting resistance last week.  We probably need to have a correction before advancing much higher, here.   

The next two or three DOE reports are going to be critical and what they show us during the month of April, traditionally a strong month, will decide whether prices will continue advancing into May or will end the bullish run early.  This is the month for oil’s fundamentals to live up to the promise of better macroeconomic data.

This week’s DOE report has had draws in distillate stocks in six of the last seven years with the seventh year unchanged.  The average over seven years is a drawdown of 1.490 million barrels.  Gasoline stocks have been lower in four of the last seven years, for a four-year average draw of 4.200 mln bbls.  Over all seven years, the average draw has been 1.343 mln bbls.  Crude oil stocks have increased in each of the last seven years for an average build of 5.400 million barrels.  Utilization has increased in four of the last seven years for an increase of 1.05%, with the seven-year average coming in at 0.314%.  Utilization has averaged 88.07% over the last seven years, with the four-year, pre-hurricane average coming in at 90.3%.  Crude imports have averaged 10.225 mln bpd over the last five years.

Prices have run into technical resistance and they have gotten ahead of their fundamentals.  We probably need a correction to realign prices with those realities.  What happens in equities and in the US dollar may short-circuit that.

An Illustrated Look at Energy Market Factors

A Look at Gasoline Supply & Demand

Thirteen-week average gasoline demand is at 8.921 mln bpd, down 1.80% on the year.  Thirteen-week average supply is at 9.835 mln bpd, down 0.61%.  Thirteen-week implied demand is at 9.757 mln bpd, up 1.21%.

A Look at Distillate Supply & Demand

Thirteen-week average distillate demand is at 4.032 mln bpd, down 5.87% on the year.  Thirteen-week average supply is at 4.494 mln bpd, up 4.36%.  Thirteen-week implied demand is at 4.401 mln bpd, down 1.62%.

A Look at Refinery Fundamentals

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. 

Recommendations for Specific Market Segments