Market Review for Monday                   

HE oil complex declined sharply yesterday as the combination of overbought pressures, fundamental weakness and changes in equities helped push prices lower.  Equities prices were lower after the resignation of GM’s CEO and the sudden prospect of bankruptcy, and traders took that weakness into their thinking.  The weakness in equities allowed oil prices to react to factors that had been masked for the last week or so, as prices soared on macroeconomic factors.

In earlier trading yesterday, oil prices had tried to move higher in response to a weak US dollar.  The combination of poor fundamentals, overbought pressures and weaker equities pressed quotes lower.  Prices had risen last week largely on technical momentum, and it seems to have been stopped on Friday.  All it needed was yesterday’s trigger to sell off severely.

Fundamentally, the oil complex was overdue for a correction, after three weeks of increasing inventories and weakening demand statistics from the DOE.  Gasoline demand had been reportedly more than 2.00% higher than the previous year, but the latest figure has it up just 0.70%.  If the trend continues, we will see four-week demand closer to unchanged in one of the next few reports.  If it falls into negative territory, it would be a negative development. 

Normally, gasoline demand starts to improve as we move into April.  This year, supply and demand figures desperately need to show signs of improvement if they are going to continue moving higher into the middle of May, which is what we typically have seen over the years.  The seasonal tendency has already worked, to the extent that prices were higher after March 15th than before it, but the future is up in the air here.  We would expect the dollar to have an impact, though, at some point.    

Technicals

           The oil complex returned to more earthly numbers in a move that was overdue, given overbought indicators.  The fundamentals were also way behind prices, although the charts reflected a number of psychological and macroeconomic factors above and beyond the supply and demand.  It was their buying that had pushed prices higher over most of the second part of March.  April will be a critical month for fundamentals as well as the charts.

Dollars per barrel

Above:  Crude oil prices sold off yesterday. Below:  Gasoline prices moved lower yesterday.

Cents per gallon

May crude oil now has buy-stops over $52.25, $54.66, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $48.10, $46.92, $46.53, $43.62, $42.50, $42.00, $41.00, $39.40, $37.65, $36.91, and $32.40.  May heating oil has buy-stops over 145.70, 147.80, 150.50, 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 and 81.50.  May RBOB has buy-stops over 149.00, 152.00, 153.72, 152.45, 153.35, 158.00, 158.90, & 160.77.  Sell-stops are under 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 bears gained 40 yards on first down yesterday, earning them another first down. 

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 rose by 3,852 contracts on Friday, when prices were lower, which would suggest new selling.  It is bearish. 

      Heating oil open interest fell by 1,317 contracts on Friday, when prices were lower.  That looks like long liquidation, which would be supportive. 

      RBOB open interest fell by 1,057 contracts on Friday, when prices were lower.  That looks like long liquidation, which would be supportive. 

      Natural gas open interest grew by 4,367 contracts on Friday, when prices were lower.  That looks like new selling and is bearish.

Friday’s Open Interest Changes:

Crude 1,161,272  up 3,852        Heat 260,855   dn 1,317       RBOB 207,591  dn 1,057        Nat gas 623,861  up 4,367    

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

May natural gas took over as the expiring contract yesterday, and prices were unchanged on the day.  Gas traders have managed to divorce themselves completely from oil prices, although any time they move in harness, observers tend to see some common reason for the move.  We are not sure after the last two weeks if that can be considered valid any more.

Given the weakness in equities and oil markets, gas prices had every reason in the world to sell off simply on momentum.  The fundamentals are still pretty horrifying, although one could debate whether they might have already fallen far enough to discount most or all of those.  Still, even for an independent market, yesterday’s relative strength was surprising.

The reason given by wire services was as old as trading in this market – the weather.  In a year in which the winter simply refuses to end, traders were reacting to temperature forecasts suggesting that we will see colder-than-normal readings in the Midwest over the next two weeks.  It was certainly colder than normal for late March over the last few days, in the Northeast.  Ever since early November, temperatures have regularly returned to colder-than-usual readings, and it does not look like it wants to end.  Of course, we cannot expect any serious withdrawals from this point forward.

In cash trading yesterday, Henry Hub prices were at $3.57-$3.80, down $0.08 and up $0.02 (DJN).  SoCal prices were at $2.96-$3.06, down $0.10 and up $0.01 on the day.  El Paso Permian prices were down $0.02-$0.06 at $2.63-$2.75.  Katy prices were down $0.15-$0.25 at $3.15-$3.45.  Waha prices were down $0.05-$0.09 at $2.68-$2.85.  Transco 6 was up $0.00-$0.01 at $4.08-$4.15/mmBtu.  It is unusual to see cash quotes lower on Monday than Friday.

Palo Verde prices were last quoted at $27.00-$28.25/mwh.  Northeastern prices last traded at $39.45-$42.25.  Entergy was last at $27.50-$28.50.  Ercot was last at $26.75-$29.00/mwh. 

Cash quotes were mostly lower yesterday, which is a rare decline on a Monday.  That is all the stranger when one considers the outlook for colder temperatures.  We cannot say, though, that this is the first time we feel we have been thrown a curveball by the natural gas market this year. 

We apparently spoke too soon on Friday, saying that winter appeared to be over.  If that were truly the case, we have every reason to believe that traders could have pushed prices dramatically lower in sympathy with lower equities and oil prices yesterday.  Clearly, there were traders who were able to convince themselves that the approaching cold might be severe enough to give us a decline in storage figures or, at the least, a much less robust increase.  Maybe prices have just gotten too low, have discounted the fundamentals, or have traders exhausted.  Maybe it was just too early in the week.  We would have a difficult time building a bullish scenario from yesterday’s unexpected resilience.

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 $3.79-$3.80, $3.96-$4.00, $4.21-$4.23, $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 up $0.67 at $49.08/barrel at 1:30 AM EDT, this morning.  April heating oil prices were up 1.49 cents to 1.3575/gallon.  April RBOB prices were up 1.37 cents to $1.3936.  April natural gas was up $0.057 to $3.796/mmBtu. 

Oil prices rallied in overnight trading into early this morning.  There seems to have been decent short-covering last night and it was still evident this early morning.  Some observers also saw value in oil relative to the US dollar, which remains a major input in traders’ thinking. 

Today, we expect trading to be predicated largely on expectations for this evening’s API report and, more importantly, tomorrow morning’s DOE report.  If the bulls are going to retake the offensive, they will need to get some kind of help from the next few reports, either in terms of decreasing supply overhangs in inventories or from improving demand figures.  We are not sure a rally based on a weaker dollar can be sustained here for long.

Crude oil prices sold off steeply yesterday.  Prices tried to advance late last week, but the momentum petered out.  The end result is a market that may have more on the downside.

Heating oil prices sold off steeply yesterday, and there is a gap between 142.25 and 142.56.  That is now tough resistance and shows the pent-up selling unleashed yesterday.

DOE Expectations

The table below lists the first 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 2.600        up 3.500          up -.--- mln bbls

Distillate      dn 0.500        dn 1.100          dn -.---

Gasoline      dn 1.100        dn 1.500          dn -.---

Utilization   up 0.2%         up 0.3%           up -.--  N.A.

Distillate stocks have risen in six of the last seven years for a seven-year average drawdown of 1.490 million barrels.  Gasoline stocks have had 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 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.

Moves in equities and the US dollar will still influence prices.  Longer-term, though, this complex needs some fundamental support to continue moving higher.

An Illustrated Look at Energy Market Factors

A Look at Inventories

A Look at Imports

Distillate imports have increased dramatically this year.

Thirteen-week average crude oil imports have fallen to their lowest level in years

– but inventories continue to increase.

Recommendations for Specific Market Segments