Market Review for Thursday  

HE oil complex finished with light gains yesterday, in a relatively quiet session.  Most of the fundamental factors highlighted this week have been bearish, so it was certainly nothing fundamental that pushed quotes higher.  Technically, prices are in trading-range consolidations, so there could have been some light technical pressure to advance, but it was not overwhelming.  Seasonally, prices should still get stronger between now and the middle of May, so that might have helped.

Fundamentally, demand is poor and inventories have built to ample or even onerous levels.  The most bullish factor, the extremely low state of refinery utilization, is also a bearish factor.  Even as refiners slash crude oil imports, crude inventories have increased because of utilization rates almost 10% below the eight-year average for this time of year. 

Yesterday’s jobless numbers were horrific, but they were not as bad as they had been expected to be.  That has been a major theme recently; economic numbers have been bad on any absolute scale, but they have not been as bad as expected or estimated.  The end result is a kind of tenuous hope that brings in light buying to the oil markets.

In other news, in an interesting twist of events, Barclay’s Capital said yesterday that energy and precious metals are “running out of favor” with investors.  They seem to like buying crude when it’s at more than $100 and gold when it is more than $1,000/ounce. 

Technicals

           The oil complex was higher yesterday, although not by very much.  If the bulls do not have a convincing session today, the bears will take this week.  Prices are in trading ranges, here.  Heating oil has support at 129.98 and resistance at 147.15 and then again at 150.50.  Gasoline has support at 134.11 and resistance at 151.90 and then again at 153.72.  Crude is trading between $47.26-$47.37 and $53.60-$53.90.  Any breaks above resistance or below support would be significant at this stage.  Prices have built powerful consolidation triangles.

Cents per gallon

Above:  Jet fuel prices are waiting, along with heating oil prices.  Below:  New York Harbor jet fuel prices.

Cents per gallon

May crude oil now has buy-stops over $52.45, $53.90, $54.66, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $48.80, $48.40, $47.25, $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 144.11, 145.21, 147.15, 147.80, 150.50, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 134.49, 132.25, 129.95, 127.95, 123.20, 119.00, 114.30, 112.50, 109.80, 104.55, and 95.95.  May RBOB has buy-stops over 149.77, 151.05, 151.90-152.00, 152.45, 153.35, 153.75, 158.00, 158.90, & 160.77.  Sell-stops are under  140.35, 136.70, 134.10, 133.55, 130.60, 124.00, 121.50, 118.25, 116.50, 107.90, 102.30, 98.70, 96.69, and 90.10.

Football: The bears lost seven yards yesterday on third and two to go, making it fourth and nine to go.

Technical Support & Resistance

Oil Inventory Reports

    This week’s DOE report showed a larger-than-expected build in crude oil stocks, exceeding estimates almost by a factor three.  Refined products stocks dropped roughly in line with expectations, and utilization bucked the trend of the last few years by increasing this week.  This was just the third time in nine years that utilization declined this week.  It is now 9.99% less than the eight-year average for this time of year.  Crude oil stocks have become the central focus in this report, and they are now at their highest level in 18½ years (September, 1990).    

   Distillate stocks are now 32.8 million bbls, or 30.71%, higher than a year ago.  Heating oil inventories are 13.6 mln bbls, or 59.91%, higher than they were a year ago.  Gasoline stocks are 1.3 million bbls, or 0.60%, lower.  Crude oil stocks are now 51.9 million bbls, or 16.49%, higher than a year ago.  Residual stocks are 3.2 mln bbls (8.12%) lower than a year ago, jet fuel stocks are up 0.7 mln bbls, (1.81%) higher than a year ago.  Utilization is 1.0% lower than a year ago and is 9.99% below the eight-year average.  It is 12.62% lower than the five-year, pre-Katrina average.  That is the most bullish factor in this complex.

                                                                    DOE Weekly Inventory Statistics

Source: US Department of Energy’s Energy Information Administration

Open Interest Analysis

      Crude oil open interest fell by 11,369 contracts on Wednesday, when prices were lower, which looks like long liquidation.  That would be supportive, and it returns us to a pattern of buying on advances and liquidation on declines.

      Heating oil open interest rose by 3,565 contracts on Wednesday, when prices were lower.  That looks like new selling, which would be bearish.

      RBOB open interest grew by 743 contracts on Wednesday, when prices were lower.  That looks like new selling, which would be bearish.

      Natural gas open interest rose by 1,149 contracts on Wednesday, when prices ended higher.  That looks like new buying, which would be supportive.

Wednesday’s Open Interest Changes:

Crude 1,181,250  dn 11,369        Heat 260,457   up 3,565       RBOB 206,301  up 743       Nat gas 664,597  up 1,149      

CFTC Commitments of Traders  (for the period ended Tuesday, Apr. 7th)  

As of Apr. 7th:                 Long                   Short:

Crude oil                   186,928               174,435                           -contracts held by speculators:  1.07 long

                                           650,424               669,668                               held by the trade

                                             65,517                 58,766                               held by small specs and hedgers.

Spreads….up 13,923 contracts   The ratio went from 1.04-to-one short to 1.07-to-one long in the last report.

   Large speculators added 2,078 long contracts and covered 3,869 shorts over the week under review.  Commercials added 3,322 longs and added 11,115 shorts.  Small specs and hedgers liquidated 5,698 longs and covered 7,54412 shorts.  Open interest grew by 13,625 contracts as prices dropped $0.51/barrel.  That suggests net new selling, which would be bearish.  The main reason open interest increased, though, was the increase in spread positions.  Commercials were selling short.

   The average large speculator has 2,149 long contracts (87 accounts), or 26 fewer contracts on average on two more accounts, and 1,762 shorts (99 accounts), or an average of 115 contracts less on four more accounts.  Commercials held 8,030 longs (81) or 41 more longs on average on the same number of accounts, and 7,787 shorts (86), or 388 more shorts on three fewer accounts. Reportable positions held 4,318 longs (254 accounts) or 80 less contracts on nine more accounts, and 4,432 shorts held by 249 accounts, or 14 more contracts on average on five more accounts.  The new sellers sold large numbers of contracts.

Heating oil                 33,149                 11,556                           - contracts held by speculators:  2.87 to 1 long

                                           138,968               175,821                              held by the trade.

                                             40,733                 25,473                               held by small specs and hedgers.

Spreads….up 1,385 contracts.    The ratio of large speculative longs to shorts went from 3.04-to-one to 2.87-to-one in a week.

       Large speculators liquidated 143 longs and added 612 shorts.  Commercial accounts liquidated 7,900 longs and covered 7,546 shorts.  Small speculators and hedgers added 1,992 longs and added 883 shorts.  Open interest fell by 4,666 contracts as prices gained 2.24 cents. That looks like net short-covering, which came from commercial accounts.

       The average large speculative long is holding 1,275 contracts (up 127 lots on 26 accounts, 3 less accounts), while the average short has 642 contracts (up 95 lots on 18 accts, dn two accounts).  The average commercial long is holding 2,171 contracts (dn 237 contracts on 64 accts, up 3) compared to the average short holding of 3,085 contracts (dn 76 lots on 57 accts, dn one).  The average reportable position is 1,841 long (dn 76 lots on 112 accts, up 1) while the average short holding is 2,237 (dn 33 lots on 99 accts, dn 1).  The reportable short category has lost 47 accounts in 8 weeks).

Rbob Gasoline          57,484                   5,891                          -contracts held by speculators:  9.75 to 1 long

                                           110,999               168.747                             held by the trade.

                                              19,184                 13,029                              held by small specs and hedgers.

Spreads…dn 1,090 contracts   The ratio of large speculative longs to shorts went from 8.77-to-one to 9.75-to-one in a week.

     Large speculative holdings grew by 773 longs and fell by 572 shorts over the latest week. Commercial holdings fell by 3,007 longs and fell by 797 shorts.  Small speculators and hedgers’ positions grew by 4,107 longs and rose by 3,242 shorts.  Open interest grew by 783 contracts as prices rallied 3.91 cents.  That looks like new buying and is supportive.  Small specs and hedgers were the week’s best buyers.  Large speculators were also buying and covering shorts.  Commercials covered shorts.

   The average holdings are 974 contracts for each large speculative long (59) and 327 for each large speculative short (18).  The average commercial long now has 1,609 contracts long (69) and 2,033 short (83). Average reportable holdings are 1,276 long (141) against 1,443 short (129).  Large speculators had the same number of long accounts and one less short account, which increased the average long position by 13 contracts and cut the average short by 13 shorts.  There were seven new long and five less short accounts in the reportable category, which cut six contracts from the longs and added 36 to the shorts.

Naturalgas                75,607               201,812                           -contracts held by speculators:  2.67 to 1 short

                                           256,406               174,753                               held by the trade.

                                             84,379                 39,822                           held by small specs and hedgers.

Spreads…dn 5,141 contracts    The ratio of large speculative shorts to longs went from 2.74-to-one to 2.67-to-one in a week.

  Large speculative holdings added 5,166 longs and added 8,913 shorts over the latest week. Commercial accounts added 2,555 new longs, and added 2,263 shorts, while small speculators and hedgers added 5,165 longs and added 1,710 shorts.  Open interest grew by 7,745 contracts as prices dropped $0.214/mmBtu.  That looks like new selling, which would be bearish.  Every category was selling new short contracts – although they also all bought. 

  The average large speculator has 1,543 contracts (49) while each large speculative short is holding 2,727 shorts (74).  The average commercial long now has 3,166 contracts long (81) and 2,913 short (60). Average reportable holdings are 2,993 long (183) long and 3,526 short (168).  Large speculators liquidated eight long accounts, which increased the average long holding by 307 contracts, and they added seven new short accounts, which diluted the average short holding by 152 contracts.  There were three fewer reportable long and one less short account, which increased average holdings by 62 longs and 57 shorts.

Natural Gas & Utility Generation

May natural gas prices sold off yesterday, leaving prices within fairly easy striking distance of any accumulated sell-stops under $3.50/mmBtu.  Prices got down as low as $3.534 before short-covering and technical buying pushed quotes back towards $3.60.  Traders seem to have been returning to the primary trend, which has had poor industrial demand and a generous cushion of gas in storage as driving factors.  This week’s EIA underground storage report offered the latest reaffirmation of those guiding motives by showing a build of 21 bcf, slightly above the survey average expectation for a build of 20 bcf (Dow Jones).  

One of the warnings made by the Energy Information Administration (EIA) earlier this week was that underground storage levels could approach or break record numbers by the beginning of November, when injection season will have ended.  We are at its beginning and are already more than a fifth again higher than the five-year average. 

Temperatures are expected to trend towards the colder side, although it was warm in the New York City greater metropolitan area yesterday.  Still, the trend has been for colder readings to show up – even when not predicted 10-15 days earlier – once we get to the actual day forecast.  It has been colder since November. 

In cash trading yesterday, Henry Hub prices were at $3.52-$3.61, down $0.04-$0.04 (DJN).  SoCal prices were at $3.00-$3.08, down $0.02-$0.05 on the day.  El Paso Permian prices were down $0.05-$0.05 at $2.86-$2.96.  Katy prices were down $0.04-$0.04 at $3.40-$3.48.  Waha prices were down $0.01-$0.02 at $2.93-$3.03.  Transco 6 was down $0.12-$0.12 at $3.97-$4.08/mmBtu.  

Palo Verde prices were last quoted at $23.00-$26.50/mwh.  Northeastern prices last traded at $27.00-$37.50.  Entergy was last at $30.50-$31.50.  Ercot was last at $27.75-$29.00/mwh. 

After its attempt on Monday to break $3.50, it seemed that gas had firmly rejected levels below that psychologically significant figure.  Yesterday, prices got within a stone’s throw of that level, but they quickly turned back up.  The problem is, and has been, that there is nothing really there to support prices in any move higher.  They have been able to reject levels at, near or under $3.50, but once they get a safe distance above that figure, they freeze up, because there is no reason for them to advance any further.

How prices act from here will determine whether they can actually put in a bottom.  If the bulls cannot do anything with prices from here, the bears will be obliged to sell quotes back to $3.50.  They do seem reluctant, though, to get aggressive after that, so it leaves us with a market in which new lows are almost certainly buying opportunities, once the sell-stops have been filled.  We have been doing that in a round-about manner since breaking under $5.00/mmBtu.  Since it does not look like the fundamentals will get stronger any time, soon, this may be a market that just runs out of selling interest.

Support is at $3.50-$3.53, $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 $3.71-$3.72, $3.79-$3.81, $3.85-$3.86, $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 were fractionally higher yesterday in a 12-cent range.

Dollars per million Btu

EIA Weekly Storage Figures

This week’s EIA report showed a build of 21 bcf on expectations for a build of 20 bcf.  Stocks are now 438 bcf higher than a year ago, against a surplus of 438 bcf a week ago, a surplus of 402 bcf two weeks ago and a surplus of 372 bcf three weeks ago.  Stocks are now 34.84% higher than a year ago.  They are 311 bcf and 22.47% above the five-year average.

For this week, our five-year average was a build of 17.4 bcf.  Our eight-year average was a build of 11.63 bcf.  Dow Jones was looking for a build of 20 bcf (in its survey of analysts).

EIA Report

News & Views

In trading on Globex, May crude oil prices were down $0.32 at $49.66/barrel at 1:30 AM EDT, this morning.  May heating oil prices were down 0.56 cents to 1.4162/gallon.  May RBOB prices were up 0.02 cents to $1.4745.  May natural gas was up $0.004 to $3.603/mmBtu. 

Oil prices were mildly lower late last night and early this morning, despite strength in Asian equities markets.  This has been happening more frequently recently and, at some point, we will return to the more familiar inverse relationship between equities and oil.  With stock markets seemingly on the mend, investors are shifting assets from commodities to shares in companies – even though this implies a belief that the economy will strengthen.

Oil traders are in the process of making a shift in focus.  It boils down to switching from being bearish because of weak demand to being bearish because of ample and generous inventories.  This latter is largely the result of the former, but it is a logical progression.  Stocks are likely to remain enlarged until demand has improved substantially.  That will take consistent gains in employment figures, which seems quite a long way away.

Crude oil prices had yet another inside day, keeping the potential for a potentially explosive break.  Key support is at $47.26 and $47.37 and resistance is at $53.60 and $53.90. 

Heating oil prices continued to trade within their recent consolidation, although yesterday was not another “inside day.”  Prices may be trying to break to the upside, and we may see short-covering before the weekend, today.

The EIA predicted yesterday that Opec countries will get less than half the amount of revenues they received in 2008.  Lower prices have been compounded by production cuts to cut deeply into their revenues.  In some cases, countries may have difficulty even generating a third of the revenues they saw last year.  For 2008, average daily output from the cartel was 31.25 million bpd, as countries pumped all-out.  Now, Opec’s members are producing an estimated 28.5 mln bpd. 

Oil Movements said yesterday that Opec will load 22.2 million bpd in the four weeks that will end on May 2^nd, down some 600,000 bpd from its estimate of Opec’s movement for the four-week period ended April 4^th.  We know that US refiners have reduced imports over the last several weeks, and this suggests that imports will remain on the lower side over the next few weeks.  The number of barrels of oil on board tankers will fall by 4.1%, it said, on May 2^nd.  Opec is still trying to reach full compliance with its targeted output cuts.    

Extremely low refinery utilization rates are typically bullish in the spring, but low demand this year is talking them as a reason to build crude oil stocks to historic high levels.  That is now the major factor in this market.

An Illustrated Look at Energy Market Factors

A Look at Inventories

Crude oil inventories keep on growing, despite huge cuts in imports (see below).

A Look at Imports

Thirteen-week crude oil imports are at their lowest levels in our records.

Refiners are trying to slash imports to reduce stocks, but utilization is so low that it is not yet ‘taking.’

Recommendations for Specific Market Segments