Market Review for Friday & the Weekend

IL prices were higher on both Thursday and Friday, and that cut into the losses seen last week.  For the full five trading days, crude oil prices lost $1.91 a barrel, heating oil prices lost 0.63 cents a gallon, gasoline prices gained 1.17 cents a gallon and natural gas prices gained 11.9 cents/mmBtu. 

The week started out on a bearish note for the complex, with traders returning from the Easter holiday weekend.  They had covered shorts on the preceding Thursday, on fears that something bullish might happen over the extended time off.  When nothing happened over the weekend, traders restored their short positions on their return last Monday. 

That was effectively it, though.  Prices were lower on Tuesday and Wednesday, but they were unable to build on the weakness as the week evolved.  By Thursday, the bulls were slightly emboldened while the shorts seem to have lost their patience.  We had a bearish DOE report, especially for crude oil, but losses were still kept to a minimum.  Imports have dropped dramatically, to their lowest aggregate levels in years, but stocks keep increasing.  Low utilization rates (10% below eight-year average figures) have contributed to higher inventories.

What attracted our attention, though, was the lack of any promising economic news last week.  Despite that fact, prices were still able to eat into the week’s losses.  In the recent past, the market needed a Fed injection (of a trillion dollars), a Treasury Department plan to save banks or a stimulus package to eclipse the market’s weak fundamentals.  Last week – without anything approaching those – prices were still able to finish without really taking a licking.  That tells us that prices are still basically strong on a technical, psychological or seasonal level.  It certainly is not on a fundamental basis.

Technicals

           Oil prices were higher on Friday, although they did not break out of their current consolidation ranges.  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 seem to be leaning towards a breakout to the upside, although that could still change.

Dollars per barrel

Above:  Crude is stuck in a consolidation.  Below:  Heating oil prices are also in a trading range.

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 145.35, 147.15, 147.80, 150.50, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 140.00, 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 152.76, 153.35, 153.75, 158.00, 158.90, & 160.77.  Sell-stops are under  144.60, 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 three yards on Friday on fourth and nine to go.  That gives the bulls a first down to start this week.

Technical Support & Resistance

Oil Inventory Reports

    This week’s DOE report has shown an average increase of 1.2% in refinery utilization, over all eight years, for this week.  During the five years that it increased, it increased by an average of 2.68%.  Gasoline stocks have still fallen in six of the last eight years, and crude stocks have increased in five of the last eight years, but distillate stocks have been much more neutral.  Three years have been higher, three years have been lower, and two years were unchanged.  The eight-year average was a drawdown of 37,500 bpd.  Crude imports have averaged 9.867 million bpd over the last five years.

   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 grew by 4,498 contracts on Thursday, when prices were higher, which looks like fresh buying.  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 1,321 contracts on Thursday, when prices were higher.  That looks like new buying, which would be bullish.

      RBOB open interest grew by 3,069 contracts on Thursday, when prices were higher.  That looks like new buying, which would be supportive.

      Natural gas open interest rose by 5,079 contracts on Thursday, when prices ended lower.  That looks like new selling, which would be bearish.

Thursday’s Open Interest Changes:

Crude 1,185,748  up 4,498        Heat 261,778   up 1,321       RBOB 209,370  up 3,069       Nat gas 669,676  up 5,079     

CFTC Commitments of Traders  (for the period ended Tuesday, Apr 14th)  

As of Apr 14th:               Long                   Short:

Crude oil                   180,982               176,020                           -contracts held by speculators:  1.03 long

                                           671,472               685,580                               held by the trade

                                             75,905                 66,759                               held by small specs and hedgers.

Spreads….up 4,817 contracts   The ratio went from 1.07-to-one short to 1.03-to-one long in the last report.

   Large speculators liquidated 5,946 long contracts and added 1,585 shorts over the week under review.  Commercials added 21,048 longs and added 15,912 shorts.  Small specs and hedgers added 10,388 longs and added 7,993 shorts.  Open interest grew by 30,307 contracts as prices were up $0.26/barrel.  That suggests net new buying, which would be supportive, although prices did not rise by very much.  Commercials and small specs and hedgers were the biggest buyers during the week. 

   The average large speculator has 2,057 long contracts (88 accounts), or 21 less contracts on average on one more account, and 1,834 shorts (96 accounts), or an average of 72 contracts more on three less accounts.  Commercials held 7,808 longs (86) or 222 fewer longs on average on three fewer accounts, and 7,618 shorts (90), or 169 less shorts on four more accounts. Reportable positions held 4,295 longs (260 accounts) or 23 less contracts on six more accounts, and 4,468 shorts held by 252 accounts, or 36 more contracts on average on three more accounts.  The new sellers sold large numbers of contracts.

Heating oil                 35,130                 11,839                           - contracts held by speculators:  2.97 to 1 long

                                           142,887               182,746                              held by the trade.

                                             41,709                 25,141                               held by small specs and hedgers.

Spreads….up 3,099 contracts.    The ratio of large speculative longs to shorts went from 2.87-to-one to 2.97-to-one in a week.

       Large speculators added 1,981 longs and added 283 shorts.  Commercial accounts added 3,919 longs and added 6,925 shorts.  Small speculators and hedgers added 976 longs and covered 332 shorts.  Open interest grew by 9,975 contracts as prices gained 1.20 cents. That looks like net, new buying, which would be supportive. 

       The average large speculative long is holding 1,211 contracts (dn 64 lots on 29 accounts, 3 more accounts), while the average short has 564 contracts (dn 78 lots on 21 accts, up three accounts).  The average commercial long is holding 2,198 contracts (up 27 contracts on 65 accts, up 1) compared to the average short holding of 3,097 contracts (up 12 lots on 59 accts, up two).  The average reportable position is 1,839 long (dn 2 lots on 117 accts, up 5) while the average short holding is 2,166 (dn 71 lots on 107 accts, up 8).  The reportable short category added eight accounts in the latest week).

Rbob Gasoline          54,805                   5,754                          -contracts held by speculators:  9.52 to 1 long

                                           118,265               172.109                             held by the trade.

                                              18,373                 13,580                              held by small specs and hedgers.

Spreads…up 2,613 contracts   The ratio of large speculative longs to shorts went from 9.75-to-one to 9.52-to-one in a week.

     Large speculative holdings fell by 2,679 longs and grew by 5,754 shorts over the latest week. Commercial holdings grew by 7,266 longs and rose by 3,362 shorts.  Small speculators and hedgers’ positions fell by 811 longs and rose by 551 shorts.  Open interest grew by 6,389 contracts as prices dropped 0.28 cents.  That looks like new selling and is negative.  Commercials were the largest sellers – and bought twice as much as they sold.  Speculators liquidated long holdings.

   The average holdings are 913 contracts for each large speculative long (60) and 320 for each large speculative short (18).  The average commercial long now has 1,577 contracts long (75) and 1,978 short (87). Average reportable holdings are 1,231 long (152) against 1,412 short (136).  Large speculators had one more long account and the same number of short accounts, which decreased the average long position by 61 contracts and cut the average short by 7 shorts.  There were 11 new long and seven more short accounts in the reportable category, which cut 45 contracts from the longs and 31 from the shorts.

Naturalgas                75,773               202,382                           -contracts held by speculators:  2.67 to 1 short

                                           264,604               183,550                               held by the trade.

                                             83,171                 37,616                           held by small specs and hedgers.

Spreads…up 24,145 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 166 longs and added 570 shorts over the latest week. Commercial accounts added 8,198 new longs, and added 8,797 shorts, while small speculators and hedgers liquidated 1,203 longs and covered 2,206 shorts.  Open interest grew by 31,306 contracts as prices rallied $0.127/mmBtu.  That looks like new buying, which would be supportive.  Commercials were the best buyers, but they were selling more than they bought. 

  The average large speculator has 1,329 contracts (57) while each large speculative short is holding 2,734 shorts (74).  The average commercial long now has 3,150 contracts long (84) and 2,781 short (66). Average reportable holdings are 2,844 long (204) long and 3,458 short (181).  Large speculators added eight long accounts, which decreased the average long holding by 219 contracts, and they kept the same number of short accounts.  There were 21 more reportable long and 13 more short accounts, which decreased average holdings by 149 longs and 68 shorts.

Natural Gas & Utility Generation

May natural gas prices were higher on Friday, as futures traders reacted to Thursday’s test of $3.50 and its failure to break beneath that level.  Prices had already received buying on Monday when they were unable to penetrate beneath the $3.50 level, so Thursday’s test – and the market’s subsequent ability to hold above that figure – acted as an effective double bottom pattern.  It is difficult to see it, particularly as a double bottom pattern, on the charts, but the effect is the same.  In fact, it is more of a triple bottom, with attempts made on Monday, Thursday and Friday to break down beneath $3.50, with all three attempts having failed.    

Traders were also covering shorts ahead of the weekend, which is something we see quite frequently, especially in oil futures (in which so many events that can affect them can happen over a weekend).  Dow Jones also quoted traders who felt that stronger equities played a role in firming up quotes.

Taken as a whole, last week’s trading has to be seen as constructive.  We all know the bearish factors in this market – too much gas in storage, the end of heating season, and the loss of industrial consumption in this market – so the market’s ability to end the week with almost 12 cents in gains has to be seen as a minor victory for the bulls. 

In cash trading on Friday, Henry Hub prices were at $3.44-$3.60, down $0.01-$0.08 (DJN).  SoCal prices were at $2.72-$2.90, down $0.18-$0.28 on the day.  El Paso Permian prices were down $0.16-$0.19 at $2.67-$2.80.  Katy prices were down $0.02-$0.07 at $3.33-$3.46.  Waha prices were down $0.17-$0.19 at $2.74-$2.86.  Transco 6 was down $0.04-$0.17 at $3.80-$4.04/mmBtu.  

Palo Verde prices were last quoted at $31.00-$33.75/mwh.  Northeastern prices last traded at $32.50-$42.85.  Entergy was last at $30.50-$31.50.  Ercot was last at $27.00-$27.75/mwh. 

Any fundamental justification for higher prices strikes us as being unlikely.  This market has not been responding all that much or that closely to economic developments or improvements.  And, it would take substantial increases in demand or decreases in inventories to alter the fundamental picture enough to justify a rise in prices.  As far as we can tell, last week’s price rise was based on this market running out of bullets on the downside.  The bears tried – for all the right reasons – to press quotes beneath $3.50 last week, on three separate occasions, and they failed each time.  As they covered shorts, prices rose, and that brought in fresh, technical buying. 

The rise in equities might have prevented prices from selling down below $3.50/mmBtu.  Still, last week’s EIA underground storage figures were seen as bearish, and they left storage facilities 34.84% higher than a year ago and 311 bcf and 22.47% above the five-year average.  It will take weeks or months to change that picture.

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 $3.78-$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 finished on a positive note last week.

Dollars per million Btu

EIA Weekly Storage Figures

Last 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 $0.93 at $49.40/barrel at 11:30 AM EDT, last night.  May heating oil prices were down 1.35 cents to 1.4090/gallon.  May RBOB prices were down 2.51 cents to $1.4676.  May natural gas was down $0.039 to $3.690/mmBtu. 

Oil prices were lower late last night, on profit-taking, and in sympathy with weaker equities quotes in Asia.  While the $50-level represents an important psychological level for some traders, it has not acted as the major breakwater on the charts that some expected it might.  There is little by way of major economic news expected this week, with equities traders focusing on corporate profit reports.

In other news, Venezuelan Oil Minister Rafael Ramirez said of a price band, “A mechanism like that has to exist, such as an improved price band, or the establishment of price parameters, or a collective formula that offers certainty and stability to producer and consumer countries.”  By “improved,” he means higher than the price band that existed before the last bull market.

Crude oil prices finished higher on Friday, but they still have trendline resistance and key resistance at $53.60 and $53.90.  Key support is at $47.26 and $47.37.

Heating oil prices broke over trendline resistance on Friday, although they could not settle above it.  They still have key resistance up to 150.50.  A break and settle over that would give us another leg higher on the charts.

Angola is scheduled to increase production by 7.3% in June, which represents an increase in output of 130,000 bpd.  This includes Palanca, which was unavailable before.

Over the last eight years, distillate stocks have risen in three of them, for a three-year average build of 0.700 million barrels, fallen three, for an average draw of 0.800 mln bbls, and were unchanged in two years.  The full eight-year average is a draw of 0.037 mln bbls.  Gasoline stocks decreased in six of the last eight years, for a six-year average draw of 1.766 mln bbls, with an eight-year average draw of 0.987 mln bbls.  Crude oil stocks have increased in five of the last eight years, for a five-year average gain of 3.04 mln bbls.  The eight-year average is a build of 1.475 mln bbls.  Utilization has increased in five years, for an average increase of 2.68%.  The eight-year average is an increase of 1.20%, to an average rate of 91.35%.  The five-year, pre-hurricane average is 93.84%.  Crude oil imports have been up an average of 223,000 bpd over the last five years, and the five-year average import rate is 9.867 million bpd.

Utilization rates were lower last week, although they have typically started to increase at this point on the calendar.  Low utilization rates contribute to higher crude oil stocks – but they also reduce refined products.

An Illustrated Look at Energy Market Factors

A Look at other News

Last week’s Consumer Price Index (CPI) showed a decline of 0.4%, showing the first drop in inflation since 1955.  Capital Economics wrote:

“The decline in the CPI in year-on-year terms is all due to the spike (and subsequent reversal) in energy prices last year, and does not necessarily mark the beginning of widespread deflation this year. Nevertheless, with the unemployment rate and the output gap both headed for 10% and the financial system still largely crippled, the risk of a pernicious debt-deflation developing is still much bigger than the risk that the Fed’s quantitative easing will lead to runaway inflation.”

Editor’s Note:  Energy prices continue to cast long shadows over the economy, and we remain convinced that the current recession is as bad as it is partly because the increase in oil prices was so much steeper than in the past.  We have noted here before, every recession in the US since the mid-seventies has been preceded by the tripling or worse in oil prices.  Every time that oil prices have tripled or worse, there has been a recession.  We believe this is because higher energy, especially heating and transportation costs, hit consumers more severely than any other more ‘discretionary’ spending.  Food, energy and housing are at the core of human existence, even subsistence.  But, when housing prices increase, they rarely triple in a few years, and people can live in cheaper environs.  When food prices increase, they are capable of tripling in a few years, but usually one can substitute chicken for steak or potatoes for bread.  When gasoline prices increase, one can consolidate trips or carpool, but only to a point in aggregate terms.  Ultimately, the ‘nuclear option’ in terms of rationing energy is unemployment, which cuts the need to drive to work for large numbers of people.  Oil prices “just” tripled from December, 1998 to September of 2000, so the recession at the start of this decade was mild.  From the subsequent lows until the highs last summer, prices were up by a factor of more than eight.  We now have a severe recession.  Yes, there are always other factors – savings and loans, dot-coms, or housing bubbles, but oil price increases are the common denominator in all of our post lunar (landing) recessions.

           Chinese refinery throughput is expected to increase by an average of 5.7% a year over the next three years, Dow Jones quotes China Securities Journal this morning.  Chinese refined products output is expected to increase by 5.9% each year, with ethylene production expected to surge by 14.7% a year over the same period.  The article quoted the China Petroleum & Petrochemical Engineering Institute as having forecast a growth rate of 4-5% in refined products demand from 2010 to 2015.

           From Bloomberg, quoting the API:  Last year’s higher prices have given rise to an increase in US domestic crude oil production, which grew by 7.2% to 5.47 million bpd in March.  In the first quarter, distillate consumption dropped by 8.5% to 3.84 million bpd.  Jet fuel demand fell by 7.6% to 1.42 million bpd.  Gasoline use actually increased by 0.8%, as recently lower prices stimulated consumption slightly.  Normal gasoline demand typically increases by 1.5% to 2.0% each year. 

           Bloomberg reported on Friday that the Reuters/University of Michigan measure of consumer confidence increased in April to 61.9 from 57.3 in March.  This makes it two months in a row of improving confidence, which apparently bottomed in November at 55.3. 

Editor’s Note:  These numbers are still historically weak, but some observers see these back-to-back increases as reasons to believe that the recession may be reaching a bottom.  Energy use is unlikely to start climbing significantly until people start going back to work, because commuting represents such a large percentage of non-discretionary transportation-fuel consumption. 

           The Guardian reported this morning that China is considering setting carbon emissions targets “for the first time” with its next five-year plan, beginning in 2011.  The British newspaper quoted Chine negotiator Su Wei as saying, “It is an option.  China hasn’t reached the stage where we can reduce overall emissions, but we can reduce energy intensity and carbon intensity.”  The article noted that China is the world’s largest “contributor of greenhouse gases.”

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