Market Review for Thursday           

HE oil complex was mixed yesterday, in what was this week’s version of attempted strength or recovery.  And that tells us a story.  It seems that prices still have some lingering remnant of seasonal strength left in them, but it has become such a hollowed husk of its former self that recent rallies have become anemic shadows of what we saw in March.  A part of this complex still wants to go higher; the mind is willing, but the muscle and sinew are atrophied and sick.  Once this complex realizes how sick it is, it will fall.

Our analogy is all about the fundamentals (the muscle) and the charts (the sinew).  The mind (the seasonal tendency) is still influencing the tide higher, but it seems to us that it is the only factor preventing prices from tumbling right out of bed.  The charts were hit hard this week.  And the fundamentals only got worse.  Inventories grew in relation to a week ago and a year ago.  The deficit, year-on-year, in gasoline inventories became a surplus this week, and refineries cranked up utilization by three full percentage points.  These had been bright spots in an otherwise bleak picture, and now they are gone.  Crude oil prices broke below major support on Monday, and heating oil and gasoline are just a light shove away from breaking major supports at 129.79 and 134.11, respectively.

On top of those burying statistics, the economic signs of hope have slowly melted away.  The Fed’s trillion-dollar injection, the Treasury’s bank rescue plan and the latest stimulus package are all distant memories now, and it is up to the men and women in the trenches to pull it out on a day-to-day, grinding basis.  That is going to take time and effort, and a number of companies may experience difficulties in the meantime.  That realization has sapped the strength in equities, and it has undermined commodities, starting with oil.  As a result, we feel that this complex is on the brink of a steep decline any day now.

Technicals

           Gasoline prices were higher.  Heating oil prices were lower, and crude oil prices were mixed, with the first four months higher and the further-out months lower on the day.  It was like Goldilocks and the three bears, which might be more appropriate (the part about bears) than we know.  Crude oil broke below $47.26 earlier in the week, although they have rallied back above that level since.  Heating oil broke 129.98, but stopped at 129.79.  Gasoline still has support at 134.11.  If those levels are broken, or if crude breaks below $43.62-$43.83, it would be quite bearish.

Dollars per barrel

Above:  Crude has rallied for two days.  Below:  Heating oil is on the brink of selling off, here, it seems.

Cents per gallon

June crude oil now has buy-stops over $50.31, $52.45, $53.90, $54.66, $56.00, $59.00, $60.00, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $47.70, $46.70, $43.62, $42.50, $42.00, $41.00, $39.40, $37.65, $36.91, and $32.40.  May heating oil has buy-stops over 135.37, 136.50, 143.38, 145.35, 147.15, 147.80, 150.50, 152.85, 154.00, 154.67, 155.10, 160.25 & 164.80.  Sell stops are under 129.79, 127.95, 123.20, 119.00, 114.30, 112.50, 109.80, 104.55, and 95.95.  May RBOB has buy-stops over 142.30, 143.50, 149.27, 152.76, 153.35, 153.75, 158.00, 158.90, & 160.77.  Sell-stops are under  136.30, 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 bulls gained 8 yards yesterday on fourth and 45 to go.  That turns over the ball to the bears as we end this week.

Technical Support & Resistance

Oil Inventory Reports

    This week’s DOE report was almost entirely bearish.  All three major inventory categories experienced builds, and the year-on-year surpluses in inventories got worse.  In the case of gasoline, the year-on-year comparison went from a deficit of 1.3 mln bbls to a surplus of 2.1 mln bbls.  The year-on-year deficit in gasoline stocks had been one of the bullish features in this market.  Now, it looks like it is gone and is unlikely to return at any time in the near future.  This report also seems to have marked the unofficial end of turnarounds for the year.

   Distillate stocks are now 35.7 million bbls, or 33.49%, higher than a year ago.  Heating oil inventories are 13.8 mln bbls, or 61.61%, higher than they were a year ago.  Gasoline stocks are 2.1 million bbls, or 0.98%, lower.  Crude oil stocks are now 54.5 million bbls, or 17.24%, higher than a year ago.  Residual stocks are 3.2 mln bbls (8.10%) lower than a year ago, jet fuel stocks are up 0.9 mln bbls, (2.32%) higher than a year ago.  Utilization is 2.2% lower than a year ago and is 7.95% below the eight-year average.  It is 10.44% lower than the five-year, pre-Katrina average.  This deficit remains the most bullish factor.

                                                                    DOE Weekly Inventory Statistics

Source: US Department of Energy’s Energy Information Administration

Open Interest Analysis

      Crude oil open interest fell by 449 contracts on Wednesday, when prices were slightly higher.  That looks like short-covering, although there was clearly long liquidation involved, as well.

      Heating oil open interest rose by 1,839 contracts on Wednesday, when prices were lower.  That looks like new selling, which would be negative.

      RBOB open interest fell by 1,722 contracts on Wednesday, when prices were lower.  That looks like long liquidation, which would be somewhat supportive.

      Natural gas open interest rose by 2,758 contracts on Wednesday, when prices were higher.  That looks like net new buying, which would be supportive.

Wednesday’s Open Interest Changes:

Crude 1,139,781  dn 449        Heat 268,447   up 1,839       RBOB 208,940  dn 1,722       Nat gas 662,258  up 2,758         

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 sold off to new six-and-a-half year lows yesterday as a combination of warming (moderating) weather and a larger-than-expected build in this week’s EIA underground storage report pressed quotes lower.  Prices broke all the way down to $3.38 before light short-covering and profit-taking clawed a couple cents back before the final bell.

We all know that the fundamentals in this market are little short of disastrous right now.  And, with almost as much certainty, we also all know that today’s six-year lows are paving the way for sharply reduced supplies down the road.  That is the easy part.  It is trying to ascertain the price at which today’s fundamentals will be fully discounted before the lower supply horizon touches ground.  And it is a little like trying to spy the horizon around a corner.  Invariably, prices will end up discounting the fundamentals at the very moment that the supply horizon becomes clearly grounded in the discernible future.

That fore-knowledge does us little good without some help with the timing of it all.  And, we have no crystal ball spelling that out for us.  We do now that it will arrive suddenly, earlier than we dare expect and that it will generate a very sharp rally as a result.  That means that buying calls with some time on them may be our only real (and expensive) shot at catching this.

In cash trading yesterday, Henry Hub prices were at $3.50-$3.58, up $0.04-$0.05 (DJN).  SoCal prices were at $2.86-$2.96, down $0.07-$0.08 on the day.  El Paso Permian prices were down $0.04-$0.05 at $2.76-$2.84.  Katy prices were up $0.04 and down $0.05 at $3.27-$3.37.  Waha prices were down $0.08 and up $0.03 at $2.84-$2.90.  Transco 6 was down $0.10-$0.20 at $3.70-$3.95/mmBtu.  

Palo Verde prices were last quoted at $24.00-$27.25/mwh.  Northeastern prices last traded at $30.75-$37.50.  Entergy was last at $30.00-$31.00.  Ercot was last at $28.00-$29.25/mwh. 

This week’s EIA underground storage report showed a build of 46 bcf on expectations for a build of 42 bcf, by Dow Jones, and for 45 bcf, by Bloomberg.  Last year, there was a build of 24-25 bcf (the difference between a Friday-ended week and a date-ended week) and the five-year average was a build of 35-40 bcf.  By any measure, it was a bearish report, and it was exacerbated by the forecasts calling for warm, pleasant temperature readings in the Northeast this weekend.  This comes hot on the heels of a bitterly and unseasonably cold week. 

In any other year, this late cold weather would have helped prices to rally.  This year, because of the recession and the lost industrial consumption, the cold weather has been ‘wasted.’  In any event, we should not be looking for it to show up in next week’s EIA report; it will show up, if it does at all, once the weather is temperate and mild.  If we actually get a real spring, we will discover the colder weather demand through its sudden absence, rather than from any apparent, current demand.  That might have been significant in January, but it will probably be harder to notice in any genuine spring we might get.

Support is at $3.38-$3.39, $3.33-$3.34, $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-$3.82, $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 made new lows again yesterday.

Dollars per million Btu

EIA Weekly Storage Figures

This week’s EIA report showed a build of 46 bcf on expectations for a build of 42-45 bcf.  Stocks are now 459 bcf higher than a year ago, against a surplus of 438 bcf a week ago, a surplus of 438 bcf two weeks ago and a surplus of 402 bcf three weeks ago.  Stocks are now 35.80% higher than a year ago.  They are 322 bcf and 22.69% above the five-year average.

Our five-year average was a build of 40.0 bcf, while the five-year average of the same dates was a draw of 35 bcf.  Last year, we had a build of 24 bcf.  Dow Jones forecast a build of 42 bcf and Bloomberg forecast a build of 45 bcf.

EIA Report

News & Views

In trading on Globex, June crude oil prices were down $0.33 at $49.29/barrel at 2:30 AM EDT, this morning.  May heating oil prices were down 1.64 cents to 1.3015/gallon.  May RBOB prices were down 0.69 cents to $1.3875.  May natural gas was down $0.029 to $3.380/mmBtu. 

One thing we are noticing is that prices seem to be weaker overnight than they have been for a long time.  We were seeing selling in New York erase overnight gains, but now we seem to be seeing more overnight losses.  We have a bad feeling that prices could fall steeply and would take protective measures on exposures to weakness right away.

Oil Movements reported yesterday that Opec will trim crude oil shipments by 0.6% in the four weeks ending May 9th, Bloomberg wrote yesterday.  Opec plans to will load 22.27 million bpd in the four week period ending May 9, down from 22.40 million a day in the four weeks that ended on April 11^th.  The article added that Oil Movements said Opec cut 2.5% in the four weeks ending on May 2^nd, which was the week out a week ago.  That suggests that the rate of Opec cuts “is visibly diminishing,” it posited.

Crude oil prices were lightly higher yesterday in what looks like a return to the broken trendline.  The most bullish aspect of this chart is the gap higher established yesterday. 

Heating oil prices were weak again yesterday, and traders seem to watching the weather on top of bearish stocks and consumption figures.

Sunoco reported yesterday that it has halted production at a crude unit and an FCC (fluid catalytic cracker) at its Philadelphia refinery.  It did this because of poor refining margins, Dow Jones wrote yesterday.  The article went on to note that the units taken out of service were the smallest in Sunoco’s northeastern system, with six crude units and four FCC’s in total, with three refineries in Pennsylvania. 

Sunoco’s refineries have been critical elements supplying the Northeast for decades, and this is one of a very few times that the company has taken units offline as we were heading into the month of May.  “Driving Season” officially starts with Memorial Day, so this closure actually tells us as much about the state of the regional economy as it foreshadows a potential, possible tightening in supplies.  Dow Jones went on to note that Sun has a capacity of 513,000 bpd in the Northeast, and it pointed out that Padd I refinery utilization is at 67.4%.  We have not seen numbers that low in a very long time.  The problem is that other refineries are certain to be coming out of seasonal turnarounds, as this week’s DOE report illustrated, and demand is still very light everywhere. 

Things just don’t feel right, here.  The fundamentals are shot.  The charts are one step away from grim.  And yet prices are holding remarkably steady – just in the most pathetic, anemic way.  This strikes us as an impending moment of judgment, or at least it seems to have that potential.  We think that the seasonal is holding it up - for now.

An Illustrated Look at Energy Market Factors

A Look at Inventories

Crude oil stocks are at their highest level since the summer of 1990, just before Saddam Hussein invaded Kuwait.  We did not believe we needed the stored barrels then, and prices reached $15.06 before events caught up with prices. 

A Look at Imports

Distillate imports have steadily improved since autumn.

Thirteen-week crude oil imports are at their lowest level in a very long time.

Recommendations for Specific Market Segments