Prices for May 12th, 2009

Market Review for Tuesday           

HE oil complex had a strong opening yesterday, and prices managed to finish in positive territory, but they could not break decisively above – nor could they settle above – resistance at $60.00 in crude or at 171.00 in gasoline.  Heating oil prices finished above 150.50, but they could not repeat the strength seen late last week, when they reached settled at 151.84.  They, too, managed to break major resistance, which had been at 152.50, but they did not end the day anywhere near that level. 

Despite the selloff from the day’s highs, crude oil prices finished at their highest settlement price since November 11th.  Heating oil reached its highest high since January 14th, but gasoline failed to equal the high of 170.95 reached twice last week.

According to Dow Jones, traders were buying crude oil on the expectation of higher refinery throughput as we get nearer to Independence Day.  That has been the historical tendency.  Recent increases in refinery utilization have bolstered that perspective, and utilization is still so much below historical averages for this time of year that one could expect to see further increases over the next several weeks.  The fact that gasoline prices have been leading the oil complex higher in recent weeks, as well as the fact that gasoline inventories are just slightly above year-ago levels, would suggest that some of the huge surplus in crude oil stocks will be processed into additional supplies of gasoline over the next few weeks.

Equities were higher yesterday, but the tight bond between oil prices and stock markets has loosened in recent days.  We are not saying that the relationship has ended, but it does not seem to have been as close as it was, just over the last few sessions.  We need to monitor this relationship nonetheless, and watch to see if a relationship redevelops between oil and the US dollar.

Technicals

           Crude oil prices have resistance at $60.00-$60.10, now, while heating oil has resistance at 152.45-152.50, and again at yesterday’s high of 153.69.  Gasoline has resistance at 170.95.  The trend is still clearly higher, but we still are aware that it could end at any time.  The seasonal starts to peter out after the 15th or 20th, then the tendency is lower during June, although prices typically have improved from Independence Day to Columbus Day (see seasonal, which we have attached for a second day at the end of this report, for any who might have missed it yesterday). 

Ratio: Crude oil prices divided by natural gas prices

Above:  Natural gas reached a ratio against crude oil that has had difficulty sustaining itself in the past.

June crude oil now has buy-stops over $60.10, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $57.80, $56.15, $55.46, $53.50, $52.55, $50.00, $48.55, $48.00, $47.25, $46.92, $46.53, and $43.62.  June heating oil has buy-stops over 153.70, 154.00, 154.67, 155.10, and 160.25.  Sell stops are under 148.74, 147.55, 146.83, 145.55, 141.60, 140.90, 137.50, 132.00, 129.50, 127.85, 123.20, 119.00, 114.30, 112.50, 109.80, 104.55, and 95.95.  June RBOB has buy-stops over 171.00, 175.00, 175.55, 189.65, 199.90, 207.00, 213.99, 222.70, & 228.86.  Sell-stops are under 165.00, 163.65, 162.40, 157.50, 156.60, 150.35, 144.60, 140.00, 136.55, 135.20, 134.10, 133.55, 130.60, 124.00, 121.50, 118.25, 116.50, and 107.90.

Football: The bulls lost a yard on first down, yesterday, making it second and 11 to go today.

Technical Support & Resistance

Jun crude oil                           Support:             $57.80-$58.00, $56.15-$56.30, $55.45-$55.60, $53.50-$53.65, $52.55-$52.70, $50.00.

                                           Resistance:        $58.85-$59.00, $59.90-$60.00, $62.25-$62.30, $65.50-$65.60, $70.35-$70.46.

Jun heating oil        Support:             148.70-148.85, 147.55-147.65, 146.80-147.00, 145.55-145.70, 141.60-141.75.

                             Resistance:        152.40-152.50, 152.80-152.85, 153.15-153.27, 153.69-154.00, 154.55-154.67.

Jun Rbob                       Support:             165.00-165.20, 163.65-163.75, 162.40-162.55, 157.55-157.70, 156.60-156.75, 150.35.

                                           Resistance:        170.80-171.00, 174.80-175.00, 175.45-175.55, 189.55-189.70, 199.75-199.90.

Oil Inventory Reports

    After last week’s increase in refinery utilization rates, one has to wonder if this week will see another build in crude oil stocks, which would be our 11th increase in a row.  Five of the last eight years have given us crude oil stock builds, which contributed to an eight-year average increase of 500,000 bbls.  Distillate stocks increased last year, for the seventh time in eight years, by 1.4 mln bbls.  Gasoline stocks were lower last year, but were higher in six of the other seven years. 

  Distillate stocks are now 40.4 million bbls, or 40.4%, higher than a year ago.  Heating oil inventories are 16.6 mln bbls, or 75.45%, higher than they were a year ago.  Gasoline stocks are 2.4 mln bbls (up 1.14%) against a year ago.  Crude oil stocks are now 56.5 million bbls, or 17.72%, higher than a year ago.  Residual stocks are 3.7 mln bbls (9.34%) lower than a year ago, jet fuel stocks are up 1.6 mln bbls, (4.09%) higher than a year ago.  Utilization is 0.3% higher than a year ago and is 7.38% below the eight-year average.  It is 9.56% lower than the five-year, pre-Katrina average.  Utilization was up significantly.

                                                                    DOE Weekly Inventory Statistics

Source: US Department of Energy’s Energy Information Administration  

Open Interest Analysis

      Crude oil open interest fell by 13,149 contracts on Monday, when prices were lower, which looks like heavy profit-taking or long liquidation, which would be supportive.

      Heating oil open interest fell by 1,153 contracts on Monday, when prices were lower.  That looks like long liquidation, which would be supportive, in principle.

      RBOB open interest grew by 652 contracts on Monday, when prices were lower.  That looks like new selling, which would be negative.  It suggests new selling, which theoretically could be sustained.

      Natural gas open interest rose by 4,628 contracts on Monday, when prices were lower.  Nonetheless, prices had been lower before rising later in the session, which could have been new buying later in the session.

Monday’s Open Interest Changes:  

Crude 1,200,035  dn 13,149        Heat 257,941   dn 1,153       RBOB 209,418  up 652       Nat gas 680,891  up 4,628      

CFTC Commitments of Traders  (for the period ended Tuesday, May 5th)   

As of May 5th:                 Long                   Short:

Crude oil                   175,443               185,728                           -contracts held by speculators:  1.06 short

                                         667,069               662,705                               held by the trade

                                           93,311                 86,390                               held by small specs and hedgers.

Spreads….up 21,037 contracts   The ratio went from 1.002-to-one long to 1.06-to-one short in the last report.

   Large speculators added 1,135 long contracts and added 12,728 shorts over the week under review.  Commercials added 17,062 longs and added 19,787 shorts.  Small specs and hedgers added 19,384 longs and added 5,066 shorts.  Open interest grew by 58,618 contracts as prices rallied $3.92/barrel.  That suggests heavy, new buying, which would be supportive.  The best buying came from small speculators and hedgers, or commission houses, which is probably technically-driven.

   The average large speculator has 2,040 long contracts (86 accounts), or 112 less contracts on average on five more accounts, and 1,745 shorts (107 accounts), or an average of 13 contracts less on 8 more accounts.  Commercials held 7,941 longs (84) or 203 more longs on average on the same accounts, and 6,976 shorts (95), or 12 less shorts on three more accounts.  Reportable held 4,122 longs (268, up 15) and 4,195 shorts (265 accts, up 9).  There are 25 new long and 16 new short accounts in 2 weeks.

Heating oil                 34,189                 15,850                           - contracts held by speculators:  2.16 to 1 long

                                         145,845               174,252                              held by the trade.

                                           39,901                 29,833                               held by small specs and hedgers.

Spreads….dn 1,048 contracts.    The ratio of large speculative longs to shorts went from 2.97-to-one to 2.16-to-one in 2 weeks.

       Large speculators added 244 longs and covered 851 shorts.  Commercial accounts liquidated 9,234 longs and covered 8,821 shorts.  Small speculators and hedgers liquidated 728 longs and covered 46 shorts.  Open interest fell by 10,766 contracts as prices rallied 9.32 cents. That looks like short-covering, which we saw from commercial accounts. 

       The average large speculative long is holding 1,068 contracts (dn 189 lots on 32 accounts, 5 more account), while the average short has 689 contracts (dn 7 lots on 23 accts, dn one account).  The average commercial long is holding 2,542 contracts (dn 227 contracts on 63 accts, up 2 accts) compared to the average short holding of 2,766 contracts (dn 140 lots on 63 accts, unchanged).  The average reportable position is 1,877 long (dn 158 lots on 115 accts, up 4 accts) while the average short holding is 2,017 (dn 18 lots on 112 accts, unch.  Reportable longs added four new accounts, which diluted the average long.

Rbob Gasoline           60,547                   8,295                          -contracts held by speculators:  7.30 to 1 long

                                          115,443               172.538                             held by the trade.

                                            19,308                 14,465                              held by small specs and hedgers.

Spreads…up 289 contracts   The ratio of large speculative longs to shorts went from 4.88-to-one to 7.30-to-one in a week.

     Large speculative holdings grew by 6,581 longs and fell by 2,760 shorts over the latest week. Commercial holdings fell by 6,579 longs and grew by 5,473 shorts.  Small speculators and hedgers’ positions grew by 2,561 longs and fell by 150 shorts.  Open interest grew by 935 contracts as prices rallied 17.27 cents.  That looks like fresh buying, although one would have expected substantially more.  Nonetheless, speculators, both large and small, were buying and covering shorts.

   The average holdings are 1,062 contracts for each large speculative long (57) and 346 for each large speculative short (24).  The average commercial long now has 1,603 contracts long (72) and 2,006 short (86). Average reportable holdings are 1,288 long (147) against 1,428 short (138).  Large speculators had three less long accounts and four more short accounts, which increased the average long position by 103 contracts and increased the average short by 207 shorts.  There were five fewer long accounts and two less short accounts in the reportable category, adding 31 and 49 contracts, respectively.

Naturalgas                77,514               208,364                           -contracts held by speculators:  2.69 to 1 short

                                         265,773               173,688                               held by the trade.

                                           79,725                 40,906                           held by small specs and hedgers.

Spreads…up 315 contracts    The ratio of large speculative shorts to longs went from 2.79-to-one to 2.69-to-one in a week.

  Large speculative holdings added 5,635 longs and added 7,506 shorts over the latest week. Commercial accounts added 4,454 longs, and added 1,669 shorts, while small speculators and hedgers added 2,264 longs and added 3,178 shorts.  Open interest grew by 12,668 contracts as prices rallied $0.175/mmBtu.  That looks like fresh buying, which would be supportive.  All three categories were adding new longs. 

  The average large speculator has 1,230 contracts (63) while each large speculative short is holding 2,572 shorts (81).  The average commercial long now has 3,281 contracts long (81) and 2,895 short (60). Average reportable holdings are 2,739 long (211) long and 3,352 short (184).  Large speculators added six long accounts, which decreased the average long holding by 31 contracts, and added three short accounts, which brought the average down 3 contracts.  The reportable category had 71 fewer longs on average, on nine more accounts while the average reportable short held 33 more contracts on one more account. 

Natural Gas & Utility Generation

June natural gas futures advanced again yesterday, gaining almost 15 cents/mmBtu on the day.  Dow Jones quoted traders as saying that trading was choppy yesterday, but that “hopes of economic recovery” had pushed prices higher into the close.  There is also clearly some upward technical momentum at work, here. 

We actually believe that the upward momentum may be more of the story than is immediately apparent.  But, every time that prices and equities move higher together, it reinforces the concept that the two are moving together.  Since we have recently seen some separation between oil prices and equities, we feel it makes sense at least to look for an alternate theory for the recent strength in this market.

One of the factors that makes trading in natural gas so deadly, and so difficult, is that we rarely see corrections.  Instead, we tend to get reversals at places where other markets would give us corrections.  That makes it ‘easier’ for pure trend traders, but for anyone who senses subtlety in this market, anyone who is looking for nuance or a more sophisticated case of give and take, this market can be frustrating.  It pretty much went lower without pause since July, and now it has moved higher in eight of the last 11 sessions.  If it turns, it could well keep dropping till we hit new lows.  If it does not, it could keep advancing.

In cash trading yesterday, Henry Hub prices were at $4.29-$4.45, up $0.11-$0.13 (DJN).  SoCal prices were at $4.09-$4.17, up $0.16-$0.24 on the day.  El Paso Permian prices were up $0.17-$0.17 at $3.96-$4.08.  Katy prices were up $0.13-$0.15 at $4.20-$4.34.  Waha prices were up $0.14-$0.20 at $4.10-$4.17.  Transco 6 was up $0.09-$0.20 at $4.77-$4.94/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $45.00-$49.00/mwh.  Northeastern prices last traded at $31.65-$43.00.  Entergy was last at $32.50-$33.50.  Ercot was last at $42.50-$43.00/mwh. 

The EIA (Energy Information Administration) reported yesterday that it expects natural gas consumption to decline by 8% in 2009, which is an additional increment of lost demand from its previous forecast of a loss of 7.4%.  Consumption has not yet been stimulated by lower prices, apparently.

At this point, it will interesting to see if demand rebounds before supplies start to decline because of the huge drop in rig counts.  Almost certainly, we will see both happen simultaneously when the big shift arrives.  We know that both will occur, we just don’t when or at what rate.  At this stage demand is still dropping, although the rate may be stalling, while production does not yet seem to have been affected.  One has to expect producers to slow recovery rates now, though, with a view to capitalizing on higher prices later, at some point soon.  It is what we would do where practical.  Clearly, there are a number of factors involved, including workforce, debt service and pressures.  But, if we could delay a bcf here or there for recovery a year or two from now, we certainly would do it.  The market is clearly telling us that it would be the smart thing to do.

Support is at $4.27-$4.28, $4.09-$4.10, $3.82-$3.84, $3.57-$3.60, $3.43-$3.46, $3.33-$3.36, $3.25-$3.26, $3.15-$3.17, $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 $4.43-$4.45, $4.53-$4.56, $4.63-$4.65, $4.85-$4.88, $5.01-$5.03, $5.22-$5.24, $5.55-$5.57, & $5.62-$5.64. 

Natural gas prices were higher yesterday, showing that momentum higher is established now..

Dollars per million Btu

Jun Natural Gas:          Support:         $4.27-$4.28, $4.09-$4.10, $3.82-$3.84, $3.57-$3.60, $3.43-$3.46, $3.33-$3.36.

                                                    Resistance:    $4.43-$4.45, $4.53-$4.56, $4.63-$4.65, $4.85-$4.88, $5.01-$5.03, $5.22-$5.24.

EIA Weekly Storage Figures

Last week’s EIA report showed a build of 95 bcf on expectations for a build of 92-95 bcf.  Stocks are now 491 bcf higher than a year ago, against a surplus of 464 bcf a week ago, a surplus of 459 bcf two weeks ago and a surplus of 438 bcf three weeks ago.  Stocks are now 34.41% higher than a year ago.  They are 362 bcf and 23.26% above the five-year average.

For this week, the five-year average was a build of 81.8 bcf.  The eight-year build average was 82.9 bcf.  Last year, there was a build of 93 bcf.  

EIA Report

Bcf, or Billions of cubic feet.  Source:  Energy Information Administration, US Department of Energy

News & Views

This week’s API report was the most bullish report seen in a very long time.  That makes today’s DOE report critical.

An Illustrated Look at Energy Market Factors

A Look at Spreads

The contango is starting to slip towards even or even backwardation.

Gasoline prices remain at a premium to heating oil prices..

Heating oil continues to have better than carry built into future months.  This is an opportunity for those with storage.

Recommendations for Specific Market Segments

July Seasonal Study Follows →

_Cameron hanove_R

Seasonal Trading Advisory

Crude Oil ….. on July 1st

Crude oil prices seem to have the same kind of seasonal tendency as the refined products have.  Over the last 26 years, it would have been profitable in 22 years (84.6%) to buy October crude in July.  In four years, it would have been unprofitable.  In a number of years when it worked, though, one would have had to be nimble to book profits, and there were at least three years in which profits on July 15th became losses by August 1st.  That means that our successful trader would have had to take profits earlier than might be ideal on average.

That makes the buy side of the trade reasonably easy to make.  Our suggestion is to take profits as they appear, anywhere from mid July until the contract goes off the board.  This seasonal tells one when to buy, but the sell part is something that needs to be played skillfully.

The best way to do this is with multiple contracts.  It makes more sense to trade more mini-contracts here than fewer full contracts, in those cases where it is a consideration.  If you can buy ten contracts or more, it is not a problem. 

Our approach would be to buy 10 contracts on July 1st and start letting one, two or three contracts go on spikes or at tricky parts.  The reason one wants multiple contracts is to have this flexibility.  This is a dreadful trade to be holding only one or two contracts during, because that would leave one with no flexibility – both to take profits and remain long.  There will be a number of times between July 15th and September 15th that one will want (and should) do exactly that – take profits on some - and yet still remain long.

This information can also be used in conjunction with heating oil budget plans or seasonal pre-buying programs.  Even if one might be able to buy winter product at decent or reasonable levels in August or September, why would one want to wait, knowing what we can see in the pages that follow?  One would not want to, especially in light of the very strong seasonal tendency fore prices to advance from March 15th to May 15th.  In our opinion, July 1st is generally the second-best time of year to buy heating oil for the following winter – in those years when one decides to buy ahead of the actual heating season, which begins on November 1st.

Even though this is primarily a seasonal tendency for crude oil, refined products follow similar patterns. 

This has been a difficult year for any kind of trading.  Last year, July would have been the absolutely worst time to buy, full-stop.  The winter just ended was not typical, and we have more stray economic variables than at any time in anyone’s lives today.  And, if economic concerns were not enough, there are greater fears of supply disruption, terrorism and violence now than in our younger days.

The tables below shows that it has been a safer bet for refiners to buy crude early (and often) through the summer and then hedge refined products as we get nearer to autumn.  That is not pure hedging, but it is always better to have a bias when legging into spreads designed to protect margins.  Those who use any legging system should have protective stop orders in place to avoid drastic losses.

More than anything else, this table tells us that it made sense to be short in this market only once every five or 10 years, on average, in July.  If you have hedging to do for harvest or for the winter ahead, these numbers strike us as being worth noting. If you do not have product you are going to need, you are effectively holding a short position. 

Knowing that the seasonal pattern calls for higher prices after Independence Day can be used to protect you.  We recommend having buy-stops strategically placed above second-half June high points to prevent you from being caught short in a market that could keep rising into October.  Each year is different, but knowing the seasonal tendency can help you maintain a sense of objectivity in your larger hedging strategy.  The potential for prices to steadily trend higher through summer into early fall tells us not to talk ourselves out of defensive hedge positions in July, despite what our logical thinking may indicate.  If we make new (recent, say, two-week or three-week) highs in July, we should act before the situation gets out of hand.

We know that we have a market highly susceptible to psychological influences in any year in oil.  This year is no different.  In addition to all of our normal concerns – about Opec, individual hot-spots like Nigeria or Iraq, hurricanes and tropical storms, unscheduled refinery downtime, Iran’s nuclear development and Israel’s potential preactions to its further evolution, and the role and trend of the US dollar – this year, we have more economic uncertainty, a new president and congress, a new relationship with equities prices and a greater oil market role for China. 

Our feeling is that every little piece of seasonal information can help. 

Œ  Holiday Trade.  This calls for buying on the day closest to July 1st and selling on July 15th.  It has worked a little more than 65%, or nearly two-thirds of the time that crude oil has been traded on the Nymex.

  Early Summer Trade:  This calls for buying as close to July 1st as possible, and we are trying to see if prices are in profit territory at any time before August 1st.  Those that are not profitable by July 15th but are by August 1st have check marks in the right hand portion of the cell box.  That adds four years and makes 11 years even more profitable if one waits.  Three years that had profits on July 15th, though, have losses on August 1st.  In 81% of the years, one could have had a profit by buying on July 1st and selling sometime between July 15th and August 1st.

Ž  Independence to after Labor Day Trade:  Here, we are just looking to see if one could have had a profit after July 15th and before September 15th in years when one bought on July 1st.  In 22 of the 26 years, one could have had a profit on October crude positions purchased on July 1st at some point between July 15th and September 15th.  That is 84.61%.

Caveat:  We need to note that half the years saw lower prices on September 15th than on August 15th.  We understand that the sell part is more difficult than the buy part, if one wants to make profits (that’s the primary object, primarily, although sometimes avoiding losses has its use).  We would always use sound money management techniques.  In no case did large or horrific losses turn around and become gains.