Prices for May 13th, 2009

Market Review for Wednesday    

IL prices ended lower yesterday after initially moving higher, as traders took profits on long positions in the face of the most bullish DOE report in months.  It was the first time in more than two months that crude oil stocks were lower on the week, and they fell fairly dramatically, dropping by 4.7 million barrels.  Estimates had been for an increase of a million barrels or more, following nine or 10 consecutive builds in crude oil inventories.  A sharp contraction in crude oil imports (down 1.212 million bpd) gave us a drawdown in crude oil inventories.

Gasoline inventories also dropped by more than four million barrels (down 4.1 mln bbls) as refinery utilization dropped 1.6%, knocking gasoline production down 208,000 bpd. 

It only goes to figure that prices would sell off at the first sign of a bullish DOE report.  And, there is some strange and distorted logic involved.  Everyone knows that the fundamentals have been pretty dreadful for a very long time, so yesterday’s bullish DOE report gives the longs their first real opportunity to sell to fundamental traders who may have been holding out for a long-overdue decline.  When this week’s DOE report was released, some of these fundamental holdouts might have been induced to buy.  The longs could have taken profits into that buying. 

Of course, it des not mean that it actually happened that way.  Report days are the most likely time for us to get fade days – days when the market should react one way, does at first, but then turns and goes the other way into the close.  It may be that yesterday’s activity just fits into that category. 

Curiously enough, this is how tops get formed sometimes.  We are not sure that we are going to see one this time or if we will see it later.  We do expect that we will see a top of sorts in the next few to several sessions.  The next few days will determine how near we are to building a top. 

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 the twin high of 153.68-153.69.  Gasoline has resistance at 170.95-171.25.  Gasoline had a disappointing session, after breaking 171.00 in response to a draw of more than 4 million bbls, but it closed substantially below that level.  Crude oil prices were turned back from $60.00 and heating oil came within a point of Tuesday’s high before selling back off.  We will have to see over the next few days, but this could be the beginning of the end of this run. 

Ratio: Crude oil prices divided by natural gas prices

Above:  Crude oil prices sold off after the first and most bullish DOE report in weeks.

June crude oil now has buy-stops over $60.10, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $57.40, $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 147.38, 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 171.25, 175.00, 175.55, 189.65, 199.90, 207.00, 213.99, 222.70, & 228.86.  Sell-stops are under 166.35, 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 eight yards on second and 11, making it third and 19 to go today.

Technical Support & Resistance

Jun crude oil                           Support:             $57.40-$57.50, $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, 147.35-147.50, 146.80-147.00, 145.55-145.70, 141.60-141.75.

                             Resistance:        152.40-152.50, 153.65-153.70, 153.90-154.00, 154.55-154.67, 155.00-155.10.

Jun Rbob                       Support:             166.35-166.50, 165.00-165.20, 163.65-163.75, 162.40-162.55, 157.55-157.70.

                                           Resistance:        170.95-171.25, 174.80-175.00, 175.45-175.55, 189.55-189.70, 199.75-199.90.

Oil Inventory Reports

    This week’s DOE report was the most bullish report we have seen in a long time.  Crude oil stocks were lower for the first time in 11 weeks, and gasoline stocks declined as refinery utilization dropped.  It should be increasing at this time of year.  Crude oil imports were down a striking 1.212 million bpd, and that contributed to the decline in crude oil inventories.  The question is, though, whether this level of imports is sustainable without backing up international crude supplies. 

  Distillate stocks are now 39.9 million bbls, or 47.08%, higher than a year ago.  Heating oil inventories are 17.2 mln bbls, or 76.79%, higher than they were a year ago.  Gasoline stocks are 1.1 mln bbls (dn 0.52%) against a year ago.  Crude oil stocks are now 55.4 million bbls, or 17.58%, higher than a year ago.  Residual stocks are 3.1 mln bbls (7.79%) lower than a year ago, jet fuel stocks are up 0.7 mln bbls, (1.78%) higher than a year ago.  Utilization is 2.9% higher than a year ago and is 8.71% below the eight-year average.  It is 10.98% lower than the five-year, pre-Katrina average.

                                                                    DOE Weekly Inventory Statistics

Source: US Department of Energy’s Energy Information Administration  

Open Interest Analysis

      Crude oil open interest rose by 46,771 contracts on Tuesday, when prices were higher, which looks like heavy new buying on an advance.  That is very bullish – at the same time that it suggests that anyone holding out might have gotten long.

      Heating oil open interest rose by 465 contracts on Tuesday, when prices were higher.  That looks like new buying, which would be supportive.

      RBOB open interest grew by 2,234 contracts on Tuesday, when prices were lower.  That looks like new selling, which would be bearish.

      Natural gas open interest rose by 5,222 contracts on Tuesday, when prices were higher.  That looks like new buying and would be supportive.

Tuesday’s Open Interest Changes:  

Crude 1,246,806  up 46,771        Heat 258,406   up 465       RBOB 211,652  up 2,234       Nat gas 686,113  up 5,222      

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 declined by 10.3 cents yesterday, as gas traders reacted to lower oil prices, lower equities quotes and a surprisingly poor retail sales report showing a decline of 0.4% on estimates calling for a decline of 0.1%.  That took the wind from the sails of those who had been repeating the mantra of the worst is behind us.

More than anything, it seems that the bulls may have now exhausted their ammunition.  We will know better after the next few sessions, but the straight line drawn between the idea that the worst might be over and the inevitability of a future rebound in demand has never been anything more than tenuous at best to begin with.  That does not mean that we may not have seen the lows for now; but it could well mean that the straight line advance higher could be over.

The factor that worries us the most is this market’s proclivity to advance or decline, but rarely correct.  In many respects, we still believe that prices got as low as they needed to (when they reached $3.155/mmBtu) in order to discount the bearish fundamentals in this market.  There may not be any new reason for prices to drop below that level on any subsequent decline.  We could see a test of that level, but we probably would need to get a new string of bearish news to force prices beneath that level.  In any event, the next several sessions should prove instructive.

In cash trading yesterday, Henry Hub prices were at $4.31-$4.47, up $0.02-$0.02 (DJN).  SoCal prices were at $4.05-$4.16, down $0.01-$0.04 on the day.  El Paso Permian prices were down $0.00-$0.08 at $3.88-$4.08.  Katy prices were up $0.04 and down $0.04 at $4.16-$4.38.  Waha prices were down $0.00-$0.15 at $3.95-$4.17.  Transco 6 was down $0.07-$0.10 at $4.70-$4.84/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $45.00-$48.00/mwh.  Northeastern prices last traded at $33.50-$39.75.  Entergy was last at $34.50-$35.50.  Ercot was last at $42.00-$43.50/mwh. 

Dow Jones conducted its weekly survey and is forecasting a build of 100 bcf in this week’s EIA underground storage report.  Bloomberg found a range of estimates between 94 and 104 bcf, with the median and average both coming in at 99 bcf.  It is difficult to predict what kind of influence this report will actually have.

We see a limited downside here because of the huge declines in drilling.  Falling rig counts may not cut supplies soon enough to eat into production soon, but they remain behind the scenes as a powerful reminder of what we all know is coming.  At the same time, though, the upside is likely to be limited by the abundant amounts of natural gas in storage. 

In effect, all things being equal, we see every reason for this market to adopt a trading range within which to trade for a while.  We are not sure that the upper end of this range has been established yet, but we do not believe that it can be all that far away.  We expect that this upper boundary will be established before the end of May.  We have probably not seen it, yet, though. 

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 $4.53-$4.56, $4.65-$4.69, $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, but they ended lower by the final bell, largely in sympathy with profit-taking in oil.

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:    $4.53-$4.56, $4.63-$4.65, $4.85-$4.88, $5.01-$5.03, $5.22-$5.24, $5.55-$5.57.

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.  Expectations are for a build of 99-100 bcf.

EIA Report

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

News & Views

This week’s DOE report followed the API report by showing a big draw in crude oil stocks.  But retail sales fell more than expected and crushed the spirit of the bulls.

An Illustrated Look at Energy Market Factors

A Look at Gasoline Supply & Demand

Thirteen-week demand is now at 9.028 million bpd, down 1.85%.  Thirteen-week supply is now 9.855 million bpd, up 0.20%.  Thirteen-week implied demand is at 9.958 million bpd, down 0.85%.

A Look at Distillate Supply & Demand

Thirteen-week demand is now at 3.769 million bpd, down 11.81%.  Thirteen-week supply is now 4.310 million bpd, up 1.16%.  Thirteen-week implied demand is at 4.247 million bpd, down 5.18%.

The demand lines on these charts look like they are about to fall through the bottom of the charts. 

Even implied demand is at its lowest level in years, and is a source of growing concern.

A Look at Refinery Utilization

Utilization is 2.9% higher than a year ago and is 8.71% below the eight-year average.  It is 10.98% lower than the five-year, pre-Katrina average.

Recommendations for Specific Market Segments