Prices for May 15th, 2009

Market Review for Friday & the Weekend 

N a classic example of the “riptides” we have mentioned here recently, oil prices dropped rather sharply on Friday as longs took profits in a somewhat volatile session.  Dow Jones quoted observers who attributed Friday’s weakness to “worries over weak demand and high inventories,” which has been a recurring theme on market weakness throughout 2009.  The timing of that observer’s comments is strange, though, given last week’s DOE report, which showed large declines in both crude oil and gasoline stocks.  Not that they altered the basic condition – which is one of poor demand and ample stocks – it’s just that the picture was even worse as prices were racing to new highs in the very strong week that preceded last week.  That is what we mean by “riptides;” competing factors seem to capture traders’ attention at the oddest times.

By that, we mean that we often see selling after bullish news and buying after bearish news at these times.  What we believe is happening is that traders are changing positions, with long-time longs taking profits and long-time shorts throwing in the towel (and covering losing short positions on decent dips).  This interaction creates the illusion of riptides as opposing interests use strength to liquidate longs and weakness to cover shorts.

At the heart of the change in thinking is the waning influence of the March-to-May seasonal tendency for stronger prices.  By May, traders typically (but not always) start to worry that gasoline demand may not be coming on as quickly as the theoretical beginning of “Driving Season” with Memorial Day would suggest it might.  June is usually a disappointing month for gasoline demand, which does not typically reach its stride until after Independence Day.

That normally is the segue to the Independence-to-Columbus Day seasonal tendency for higher prices.  And, while it often starts with higher gasoline demand, it, in turn, passes on to higher refinery demand for crude and finally to pre-season buying in heating oil before ending prior to the start of heating season on All Saints’ Day (November 1st).

Technicals

           Oil prices started the week (last week) with a correction after a very strong breakout week from the week before.  We ended this last week on a weak note, with potential tops setting up and the two-month seasonal coming to an end.  While we cannot rule out fresh, new highs this week, we feel that the confusing activity at the end of last week was a sign that the bigger moves are more likely to be on the downside, moving forward. 

Cents per gallon

Above:  The previous week ended near its highs; last week ended on a weak note after a consolidation period.

June crude oil now has buy-stops over $59.00, $60.10, $62.28, $65.56, $70.46, & $71.80.  Sell-stops are under $56.55, $56.15, $55.46, $53.50, $52.55, $50.00, $48.55, $48.00, $47.25, $46.92, $46.53, & $43.62.  June heating oil has buy-stops over 150.30, 153.70, 154.00, 154.67, 155.10, & 160.25.  Sell stops are under 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 172.90, 175.00, 175.55, 189.65, 199.90, 207.00, 213.99, 222.70, & 228.86.  Sell-stops are under 168.75, 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 23 yards on Friday on fourth and 13.  That turns the ball over the bears as we start this new week.

Technical Support & Resistance

Jun crude oil                           Support:             $56.55-$56.60, $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:             141.60-141.75, 140.90-141.00, 137.50-137.65, 132.00-132.20, 129.50-129.65.

                             Resistance:        149.72-149.75, 150.20-150.30, 152.40-152.50, 153.65-153.70, 153.90-154.00, 154.67.

Jun Rbob                       Support:             168.75-169.00, 166.35-166.50, 165.00-165.20, 163.65-163.75, 162.40-162.55, 157.55.

                                           Resistance:        172.60-172.90, 174.80-175.00, 175.45-175.55, 189.55-189.70, 199.75-199.90.

Oil Inventory Reports

    We feel that the most important number in this week’s DOE report will be the crude oil import figure.  At 8.7 mln bpd, imports are at drastically low levels, and are the culmination of a recent pattern of lower figures.  Crude oil imports have been at heir lowest aggregate averages in years, recently, as refiners have been trying to limit the amount of crude oil that ends up going into storage.  This task has been made more difficult by the slower-than-usual seasonal increase in utilization.

  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 fell by 45,899 contracts on Thursday, when prices were higher, and that suggests very heavy short-covering.  In the last six sessions, 70,486 contracts were added and 86,226 contracts were taken off, suggesting distribution.

      Heating oil open interest fell by 1,846 contracts on Thursday, when prices were higher.  That looks like short-covering, which would be bearish. 

      RBOB open interest grew by 4,195 contracts on Thursday, when prices were higher.  That looks like net new buying and would be bullish. 

      Natural gas open interest fell by 2,722 contracts on Thursday, when prices were lower.  That looks like long liquidation and is supportive.

Thursday’s Open Interest Changes:  

Crude 1,173,729  dn 45,899        Heat 260,144   dn 1,846       RBOB 224,786  up 4,195       Nat gas 690,247  dn 2,722   

CFTC Commitments of Traders  (for the period ended Tuesday, May 12th)   

As of May 12th:                 Long                   Short:

Crude oil                   170,991               167,925                           -contracts held by speculators:  1.02 long

                                         673,149               690,277                               held by the trade

                                         125,360               111,298                               held by small specs and hedgers.

Spreads….up 15,175 contracts   The ratio went from 1.06-to-one short to 1.02-to-one long in the last report.

   Large speculators liquidated 4,452 long contracts and covered 18,803 shorts over the week under review.  Commercials added 6,080 longs and added 27,572 shorts.  Small specs and hedgers added 32,049 longs and added 24,908 shorts.  Open interest grew by 48,852 contracts as prices rallied $5.01/barrel.  That makes it 107,470 contracts added on a two-week gain of $8.93.  It is bullish, except the best buying came from commission houses, which were selling along with commercials.  Eighty percent of the buying came from large speculative short-covering and commission house buying, or small traders; that’s bearish.

   The average large speculator has 2,060 long contracts (83 accounts), or 20 more contracts on average on three less accounts, and 1,513 shorts (111 accounts), or an average of 232 contracts less on 4 more accounts.  Commercials held 7,827 longs (86) or 114 less longs on average on two more accounts, and 7,343 shorts (94), or 367 more shorts on one less account. Reportable held 4,185 longs (268, unch) and 4,269 shorts (266 accts, up 1). The long average was up 63 while the short average was up 74.

Heating oil                 33,222                 13,086                           - contracts held by speculators:  2.54 to 1 long

                                         145,152               177,366                              held by the trade.

                                           42,093                 30,015                               held by small specs and hedgers.

Spreads….up 2,102 contracts.    The ratio of large speculative longs to shorts went from 2.16-to-one to 2.54-to-one in a week.

       Large speculators liquidated 967 longs and covered 2,764 shorts.  Commercial accounts liquidated 693 longs and added 3,114 shorts.  Small speculators and hedgers added 2,192 longs and added 182 shorts.  Open interest grew by 2,634 contracts as prices rallied 8.08 cents. That looks like new buying, which came from commission houses and small speculators and hedgers.

       The average large speculative long is holding 1,146 contracts (up 78 lots on 29 accounts, 3 less accounts), while the average short has 523 contracts (dn 166 lots on 25 accts, up 2 accts).  The average commercial long is holding 2,166 contracts (dn 376 contracts on 67 accts, up 4 accts) compared to the average short holding of 2,956 contracts (up 190 lots on 60 accts, dn 3 accts).  The average reportable position is 1,818 long (dn 59 lots on 119 accts, up 4 accts) while the average short holding is 2,115 (up 98 lots on 108 accts, dn 4).  Here, as well, small traders were buying from larger traders in classic distribution.

Rbob Gasoline           64,073                   8,658                          -contracts held by speculators:  7.40 to 1 long

                                          116,030               175.424                             held by the trade.

                                            17,643                 14,326                              held by small specs and hedgers.

Spreads…dn 128 contracts   The ratio of large speculative longs to shorts went from 4.88-to-one to 7.40-to-one in 2 weeks.

     Large speculative holdings grew by 4,188 longs and fell by 363 shorts over the latest week. Commercial holdings grew by 587 longs and grew by 2,886 shorts.  Small speculators and hedgers’ positions fell by 1,665 longs and fell by 139 shorts.  Open interest grew by 2,982 contracts as prices rallied 9.57 cents.  That looks like light, fresh buying, although this time we would have expected more of a change in the open interest.  It is bullish, but the ratio of large specs long to short is still very high.

   The average holdings are 1,116 contracts for each large speculative long (58) and 433 for each large speculative short (20).  The average commercial long now has 1,527 contracts long (76) and 2,040 short (86). Average reportable holdings are 1,252 long (155) against 1,484 short (133).  Large speculators had one more long account and four more short accounts, which increased the average long position by 54 contracts and increased the average short by 87 shorts.  There were eight more long accounts and five less short accounts in the reportable category, subtracting 36 and adding 56 contracts, respectively.

Naturalgas                88,069               219,806                           -contracts held by speculators:  2.69 to 1 short

                                         267,829               179,304                               held by the trade.

                                           84,146                 40,934                           held by small specs and hedgers.

Spreads…up 11,317 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 10,555 longs and added 11,442 shorts over the latest week. Commercial accounts added 2,056 longs, and added 5,616 shorts, while small speculators and hedgers added 4,421 longs and covered 26 shorts.  Open interest grew by 28,349 contracts as prices rallied $0.834/mmBtu.  That looks like fresh buying, which would be supportive.  Speculators were the best buyers during the week. 

  The average large speculator has 1,493 contracts (59) while each large speculative short is holding 2,556 shorts (86).  The average commercial long now has 3,434 contracts long (78) and 3,091 short (58). Average reportable holdings are 2,813 long (214) long and 3,506 short (184).  Large speculators closed four long accounts, which increased the average long holding by 263 contracts, and added five short accounts, which brought the average down 16 contracts.  The reportable category had 74 more longs on average, on 3 more accounts while the average reportable short held 154 more contracts with the same accounts.    

Natural Gas & Utility Generation

June natural gas futures declined by a little more than 19 cents/mmBtu on Friday, in the market’s biggest one-day decline since March 27th.  Natural gas prices were more heavily influenced by oil prices last week than they were through most of the month of April.  And, in that respect, gas prices  seem to have gone through their own version of the riptides we saw in oil trading.  It seems that longs were taking profits on existing positions, which is one of the signs of a trend change in progress; traders first need to get out of positions before establishing new lines.  The two actions are different in objective and in implementation.  When traders get out of positions, they are usually watching each print closely and here is an atmosphere of urgency and stress.  This is especially true of traders using limit orders (trying to sell at a number or better).  As they wait for their fills, they are generally quite anxious, and this can get quite thick at major tops (or bottoms).  When traders are attempting to enter a new position, they tend to be more relaxed.  If a limit order is missed, it is rarely a dire result, which can be the case when traders are trying to exit positions). 

Traders noted the steep decline in oil futures as one reason for the greater urgency to exit long holdings, while others noted the weakness in equities, with the DJIA finishing down 62.68 points. 

In cash trading on Friday, Henry Hub prices were at $4.00-$4.10, down $0.03-$0.03 (DJN).  SoCal prices were at $3.64-$3.80, down $0.09-$0.09 on the day.  El Paso Permian prices were down $0.05-$0.25 at $3.35-$3.65.  Katy prices were down $0.12 and up $0.04 at $3.89-$3.98.  Waha prices were down $0.15-$0.25 at $3.40-$3.59.  Transco 6 was up $0.15 and down $0.05 at $4.32-$4.65/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $45.00-$46.25/mwh.  Northeastern prices last traded at $32.50-$43.25.  Entergy was last at $32.50-$33.50.  Ercot was last at $33.50-$34.50/mwh. 

Last week’s EIA underground storage report was supportive, which seems to have been the kiss of death for this market.  Traders holding long positions saw it as an opportunity to take profits and, once prices started weakening, additional long liquidation, producer hedging and technically-motivated commission house selling came into the market.  The fact that it was a Friday increased the unease of more recent longs, who felt that the better part of discretion dictated taking profits and re-evaluating the picture on Monday. 

We expect prices to be under selling pressure as we start this week.  Economic news and the trajectory of equities and oil futures are likely to be the most consistent sources of motivation.  On Friday, the temperature outlook was for predominantly mild seasonable readings across most of the country with warmer-than-usual figures possible in the Northeast and West.  Still, it is too early for warm weather north of the Mason-Dixon Line to trigger heavy air-conditioning use.  We expect volatility to pick up this week as prices try to define a working trading range.  We may see an attempt to break to new highs, but it is just as likely to fail as succeed after the activity seen on Thursday and Friday.    

Support is at $4.14-$4.15, $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 $4.31-$4.35, $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 lower again yesterday, and they could be making a top – or it could already be in place.

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 99-100 bcf.  Stocks are now 497 bcf higher than a year ago, against a surplus of 491 bcf a week ago, a surplus of 464 bcf two weeks ago and a surplus of 459 bcf three weeks ago.  Stocks are now 32.78% higher than a year ago.  They are 374 bcf and 22.82% above the five-year average.

The five-year average for this week was a build of 89.4 bcf.  The eight-year build average was 90.4 bcf.  Last year, there was a build of 85 bcf.

EIA Report

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

News & Views

We feel that prices have constructed or are still constructing a top.  We expect prices to work lower into June.

There will be no report out on Friday or Monday for Memorial Day Weekend.  Markets are closed next Monday.

An Illustrated Look at Energy Market Factors

Signs of the Time: A Look at This Week’s Critical Fundamental Charts

Distillate demand is shockingly poor, and is all the more glaring after last year.  Refiners are desperate not to produce more.

Refineries are producing fewer refined products, as a result of poor demand …

… which means that refineries need to import much less crude oil …

… or it will add to already historically high inventories.  “For want of a nail … the kingdom was lost,” Proverb

Recommendations for Specific Market Segments

Any customer who did not see the July-October crude oil seasonal should e-mail us for a copy (no cost to clients).

There will be no report out Friday, because we are taking the day off for a long Memorial Day Weekend.  Anyone needing prices for Thursday can e-mail us and we will get them to you.