Prices for May 18th, 2009

Market Review for Monday           

IL prices raced higher yesterday on short-covering ahead of today’s June crude oil contract expiration.  The “smoking gun” for yesterday’s advance came from violence in Nigeria, which has been an ongoing factor in this market.  Nigerian separatists fought the Nigerian army in the Niger Delta yesterday, and this actual fighting comes closely on the heels of last week’s war of words in which leaders of MEND (Movement for the Emancipation of the Niger Delta) threatened international oil companies with sabotage and violence if they did not pack up and leave.  That was, of course, a difficult proposition for the oil companies to comply with, and the Nigerian government moved in to protect its largest single source of revenues.  The result has been heavy but sporadic fighting. 

Curiously enough, yesterday’s steep rise confirms our feeling that we are in the process of building a top.  What typically happens at the end of a major move is that we see a move lower, which is followed by a day like yesterday, in which long-suffering shorts cover positions with real urgency, out of fear that the move higher is about to enter a new stage.  Commission houses typically buy into this strength – while larger speculators and commercial accounts sell into the advance.  It is often ‘last-gasp’ buying in a dying advance.

One of the more fascinating tendencies of the oil market is to ignore, in June, the bullish factors that seemed so critical in April and May.  While this does not happen every year (last year was an example of a year that it did not occur), it has happened more frequently than it has not.  As we wind down the second half of this month, we need to keep our eyes peeled for examples of this seasonal switch in emphasis.

Traders were also encouraged by higher equities prices yesterday, and they once again drew a long and overextended line between higher equities quotes and an expectation that the economy, and oil demand with it, will improve.  It may make some kind of vague and hopeful sense, but we have difficulty trying to assign precise numbers from one to the other.  It makes no sense to say a 200 rally on the DJIA is worth $2.00 in crude oil.

Technicals

           The oil complex was higher yesterday and we believe it was the last-gasp buying that is often seen at the end of bull moves.  Of course, we could be wrong, and prices could be getting ready to make new recent highs.  If all we had to work with was oil price dynamics, we would be bearish, but the influence of equities on this complex complicates the matter.  We are not keen to adopt short positions, in any event, and would use rallies to get flat on long holdings.

Cents per gallon

Above:  Gasoline prices raced to new highs yesterday, casting in doubt the likelihood of a top right away.

July crude oil now has buy-stops over $60.10, $62.28, $65.56, $70.46, $71.80, $76.25, $79.17, and $84.83.  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 149.00, 150.30, 153.70, 154.00, 154.67, 155.10, & 160.25.  Sell stops are under 141.30, 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 176.60, 189.65, 199.90, 207.00, 213.99, 222.70, & 228.86.  Sell-stops are under 167.70, 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 bears started the week with a slip in the backfield, losing 27 yards, making it second and 37 to go.

Technical Support & Resistance

Jul crude oil                            Support:             $56.55-$56.75, $56.10-$56.30, $55.45-$55.60, $53.50-$53.65, $52.55-$52.70, $50.00.

                                           Resistance:        $59.90-$60.10, $62.25-$62.30, $65.50-$65.60, $70.35-$70.46, $71.65-$71.80.

Jun heating oil        Support:             141.30-141.60, 140.90-141.00, 137.50-137.65, 132.00-132.20, 129.50-129.65.

                             Resistance:        148.95-149.00, 149.72-149.75, 150.20-150.30, 152.40-152.50, 153.65-153.70.

Jun Rbob                       Support:             167.70-167.85, 166.35-166.50, 165.00-165.20, 163.65-163.75, 162.40-162.55, 157.55.

                                           Resistance:        176.45-175.60, 179.25-179.40, 180.10-180.25, 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 37,496 contracts on Friday, when prices were lower, and that suggests very heavy long liquidation. In the last seven sessions, 70,486 contracts were added and 123,722 contracts taken off, suggesting distribution.

      Heating oil open interest rose by 3 contracts on Friday, when prices were lower.  That looks like balanced buying and selling, liquidation and new positions and is neutral.

      RBOB open interest grew by 2,220 contracts on Friday, when prices were lower.  That looks like net new selling and would be bearish. 

      Natural gas open interest fell by 9,291 contracts on Friday, when prices were lower.  That looks like long liquidation and is supportive.

Friday’s Open Interest Changes:  

Crude 1,136,233  dn 37,496        Heat 260,147   up 3       RBOB 227,006  up 2,220       Nat gas 680,956  dn 9,291           

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 rallied a little more than four cents yesterday as gas traders kept one eye on equities and one eye on oil.  That pretty much exhausted the eyes.  There was nothing left to look at supply and demand of natural gas.  The fact that traders chose to look at the bullish factors available yesterday rather than the more bearish supply and demand factors tells us that this market is not ready to move lower without reservation, yet.  We still see this as part of the topping process, with big up days interrupted by large declines. 

The bottom line in natural gas is that we have plenty of daily production and not enough daily demand to absorb it all.  The leftover gas finds its way into storage.  That is the underlining truth of this market.  It just gets easily sidetracked.  Equities were higher yesterday, and in the recent logic of energy markets, that is a clear sign that the economy is no longer getting any worse, which should translate ultimately into higher demand for oil and natural gas.  And we had violence in Nigeria yesterday, which could mean fewer barrels of crude, which should lead to higher oil prices, which should make natural gas more attractive as an alternative.  In any event, after trading on either side of unchanged yesterday, natural gas prices ended the day in positive territory.  It was not specifically because of anything natural gas related.

In cash trading yesterday, Henry Hub prices were at $3.99-$4.06, down $0.01-$0.04 (DJN).  SoCal prices were at $3.67-$3.71, down $0.09 and up $0.03 on the day.  El Paso Permian prices were down $0.07 and up $0.15 at $3.50-$3.58.  Katy prices were down $0.01-$0.01 at $3.88-$3.97.  Waha prices were up $0.01-$0.10 at $3.50-$3.60.  Transco 6 was up $0.11 and down $0.17 at $4.43-$4.48/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $37.75-$39.50/mwh.  Northeastern prices last traded at $32.50-$41.25.  Entergy was last at $29.25-$29.75.  Ercot was last at $30.75-$31.50/mwh. 

It was remarkably cold yesterday in the Northeast, the coldest we can recall this late in spring for quite a long time.  And that suggests to us that the colder-than-normal pattern we have had since early November is still in place.  If it continues, it will be a cooler summer, on average, and we could also get late frosts.  There was fear that we could have one last night.  This is awfully late to be worrying about frosts, even in southern New England.  By this weekend, it will be time to plant tomatoes, and they do not grow well in 40 or 50-degree temperatures.

After watching this market advance out of hand over the last few weeks, a number of traders holding shorts through most or all of that would have been eager to get out with smaller losses than they had been threatened with last week.  These shorts would have been scared into getting out urgently once it became clear yesterday that the decline was taking a break.  This is far from unusual.  At the end of almost every bullish market, we see an urgent round of short-covering just before everything is over.  The fact of those shorts getting out when they do removes a natural source of buying that might otherwise halt or slow the decline once it really gets under way.  We still believe a top is forming, but we are not keen to get short in this market.     

Support is at $4.09-$4.10, $3.98-$4.01, $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 $4.22-$4.24, $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 traded on both sides of unchanged before ending in slightly positive territory.

Dollars per million Btu

Jun Natural Gas:          Support:         $4.09-$4.10, $3.98-$4.01, $3.82-$3.84, $3.57-$3.60, $3.43-$3.46, $3.33-$3.36.

                                                    Resistance:    $4.22-$4.24, $4.31-$4.35, $4.53-$4.56, $4.65-$4.69, $4.85-$4.88, $5.01-$5.03.

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 still feel prices are constructing a top.  A switch of focus from equities to oil market fundamentals would be bearish.

An Illustrated Look at Energy Market Factors

A Look at Longer-Term Price Charts

Gasoline prices are roughly double last year’s lows and half of last year’s highs.

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 Memorial Day Weekend.  Markets will be closed on Monday, so we will have reports on Thursday and then Tuesday.  Anyone needing prices for Thursday can e-mail us and we will get them to you.