Prices for May 22nd, 2009

Market Review for Friday & over the Weekend

HE approach of Memorial Day Weekend kept shorts on the back foot, and buying kept coming in from a variety of sources, mostly in gasoline.  Crude oil prices gained 62 cents a barrel and heating oil prices were up 86 points, muscled higher by strong gasoline quotes.  There was more short-covering than long-liquidation/profit-taking going into the long weekend, which is unusual. 

The increase in gasoline prices, which rivals some of the strongest years seen, has come completely on relative improvement.  Of all the March-to-May advances seen in gasoline futures over the years, this one has been among the most confusing, with the biggest increase on the flimsiest reasons.    

Last week, we saw a decent drawdown in gasoline inventories, but these are still very close to five-year average figures and are only 4.8 million bbls, (2.29%) lower than a year ago.  Also, imports were extremely light in April and have remained below a million bpd, which is what we expect and usually need to make it through a normal driving season.  Refineries also have lots of capacity they can press into use, should margins increase dramatically enough to warrant it.  And, we are extremely unlikely to run out of supplies, given the normal amount currently in storage. 

Production and imports have been on the lighter side recently, but the 13-week aggregate average is 9.861 million bpd, only 0.13% below year-ago levels;  it’s less than 13,000 bpd.  Reported demand is down 1.77% against last year, over the same 13 weeks, or off about 160,000 bpd. 

We think a large part of the increase has been based on seasonal tendencies for stronger quotes.  Seasonally, the trend higher should be ready to peter out.  Crude prices are their most overbought on our charts, going back to 2002 which, in concert with the gargantuan swings in open interest recently, makes us very nervous that we could see a collapse of shocking proportions.  We have no sign it is about to happen, but we are on alert.

Technicals

           The oil complex completed its technical breakouts last week with a decisive breakout to the upside in heating oil, giving it a swing objective to 167.13, along with a previous one to 165.83.  Gasoline exceeded its objective to 185.52, leaving an objective to 209.33.  Crude oil has a new swing objective to $72.14, in addition to previous objectives to $64.94 and $68.54.  Crude oil prices are extremely overbought here, more than at any time in the last seven years (pp 9).

Ratio: Crude divided by natural gas

Above:  Crude oil prices have increased in relation to natural gas prices and are now at their highest ratio this century.

July crude oil now has buy-stops over $62.26-$62.28, $65.56, $70.46, $71.80, $76.25, $79.17, and $84.83.  Sell-stops are under $59.85, $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 154.53-154.67, 155.10, 160.25, 164.80, 166.90, 172.71, 176.70, 178.52, 183.02, 189.06, 192.12, 193.45, and 199.20. Sell stops are under 150.70, 148.40, 141.30, 140.90, 137.50, 132.00, 129.50, 127.85, 123.20, 119.00, 114.30, 112.50, 109.80, and 104.55.  June RBOB has buy-stops over 184.35, 187.25, 189.65, 199.90, 207.00, 213.99, 222.70, 228.86, 240.10, 250.40, 252.00, 265.10, 267.85, and 270.85.  Sell-stops are under 179.85, 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.

Football: The bears lost another six yards on Friday, on fourth and 62.  The bulls start this week with a first down.

Technical Support & Resistance

Jul crude oil                            Support:             $59.85-$60.10, $58.90-$59.05, $56.55-$56.75, $56.10-$56.30, $55.45-$55.60.

                                           Resistance:        $61.95-$62.00, $62.25-$62.30, $65.50-$65.60, $70.35-$70.46, $71.65-$71.80.

Jun heating oil        Support:             150.70-150.85, 148.40-148.60, 145.40-145.55, 141.30-141.60, 140.90-141.00.

                             Resistance:        154.40-154.55, 149.72-149.75, 150.30-150.50, 152.40-152.50, 153.65-153.70.

Jun Rbob                       Support:             179.85-180.00, 173.20-173.35, 167.70-167.85, 166.35-166.50, 165.00-165.20.

                                           Resistance:        184.20-184.35, 185.90-186.10, 187.10-187.25, 188.25-188.40, 189.55-189.70, 199.00.

Oil Inventory Reports

    Traders will be looking at this week’s figures to see if crude oil imports can rebound, and that may tie in directly with refinery utilization.  Normally, refineries start to crank up runs at this time of year, although this year could prove to an exception.  Over the last eight years, refineries have run at an average rate of 93.65%.  Prior to Hurricane Katrina, refineries ran at a rate of 95.76%, over the five years between 2001 and 2005.  Refineries are currently running nearly 12% below normal.

  Distillate stocks are now 39.0 million bbls, or 35.74%, higher than a year ago.  Heating oil inventories are 17.0 mln bbls, or 74.24%, higher than they were a year ago.  Gasoline stocks are 4.8 mln bbls (dn 2.29%) lower against a year ago.  Crude oil stocks are now 56.9 million bbls, or 18.26%, higher than a year ago.  Residual stocks are 3.0 mln bbls (7.50%) lower than a year ago, jet fuel stocks are 0.1 mln bbls, (0.25%) higher than a year ago.  Utilization is 6.1% lower than a year ago and is 11.41% below the eight-year average.  It is 13.60% lower than the five-year, pre-Katrina average.  That is the most bullish fact.

                                                                    DOE Weekly Inventory Statistics

Source: US Department of Energy’s Energy Information Administration  

Open Interest Analysis

      Crude oil open interest rose by 3,407 contracts on Thursday, when prices were lower.  That looks like new selling, but it could have buying at this point in the advance.  That would be bearish (if it is new selling).

      Heating oil open interest rose by 3,448 contracts on Thursday, when prices were lower.  That looks like new selling, which should be bearish. 

      RBOB open interest grew by 5,524 contracts on Thursday, when prices were lower.  That looks like net new selling and would be bearish. 

      Natural gas open interest grew by 6,426 contracts on Thursday, when prices were lower.  That looks like new selling and would be negative. 

Thursday’s Open Interest Changes:  

Crude 1,103,516  up 3,407        Heat 266,452   up 3,448       RBOB 239,807  up 5,524       Nat gas 688,819  up 6,426     

CFTC Commitments of Traders  (for the period ended Tuesday, May 19th)   

As of May 19th:                 Long                   Short:

Crude oil                   175,047               139,810                           -contracts held by speculators:  1.25 long

                                         578,870               626,843                               held by the trade

                                           82,719                 69,983                               held by small specs and hedgers.

Spreads….dn 19,966 contracts   The ratio went from 1.06-to-one short to 1.25-to-one long in the last two reports.

   Large speculators added 4,056 long contracts and covered 28,115 shorts over the week under review.  Commercials liquidated a staggering 94,279 longs and covered 63,434 shorts.  Small specs and hedgers liquidated 42,641 longs and covered 41,315 shorts.  Open interest fell by 152,830 contracts as prices rallied $0.80/barrel.  There were 107,470 contracts added on a two-week gain of $8.93, and now we see 150,000 contracts taken off as prices rose 80 cents.  That is the largest figure we recall seeing.  It represents massive short-covering and is bearish.  Unless they all come back buying, it is historically bearish.

   The average large speculator has 2,135 long contracts (82 accounts), or 75 more contracts on average on one less account, and 1,456 shorts (96 accounts), or an average of 57 contracts less on 15 less accounts.  Commercials held 7,421 longs (78) or 406 fewer longs on average on 8 fewer accounts, and 6,740 shorts (93), or 603 less shorts on one less account. Reportables held 4,128 longs (245, dn 23 accts) and 4,146 shorts (247 accts, dn 19).  Fifteen large speculative short accounts were closed.

Heating oil                 33,611                 13,475                           - contracts held by speculators:  2.49 to 1 long

                                         146,177               176,853                              held by the trade.

                                           40,434                 29,894                               held by small specs and hedgers.

Spreads….up 2,461 contracts.    The ratio of large speculative longs to shorts went from 2.54-to-one to 2.49-to-one in a week.

       Large speculators added 389 longs and added 389 shorts.  Commercial accounts added 1,025 longs and covered 513 shorts.  Small speculators and hedgers liquidated 1,659 longs and covered 121 shorts.  Open interest grew by 2,216 contracts as prices dropped 2.04 cents. That looks like new selling, but is not.  The increase in open interest came from spreads.

       The average large speculative long is holding 1,050 contracts (dn 96 lots on 32 accounts, 3 more accounts), while the average short has 613 contracts (up 90 lots on 22 accts, dn 3 accts).  The average commercial long is holding 2,150 contracts (dn 16 contracts on 68 accts, up 1 acct) compared to the average short holding of 2,852 contracts (dn 104 lots on 62 accts, up 2 accts).  The average reportable position is 1,805 long (dn 13 lots on 122 accts, up 3 accts) while the average short holding is 2,079 (dn 36 lots on 111 accts, up 3).  Small trader liquidation was the best selling we saw during this week under review.

Rbob Gasoline           65,781                   9,707                          -contracts held by speculators:  6.78 to 1 long

                                          127,506               188,090                             held by the trade.

                                            18,916                 14,406                              held by small specs and hedgers.

Spreads…up 5,040 contracts   The ratio of large speculative longs to shorts went from 7.40-to-one to 6.78-to-one in 1 week.

     Large speculative holdings grew by 1,046 longs and rose by 1,049 shorts over the latest week. Commercial holdings grew by 11,476 longs and grew by 12,666 shorts.  Small speculators and hedgers’ positions grew by 1,273 longs and grew by 80 shorts.  Open interest grew by 18,835 contracts as prices rallied 14.46 cents.  That looks like heavy, new buying, and all three categories were, in fact, buying.  The problem is that all three categories were also selling – sometimes more than they bought.

   The average holdings are 1,078 contracts for each large speculative long (61) and 441 for each large speculative short (22).  The average commercial long now has 1,678 contracts long (76) and 2,090 short (90). Average reportable holdings are 1,331 long (159) against 1,532 short (141).  Large speculators and commercials were both buying and selling, in almost equal quantities.  Small speculators and hedgers bought considerably more than they sold, and it may have been their buying that helped to drive prices up as dramatically as they were.

Naturalgas                79,964               215,174                           -contracts held by speculators:  2.69 to 1 short

                                         278,551               187,130                               held by the trade.

                                           81,061                 37,272                           held by small specs and hedgers.

Spreads…dn 5,122 contracts    The ratio of large speculative shorts to longs stayed at 2.79-to-one in the latest week.

  Large speculative holdings liquidated 8,105 longs and covered 4,632 shorts over the latest week. Commercial accounts added 10,722 longs, and added 7,826 shorts, while small speculators and hedgers liquidated 3,085 longs and covered 3,662 shorts.  Open interest fell by 5,590 contracts as prices dropped $0.535/mmBtu.  That looks like long liquidation, which would be supportive.    

  The average large speculator has 1,212 contracts (66) while each large speculative short is holding 2,690 shorts (80).  The average commercial long now has 3,397 contracts long (82) and 3,119 short (60). Average reportable holdings are 2,725 long (220) long and 3,440 short (187).  Large speculators added seven long accounts, which decreased the average long holding by 281 contracts, and cut six short accounts, which brought the average up 134 contracts.  The reportable category had 88 less longs on average, on 6 more accounts while the average reportable short held 66 less contracts with three new accounts.    

Natural Gas & Utility Generation

Even as oil prices were rallying, natural gas traders decided to focus on their own supply and demand figures, rather than any outside influence.  That is one of the factors that has made natural gas trading so difficult recently; it is almost impossible (before the fact) to know which natural gas market is going to show up on any given day.  Some days, and these are generally the days that prices move higher, we awake to a strangely outward-looking gas market, one that is susceptible to outside influences or activity.  That is our “teenaged market,” the one that gives in to peer pressure among other markets and seems genuinely to care what other markets are thinking or doing.  On other days, we awaken to a curiously self-directed fundamental market.  This is our “mature market,” one that reasons on its own, looks inward for direction, acts according to well-known facts and can be almost pensive.  This market shows up, generally, on days during which prices decline.  This market knows the score (the fundamentals are bearish) and it acts accordingly.

It was this more “mature” market that showed up on Friday.  Prices dropped because supplies are generous and demand is weak.  According to Dow Jones, traders were even looking ahead to mild temperatures over the predicted future and saw in those forecasts additional reasons to be selling.  If the cooler-than-normal pattern lasts through summer, the weather won’t help.

In cash trading on Friday, Henry Hub prices were at $3.36-$3.45, down $0.14-$0.35 (DJN).  SoCal prices were at $2.88-$3.10, down $0.33-$0.39 on the day.  El Paso Permian prices were down $0.30-$0.43 at $2.77-$3.00.  Katy prices were down $0.30-$0.33 at $3.20-$3.36.  Waha prices were down $0.41-$0.44 at $2.88-$2.93.  Transco 6 was down $0.35-$0.49 at $3.59-$3.83/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $27.00-$29.25/mwh.  Northeastern prices last traded at $36.25-$40.50.  Entergy was last at $32.00-$33.25.  Ercot was last at $34.00-$35.50/mwh. 

Natural gas prices dropped 58.3 cents/mmBtu last week.  This was in the face of some rather strong gains in the oil complex.  As we noted above, though, some days it matters more which market shows up than it does what influences are out there.  When gas traders are thinking about outside influences, it does not matter that stocks are growing or are heavy to begin with.    

Bloomberg reported on Thursday, “The 2009 hurricane season will be “near-normal,” with four to seven of the storms forming in the Atlantic Ocean, the National Oceanic and Atmospheric Administration predicted in a conference call.  The season will probably bring nine to 14 named storms to the Atlantic, and as many as three of them will be major hurricanes, meaning winds of 111 mph (178 kph) or more on the Saffir-Simpson Scale, NOAA said.”  Although it went almost unnoticed, last year’s storms (Ike & Gustav) were almost as severe as Katrina and Rita in 2005.  They idled a comparable number of refineries, albeit relatively briefly.  As a result, we would be quick to note that we are in a more active period.  We would also be quick to note that it only takes one bad landfall along the US Gulf Coast to shut in oil and gas production.

Support is at $3.43-$3.47, $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 $3.63-$3.65, $4.01-$4.03, $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 dropped dramatically last week, breaking from a small head & shoulders top.

Dollars per million Btu

Jun Natural Gas:          Support:         $3.63-$3.65, $3.81-$3.84, $3.57-$3.60, $3.43-$3.46, $3.33-$3.36, $3.25-$3.26.

                                                    Resistance:    $4.01-$4.03, $4.22-$4.24, $4.31-$4.35, $4.53-$4.56, $4.65-$4.69, $4.85-$4.88.

EIA Weekly Storage Figures

Last week’s EIA report showed a build of 103 bcf on expectations for a build of 93-94 bcf.  Stocks are now 514 bcf higher than a year ago, against a surplus of 497 bcf a week ago, a surplus of 491 bcf two weeks ago and a surplus of 464 bcf three weeks ago.  Stocks are now 32.08% higher than a year ago.  They are 387 bcf and 22.38% above the five-year average.

The five-year average for this week was a build of 89.8 bcf.  The eight-year build average was 89.25 bcf.  Last year, there was a build of 87 bcf. 

EIA Report

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

News & Views

Now comes the time for the “proof of the pudding,” as it were.  The next two or three demand figures from the DOE will tell us how much gasoline was actually used this past weekend.  We fear a bearish surprise in the crude market.

An Illustrated Look at Energy Market Factors

A Look at Inventories

Gasoline stocks traditionally do start to decline in the second quarter.

As the red arrows show above, distillate stocks have almost always declined from January.  This year, represented by the green arrow, they did not.  That is because of the extremely poor demand seen over the first two quarters (see page 9).  Stocks almost always increase from April or May, which could take us to record levels by November 1st (heating season).

Crude oil stocks typically peak in the second quarter as refinery utilization reaches its peak on Independence Day.

A Look at Thirteen-Week Average Imports

Only by keeping these at historically low levels have refiners been able to prevent crude stocks from soaring.

A Look at This Week’s Critical Factors

Distillate demand has literally dropped through the floor of our chart, which made us rescale it. 

No, rescaling charts is not difficult, but it can be meaningful.  In this case, it means demand is its lowest in years.

This could affect refinery runs, which, in turn, would affect crude oil stocks.  It may be a case of picking one’s poison.

Crude oil prices are more overbought here than they were at such critical junctures as last July and in the aftermath of Hurricanes Katrina & Rita.  That, in combination with the wild distribution seen in open interest, tells us to be wary of a potential violent selloff.  The only mitigating factor is how oversold we were at the lows.  Still, … .

Utilization is 6.1% lower than a year ago and is 11.41% below the eight-year average.  It is 13.60% lower than the five-year, pre-Katrina average.  Utilization typically reaches its high for the year on Independence Day.

Recommendations for Specific Market Segments