Prices for May 26th, 2009

Market Review for Tuesday           

RUDE oil prices started the day on a weak note, but they finished in positive territory yesterday.  In the process, they printed their highest intraday high since November 5th, 2008.  Heating oil prices followed the same script, and they printed their highest settlement since December 3rd, 2008.  Gasoline prices had their strongest settlement price since October 14th, last year.  The biggest jump in consumer confidence (to 54.9) since September was the hot-button item.

We still see a number of compelling reasons for prices to turn lower at any point, but they are stubbornly holding up in the face of extreme turnover in open interest, a no-win proposition for refiners forced to choose between higher crude stocks or higher distillate stocks, heavily overbought pressures, record levels for crude against natural gas prices and a waning seasonal. 

Some of the factors listed above are distinctly unique.  Prices have not been this overbought in crude oil this century, nor have crude oil prices been at a higher ratio in relation to natural gas this century.  Neither is a one-day timing device, but both suggest that a major turn should be coming soon.  Marry those factors to the dying seasonal tendency for higher prices from March to May, and the likelihood of a turn seems even more imminent.  The last three open interest reports have shown huge changes in open positions, and that is something often associated with important tops. 

And, then there are the fundamentals.  Refiners have cut crude oil imports down to a comparative trickle in an effort to contain inventories.  At the same time they have resisted the obvious solution to high crude oil stocks – especially at this time of year – which is higher utilization.  As far as we can tell, the main objection to higher run rates is distillate stocks, which showed no obvious pattern of seasonal withdrawal this past first quarter (into the second quarter), something unheard of in previous years.  Typically, that kind of a response, at a time when Opec is struggling to comply with its own quotas, would be a sloppy international crude oil market.  Instead, prices are racing to new highs on one-time factors that were never bullish before.

Technicals

           Oil prices continued their unlikely advance yesterday, with all three major contracts printing new six, seven or eight-month high settlement levels.  Heating oil has objectives to 165.83 and 167.13.  Gasoline has exceeded its objective to 185.52, leaving one 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 remain more overbought than at any time in the last seven years.

Ratio: Crude divided by natural gas

Above:  Crude oil prices have increased in relation to natural gas prices and are now at another new high ratio.

July crude oil now has buy-stops over $62.55, $65.56, $70.46, $71.80, $76.25, $79.17, and $84.83.  Sell-stops are under $59.50, $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 154.67, 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 147.70, 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 187.10-187.25, 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 178.00, 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 bulls gained eight yards yesterday on first down, making it second and two to go, here.

Technical Support & Resistance

Jul crude oil                            Support:             $59.50-$59.65, $58.90-$59.05, $56.55-$56.75, $56.10-$56.30, $55.45-$55.60.

                                           Resistance:        $62.45-$62.55, $63.85-$64.00, $65.50-$65.60, $70.35-$70.46, $71.65-$71.80.

Jun heating oil        Support:             150.70-150.85, 147.70-147.85, 145.40-145.55, 141.30-141.60, 140.90-141.00.

                             Resistance:        154.40-154.60, 149.72-149.75, 150.30-150.50, 152.40-152.50, 153.65-153.70.

Jun Rbob                       Support:             178.00-178.15, 173.20-173.35, 167.70-167.85, 166.35-166.50, 165.00-165.20.

                                           Resistance:        185.90-186.10, 187.10-187.25, 188.25-188.40, 189.55-189.70, 199.00-199.25.

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 fell by 4,601 contracts on Friday, when prices were higher.  That looks like short-covering, which would be bearish. 

      Heating oil open interest rose by 213 contracts on Friday, when prices were higher.  That looks like new buying, which should be supportive, mildly.

      RBOB open interest fell by 1,739 contracts on Friday, when prices were higher.  That looks like short-covering and would be bearish.   

      Natural gas open interest grew by 1,165 contracts on Friday, when prices were lower.  That looks like new selling and would be negative. 

Friday’s Open Interest Changes:  

Crude 1,098,915  dn 4,601        Heat 266,665   up 213       RBOB 238,068  dn 1,739       Nat gas 689,984  up 1,165         

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

Here we go, again.  Yesterday, it was the more insecure version of the market that made an appearance, as traders kept their eyes on events in the oil rings and on Wall Street, where equities were rallying.  Nothing changed in terms of supply or demand factors yesterday, and yet prices managed to finish with very minor gains. 

Some traders preferred to focus on the very limited nature of yesterday’s gains, attributing the mild gains to the bearish fundamental picture that exists right now.  We tend to look at this market’s recent activity in a different light.  Traders are reacting to markedly different factors because they are trading within a broader range.  At this stage, there is support at $3.155, although we fully expect to see a break just under $3.00 if prices get within striking distance of $3.15.  There will be sell-stops strung out from $2.94 to $3.09, with expectations for a heavy little trove of sell-stops beneath $2.99.  Commercial accounts are certain to be eager to buy from $2.90 to $3.10, with technical buyers lined up from $3.15 to $3.20.  But, if the bears get up a head of steam, prices are likely to break through stops, which will accelerate the decline. 

On the upside, there is resistance at $4.69.  While it would seemingly require quite a bit more to generate a run back towards that level, there will be buy-stops from $4.70 on up, possibly as far as $5.01.  Prices are finding a home in this range.

In cash trading yesterday, Henry Hub prices were at $3.30-$3.51, up $0.06 and down $0.06 (DJN).  SoCal prices were at $2.89-$3.02, up $0.01 and down $0.08 on the day.  El Paso Permian prices were down $0.03-$0.07 at $2.74-$2.93.  Katy prices were up $0.14 and down $0.02 at $3.18-$3.50.  Waha prices were up $0.02 and down $0.07 at $2.81-$2.95.  Transco 6 was up $0.02-$0.16 at $3.75-$3.85/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $27.00-$32.00/mwh.  Northeastern prices last traded at $36.25-$38.50.  Entergy was last at $29.50-$30.50.  Ercot was last at $28.75-$30.00/mwh. 

The most recent mini-trend is lower in this market, and there is nothing looming on the horizon that strikes us as being likely to turn attitudes suddenly more bullish.  However, having said that, we are aware that prices are capable of catching an unseen updraft without much warning, and the market has enough divergent personalities to be able to focus on any number of unexpected factors at very short notice. 

If left to its own devices, we would imagine a course that would ultimately bring prices back down to test the lows near $3.15.  At the same time, though, we could imagine that being a long, drawn-out process that could take time.  In the meantime, there may be a large number of days that seemingly make no sense, where prices meander along, alternately following one and then another impulse. 

Eventually, the economy will recover and, when it does, the accumulated loss of drilling rigs in service will catch up with prices, giving them a push from demand and a pull from supplies.  That fact is what suggests to us a test of $3.15; the bears have limited time and the real bulls want to see lower prices at which hey can build long positions for the future.

Support is at $3.43-$3.47, $3.38-$3.39, $3.33-$3.34, $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 Dollar-Euro

Dollar-Euro:  One-Year Chart

A weaker US dollar – which has been seen recently – is bullish for crude oil.

There is very good resistance at 80 to 81 euro cents, and support is at 67-69 euro cents per dollar.

Dollar-Euro: Six-Month Chart

A strong dollar rally could be the factor that tips oil into a correction.

Recommendations for Specific Market Segments