Prices for May 27th, 2009

Market Review for Wednesday 

RICES just kept going higher yesterday, and this time they did so in the face of falling stock market (equities) prices.  That is unusual because prices have followed equities higher on a number of occasions when the fundamentals suggested that they should instead be dropping. 

Yesterday’s standard bearer to higher prices was none other than Opec.  That certainly makes sense; the cartel is meeting in Vienna today and talk by some of the more influential ministers could have spooked traders into expecting an output cut.  But, of course, that never happened.  Opec ministers talked about keeping production at existing levels, or at least at keeping current quotas.  What they did say - that struck the market as being bullish - was that demand is poised to grow, again. 

Saudi Oil Minister Ali Naimi told reporters that “customers are asking for greater volumes of oil to satisfy a rise in industrial demand,” according to Dow Jones.  This is where we would use one of those emoticons showing shocked disbelief if we were a teenager with that sort of icon at our disposal.  What?  Where, exactly, is this demand coming from?  Just one look at 13-week crude oil imports here tells us it is not here in the US.  Europe is supposedly using more diesel than gasoline these days, and yet they do not seem interested in any of the product we have socked away in storage (mostly because our prices are so high, but also because they are not using as much).  Chinese demand is still reportedly growing, but not at comparable rates to those seen for most of the last three or four years.  And Mr Naimi specifically cited “industrial demand.”  We guess it’s a good thing they fixed the Hubbell telescope, because that’s the only way we are likely to see this demand.  It is not on this planet.

 Demand rises from the first minute of the third quarter right through New Year’s Eve.  Vacations, ice-cream runs, kids working or going to the beach or getting to do both as lifeguards, fall foliage and finally heating demand all help.  Still, none of these represent any kind of increase in industrial demand.  It is perplexing; still, prices rose on Naimi’s comments.  In trading this morning, they seem to have taken Opec’s decision in stride.

Technicals

           Crude oil prices printed a new high since November 5th, heating oil prices had a new high settlement since December 3rd and gasoline printed a new high since October 13th.  Looking at our oscillators, or differences against moving averages, we can see prices more overbought than they have been in a long time.  Objectives remain to higher figures, $68.54 and $72.14 in crude, 167.13 in heating oil and 209.33 in gasoline.  Crude is also at a record ratio to gas.

Ratio: Crude divided by natural gas

Above:  Crude oil prices reached another new multi-year high ratio to gas, at 17.93-to-one, yesterday.

July crude oil now has buy-stops over $63.82, $65.56, $70.46, $71.80, $76.25, $79.17, and $84.83.  Sell-stops are under $62.19, $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 157.30, 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 153.50, 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 189.95, 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 184.84, 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 ten yards yesterday on second and two.  That gives the bulls a new set of downs.

Technical Support & Resistance

Jul crude oil                          Support:             $62.15-$62.30, $59.50-$59.65, $58.90-$59.05, $56.55-$56.75, $56.10-$56.30.

                                           Resistance:        $63.80-$64.00, $65.50-$65.60, $70.35-$70.46, $71.65-$71.80, $72.10-$72.15.

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:        157.20-157.30, 160.10-160.25, 164.65-164.80, 166.75-166.90, 172.65-172.71.

Jun Rbob                      Support:             184.80-184.95, 178.00-178.15, 173.20-173.35, 167.70-167.85, 166.35-166.50.

                                           Resistance:        189.70-189.95, 199.00-199.25, 199.80-199.90, 206.85-207.00, 209.25-209.35.

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 3,050 contracts on Tuesday, when prices were higher.  That looks like short-covering, which would be bearish. 

      Heating oil open interest fell by 822 contracts on Tuesday, when prices were higher.  That looks like short-covering, which would be bearish.

      RBOB open interest fell by 11,121 contracts on Tuesday, when prices were higher.  That looks like heavy short-covering and would be decidedly bearish.   

      Natural gas open interest fell by 7,888 contracts on Tuesday, when prices were higher.  That looks like short-covering, which would be bearish.

Tuesday’s Open Interest Changes:  

Crude 1,095,865  dn 3,050        Heat 265,843   dn 822       RBOB 226,947  dn 11,121       Nat gas 682,096  dn 7,888      

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

Natural gas prices finished almost unchanged yesterday, as traders paused to catch their collective breaths.  The June contract expired yesterday, and traders were squaring their books going into this final session.  Cash market traders were also squaring books ahead of the end-of-month bookouts and balancing.    

After so much trading up and down over the last month, there did not seem to be one faction or the other of longs or shorts who had waited until the bitter end to get out of their holdings before expiration.  In recent months, expiration days have been relatively quiet, with the biggest bouts of long-liquidation or short-covering coming two or three days prior to the final trading day.  This month seems to have been fairly well balanced by the time we got nearer the end.

Traders were reportedly looking ahead at weather forecasts, which are once again falling into the trend seen since November for cooler readings.  Under different circumstances, the cooler readings would have been supportive through March this year, although they did not meet their expectations because of lost and reduced industrial demand.  Now that it is summer, that calculus is stood on its head.  In a declining or weak market, cooler weather will reduce cooling demand and the need for natural gas. 

In cash trading yesterday, Henry Hub prices were at $3.45-$3.53, up $0.02-$0.15 (DJN).  SoCal prices were at $2.95-$3.09, up $0.06-$0.07 on the day.  El Paso Permian prices were up $0.05-$0.12 at $2.86-$2.98.  Katy prices were up $0.04-$0.14 at $3.32-$3.54.  Waha prices were up $0.09-$0.16 at $2.90-$3.11.  Transco 6 was up $0.14-$0.18 at $3.89-$4.03/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $27.50-$31.00/mwh.  Northeastern prices last traded at $32.50-$40.50.  Entergy was last at $29.00-$32.00.  Ercot was last at $29.00-$32.00/mwh. 

Estimates for this morning’s EIA underground storage report call for a build of 111-112 bcf, with Bloomberg at 111 bcf, as its mean and average in a range of expectations (for builds) between 98 and 120 bcf.  Dow Jones is at 112 bcf, and Reuters had a range of 98 to 115 bcf.  Any which way one cuts it, though, we have plenty of gas in storage.  The weekly reactions to the reports have become exercises in splitting hairs – on a very hairy ape.  By that, we mean that traders often get tricked into reacting to the number of bcf deposited into storage in comparison with expectations, rather than in comparison to absolute levels, last year or an aggregated average of recent years.  That’s  splitting a few hairs among many.  And it may be losing the plot just because prices are having trouble moving earnestly higher or lower.   

The bottom line in this market is this: Prices are currently in a trading range that we do not believe has fully defined itself, yet.  Its parameters right now are $3.15 and $4.69.  Neither boundary strikes us as being its own final word, so we could see his range expanded in both directions.  It may be cynical for us to see everything happening inside this range as background noise or glorified “wiggle and jiggle,” the normal ebb and flow of prices within a trading range not yet fully defined.

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 were essentially unchanged yesterday.

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.  Expectations are for a build of 111-112 bcf in a range (expectations for builds) between 98 and 120 bcf.

EIA Report

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

News & Views

Last night’s API report showed one way of eating away the crude oil surplus – through continuing low imports and a jump in utilization.  We would regard a similar jump in utilization in the DOE report as a possible game-changer.

An Illustrated Look at Energy Market Factors

A Look at Jet Fuel Prices

Jet fuel prices look like they are trying to build a longer-term head & shoulders bottom.

Demand is languishing 9.0% below year-ago levels (in four-week aggregate averages).

Prices could be trying to construct a longer-term head & shoulders bottom, here. 

The incentive to process crude into jet fuel, in the US Gulf, is at its lowest level in years.

Recommendations for Specific Market Segments