Prices for May 27th, 2009

Market Review for Thursday    

ESTERDAY’s DOE report was seen as being bullish, and it pushed oil prices to new recent highs, yet again.  Traders were mostly impressed by the drawdown in crude oil stocks, but that came strictly as a matter of two trends intersecting.  The first has been the trend towards very low imports.  Despite what Ali Naimi said recently about industrial demand coming back, these low imports have to have hurt Opec.  The second trend is the normal seasonal tendency for refinery runs to jump at the end of May and into June, as they move towards a high on Independence Day. 

This week’s report showed a big jump in processing rates, by 3.3%.  That helped pull crude oil from storage.  But, even if we were to see that kind of pull each week through the summer, it is unlikely that we would draw down stocks enough.

Traders saw the bullish side of higher utilization rates yesterday, but they seem to have missed the biggest feature in this week’s numbers.  Gasoline supply jumped nearly three-quarters of a million bpd, by 710,000 bpd between higher output and higher imports.  That is gargantuan.  Somehow, refiners managed to increase gasoline output by 643,000 bpd without getting a single extra barrel of distillate, but we have our doubts about that as a longer-term trend.  The significance of the increases in gasoline production and imports is the addition each week of 5 million barrels of supply.  We may see reductions or revisions in future weeks, but any sustained period of higher supply should kill the leadership role of gasoline in the current advance. 

Traders more or less ignored this aspect of yesterday’s report, but we see it as being central to the future of this market’s movement.  Gasoline has been the market leader for this move, and yesterday’s report really pulls any fundamental rug right out from under it. 

Technicals

           Crude oil prices printed a new high since November 5th, heating oil prices had a new high settlement since December 1st and gasoline printed a new high since October 13th.  Prices remain extremely overbought on our oscillators, and crude oil prices are still very high against natural gas, although a rally in gas prices yesterday pushed the ratio back down.  We do still have swing objectives to higher numbers in the oil markets.   

Cents per gallon

Above:  Gasoline prices are at their highest premium to heating oil in a long time.

July crude oil now has buy-stops over $65.44-$65.56, $70.46, $71.80, $76.25, $79.17, and $84.83.  Sell-stops are under $62.75, $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 161.00, 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 154.75, 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 192.00, 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 186.85, 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 16 yards yesterday on first down, and that gives them another set of downs.

Technical Support & Resistance

Jul crude oil                          Support:             $62.75-$62.90, $62.15-$62.30, $59.50-$59.65, $58.90-$59.05, $56.55-$56.75.

                                           Resistance:        $65.44-$65.60, $70.35-$70.46, $71.65-$71.80, $72.10-$72.15, $76.10-$76.25.

Jun heating oil       Support:             154.75-154.90, 150.70-150.85, 147.70-147.85, 145.40-145.55, 141.30-141.60.

                             Resistance:        160.10-160.25, 160.90-161.00, 164.65-164.80, 166.75-166.90, 172.65-172.71.

Jun Rbob                      Support:             186.85-187.00, 184.80-184.95, 178.00-178.15, 173.20-173.35, 167.70-167.85.

                                           Resistance:        191.80-192.00, 199.00-199.25, 199.80-199.90, 206.85-207.00, 209.25-209.35.

Oil Inventory Reports

    This week’s DOE report showed a heavy drawdown in crude oil stocks, but it also showed the reason why – a huge jump in refinery utilization.  That translated into an increase of 710,000 bpd in gasoline supply (production and imports), and that could well lead to builds in gasoline inventories down the road.  Curiously, refiners were able to focus enough on increasing gasoline yields to generate an increase in gasoline production without producing an extra drop of distillate.  That argues for a continuation of existing run rates. 

  Distillate stocks are now 37.8 million bbls, or 34.18%, higher than a year ago.  Heating oil inventories are 17.6 mln bbls, or 75.21%, higher than they were a year ago.  Gasoline stocks are 4.9 mln bbls (dn 2.35%) lower against a year ago.  Crude oil stocks are now 55.2 million bbls, or 17.93%, higher than a year ago.  Residual stocks are 1.8 mln bbls (4.47%) lower than a year ago, jet fuel stocks are 0.6 mln bbls, (1.51%) higher than a year ago.  Utilization is 2.8% lower than a year ago and is 8.55% below the eight-year average.  It is 10.66% 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 grew by 27,998 contracts on Wednesday, when prices were higher.  That looks like heavy, new buying and is the first sign seen recently that old buyers are getting back in on the long side.

      Heating oil open interest fell by 3,093 contracts on Wednesday, when prices were higher.  That looks like short-covering, which would be bearish.

      RBOB open interest fell by 3,348 contracts on Wednesday, when prices were higher.  That looks like heavy short-covering and would be decidedly bearish.   

      Natural gas open interest fell by 4,567 contracts on Wednesday, when prices were higher.  That looks like short-covering, which would be bearish.

Wednesday’s Open Interest Changes:  

Crude 1,123,863  up 27,998        Heat 262,750   dn 3,093       RBOB 223,599  dn 3,348       Nat gas 677,529  dn 4,567   

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 jumped nearly 32 cents yesterday as traders once again repudiated prices beneath $3.50/mmBtu.  We knew that if prices kept falling and got within striking distance of $3.15 that they would be sucked down to test and possibly trigger the sell-stops below that number – and it almost certainly would have resulted in a print below $3.00.  But yesterday’s activity effectively says that this market now does not want to be below $3.50.

There seems to have been some heavy buying as a result of this week’s EIA underground storage figure, which showed a build of 106 bcf, against estimates calling for a build of 111-112 bcf.  That was seen as being bullish and it reinforced the market’s decision to get away from the temptation of testing $3.15.  Many traders saw the report as the sole reason for the advance yesterday, but we believe that the repudiation of numbers under $3.50 and the strength seen in oil markets were also considerations.  Prior to yesterday’s rally, natural gas prices had fallen to their lowest levels against crude oil in our records, which go back to 2002.  We do not believe that the ratio was higher going back to 1998. 

In cash trading yesterday, Henry Hub prices were at $3.49-$3.70, up $0.04-$0.17 (DJN).  SoCal prices were at $2.90-$3.04, down $0.05-$0.05 on the day.  El Paso Permian prices were up $0.03 and down $0.01 at $2.89-$2.97.  Katy prices were up $0.03 and down $0.06 at $3.35-$3.48.  Waha prices were down $0.02-$0.03 at $2.88-$3.08.  Transco 6 was down $0.04-$0.08 at $3.85-$3.95/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $27.50-$31.00/mwh.  Northeastern prices last traded at $30.75-$40.75.  Entergy was last at $27.50-$28.50.  Ercot was last at $31.50-$33.00/mwh. 

Some traders felt that prices had been looking for a rally when yesterday’s numbers were released, and this week’s report gave them the ability to do just that.  After reaching a low of $3.45, the market had an important decision to make.  Had prices gotten as low as $3.29, we believe they would have been sucked lower by sell-stops under $3.15 all the way down to $2.90 or $2.95.  With rig counts at such low levels recently, that would have been giving away material, especially to those who can store the gas for an extended period. 

Prices were not ready for that, and yesterday’s sharp rally now tells us hat $3.15 is, in fact, a low of consequence.  We were not sure that it could hold up longer-term, but we now believe that it is in for the long haul.  It looks like it will be extremely difficult for prices to get back down anywhere near that level.

Yesterday’s strong rally brought in technical buying that is likely to continue giving this market support.  We have to expect that the nest major move in this market will be on the upside as prices decide how significant the recent high at $4.69 is.  We have to expect prices to try to test that level next. 

Support is at $3.57-$3.60, $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 $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:        $3.57-$3.60, $3.43-$3.46, $3.33-$3.36, $3.25-$3.26, $3.15-$3.17, $3.10-$3.14.

                                                    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

This week’s EIA report showed a build of 106 bcf on expectations for a build of 111-112 bcf.  Stocks are now 524 bcf higher than a year ago, against a surplus of 514 bcf a week ago, a surplus of 497 bcf two weeks ago and a surplus of 491 bcf three weeks ago.  Stocks are now 31.02% higher than a year ago.  They are 393 bcf and 21.59% 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 were for a build of 111-112 bcf in a range between 98 and 120 bcf.

EIA Report

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

News & Views

Forget the decline in crude oil stocks; the big factor was the jump in gasoline supply of 710,000 bpd in this DOE report.

An Illustrated Look at Energy Market Factors

A Look at Long-Term Prices

Recommendations for Specific Market Segments