Prices for June 11th, 2009

Market Review for Thursday        

IL prices had another strong day yesterday as the weak dollar compelled traders to bid oil futures higher for a third straight session.  Crude oil prices touched their highest intraday high since October 21st; it was their highest settle since October 20th.  Heating oil prices had their highest intraday high since November 17th and their highest settle since November 13th.  Gasoline prices printed their highest intraday high since October 7th and their highest settle since October 3rd.  Prices are extremely overbought, here. 

Clearly, some of what is going on here is that prices are correcting from the severe move from $147.27 to $32.40.  It’s the same old story; $147 was too high; $32 was too low.  That’s fine, but we should not let that inform us that $73 is just right.

American consumers paid $9.54 billion more for gasoline in May than they did in December.  And, to be fair, they paid more than $20 billion more last June than they did this past May.  And, this raises a pertinent question: Which is better or worse - the $20 billion more consumers did not pay in May or the $9.5 billion more they did pay?  We know it may not sound important after talking about trillions of dollars, but billions are still significant, and there are reasons to be frightened.  Higher energy prices taxed $1.5 trillion more from consumers in the first eight years of the 21st Century than during the last eight years of the 20th Century.  That helped tip us into such a severe recession.

It is not just a number.  It was mortgages not paid, credit cards a month, two and then more in arrears.  The big investment banks thought they could make money on mortgages and on oil.  But it can’t work out that way any more than one can shear the lamb that was last night’s mutton.  Consumers will drive to work before paying a mortgage payment on time.  They will keep their computers and televisions running before paying down credit cards.  And, now we have increasing interest rates and a higher price for oil, which is an explosive combination.   It is not a combination that bodes well for our economy’s nascent recovery; the only way to fight them at the same time is for a double-dip recession or another leg lower.  And the government won’t be able to help the next time.

Technicals

           This all started so innocently.  No one was bullish on March 1st, and we were reluctant to look at the long side even though prices have always moved higher after March 15th, at some point before the end of May.  We never expected to be watching in horror as the dollar is being used to round up its relatives held by shorts.  It is all about the dollar, here.

Dollars per barrel

Above:  The gasoline crack is holding steady in a sideways configuration.

July crude oil now has buy-stops over $73.25, $76.25, $79.17, and $84.83.  Sell-stops are under $71.30, $70.43, $68.43, $66.75, $65.90, $64.95, $64.65, $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.  July heating oil has buy-stops over 187.10, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 183.09, 181.09, 177.36, 174.00, 173.50, 171.00, 167.80, 162.35, 159.45, 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, and 109.80.  July RBOB has buy-stops over 207.65, 214.00, 222.70, 228.86, 240.10, 250.40, 252.00, 265.10, and 267.85.  Sell-stops are under 201.70, 200.00, 196.37, 193.43, 192.10, 189.40, 185.90, 184.84, 178.00, 167.70, 166.35, 165.00, 163.65, 162.40, 157.50, 156.60, 150.35, 144.60, 140.00, and 136.55. 

Football: The bears lost 13 yards yesterday on third and 26, and that makes it fourth and 39 today. 

Technical Support & Resistance

Jul crude oil                            Support:             $71.30-$71.45, $70.40-$70.50, $68.40-$68.50, $66.75-$66.85, $65.90-$66.10.

                                           Resistance:        $71.65-$71.80, $72.10-$72.15, $76.10-$76.25, $79.00-$79.17, $84.75-$84.83.

Jul heating oil         Support:             183.05-183.15, 181.00-181.15, 177.55-177.65, 174.00-174.15, 173.50-173.70.

                             Resistance:        187.00-187.06, 188.90-189.10, 191.95-192.12, 193.30-193.45, 199.00-199.20.

Jul Rbob                        Support:             201.70-202.00, 196.35-196.45, 193.40-193.50, 192.00-192.15, 189.40-189.60.

                                           Resistance:        206.85-207.00, 207.55-207.63, 213.90-214.00, 222.50-222.70, 228.75-228.86.

Oil Inventory Reports

    This week’s DOE report was really quite bullish.  Crude oil stocks were surprisingly drawn down, gasoline stocks were shockingly drawn down and even distillate stocks were lower.  Utilization was lower and crude oil imports were lower.  Even refined products imports were lower in this report.  Only prices were higher.  Traders reacted by purchasing futures contracts in reaction to this report.  In another shocker, four-week gasoline demand is now higher on the year.

    Distillate stocks are now 35.8 million bbls, or 31.43%, higher than a year ago.  Heating oil inventories are 15.4 mln bbls, or 62.60%, higher than they were a year ago.  Gasoline stocks are 6.1 mln bbls (dn 2.94%) lower against a year ago.  Crude oil stocks are now 59.9 million bbls, or 19.85%, higher than a year ago.  Residual stocks are 1.4 mln bbls (3.44%) lower than a year ago, jet fuel stocks are 1.8 mln bbls, (4.49%) higher than a year ago.  Utilization is 2.75% lower than a year ago and is 8.19% below the eight-year average.  It is 10.51% 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 5,092 contracts on Wednesday, when prices were higher.  That looks like new buying and is supportive.    

      Heating oil open interest fell by 474 contracts on Wednesday, when prices were higher.  That looks like short covering, which would be negative. 

      RBOB open interest rose by 5,728 contracts on Wednesday, when prices were higher.  That looks like new buying, which would be supportive. 

      Natural gas open interest grew by 14,032 contracts on Wednesday, when prices were lower.  That looks like new selling, which would be bearish but, at this stage, we would not be wrong to acknowledge the buying in there as well. 

Wednesday’s Open Interest Changes:  

Crude 1,208,771  up 5,092        Heat 281,105   dn 474       RBOB 220,357  up 5,728       Nat gas 727,342  up 14,032      

CFTC Commitments of Traders  (for the period ended Tuesday, June 2nd)   

As of June 2nd:                 Long                   Short:

Crude oil                   199,497               159,810                           -contracts held by speculators:  1.25 long

                                         597,601               654,322                               held by the trade

                                         114,983                 97,949                               held by small specs and hedgers.

Spreads….up 21,341 contracts   The ratio went from 1.28-to-one short to 1.25-to-one long in the last report.

   Large speculators added 14,260 long contracts and added 14,695 shorts over the week under review.  Commercials added 28,576 longs and added 29,652 shorts.  Small specs and hedgers added 31,596 longs and added 30,085 shorts.  Open interest grew by 95,773 contracts as prices rallied $6.10/barrel.  We had 107,470 contracts added, then 150,000 contracts taken off; then we had an increase of 52,000 contracts last week, and now 95,773 contracts added.  That might be all there is to add.

   The average large speculator has 1,971 long contracts (100 accounts), or 24 more contracts on average on 6 more accounts, and 1,682 shorts (95 accounts), or an average of 105 contracts more on 3 more accounts.  Commercials held 7,863 longs (76) or 660 more longs on average on 3 less accounts, and 7,036 shorts (93), or 391 more shorts on one less account. Reportables held 4,141 longs (260, up 4 accts) and 4,239 shorts (258 accts, up 8).  Average longs were up 186, shorts were up 127.

Heating oil                 36,041                 14,118                           - contracts held by speculators:  2.55 to 1 long

                                         148,674               183,390                              held by the trade.

                                           42,538                 29,745                               held by small specs and hedgers.

Spreads….dn 137 contracts.    The ratio of large speculative longs to shorts went from 2.49-to-one to 2.55-to-one in 2 weeks.

       Large speculators added 376 longs and covered 48 shorts.  Commercial accounts liquidated 590 longs and added 3,121 shorts.  Small speculators and hedgers added 2,278 longs and covered 1,009 shorts.  Open interest grew by 1,927 contracts as prices rallied 22.69 cents. That looks like new buying, which came from small speculators and hedgers.

       The average large speculative long is holding 1,126 contracts (dn 24 lots on 32 accounts, 1 more account), while the average short has 614 contracts (dn 30 lots on 23 accts, up 1).  The average commercial long is holding 2,252 contracts (up 120 contracts on 66 accts, dn 4 accts) compared to the average short holding of 2,737 contracts (dn 124 lots on 67 accts, dn 2 accts).  The average reportable position is 1,893 long (up 44 lots on 119 accts, dn 3) while the average short holding is 2,144 (up 82 lots on 111 accts, dn 3).  The shorts remain in stronger hands, here.

Rbob Gasoline           71,073                 10,085                          -contracts held by speculators:  7.05 to 1 long

                                          106,188               170,318                             held by the trade.

                                            18,765                 15,623                              held by small specs and hedgers.

Spreads…dn 1,991 contracts   The ratio of large speculative longs to shorts went from 7.62-to-one to 7.05-to-one in 1 week.

     Large speculative holdings grew by 570 longs and grew by 839 shorts over the latest week. Commercial holdings fell by 14,145 longs and fell by 15,826 shorts.  Small speculators and hedgers’ positions fell by 971 longs and grew by 441 shorts.  Open interest fell by 16,537 contracts as prices rallied 10.34 cents.  That looks like short-covering and would be bearish.  Commercials did the most short-covering, but also did the most long liquidation.  Large speculators bought lightly.

   The average holdings are 1,093 contracts for each large speculative long (65) and 438 for each large speculative short (23).  The average commercial long now has 1,361 contracts long (78) and 1,958 short (87). Average reportable holdings are 1,176 long (163) against 1,432 short (136).  Large speculators were the only ones buying new longs over the course of this week.  Small speculators and hedgers added new shorts and liquidated longs.

Naturalgas                85,161               223,920                           -contracts held by speculators:  2.63 to 1 short

                                         275,375               180,421                               held by the trade.

                                           74,912                 31,107                           held by small specs and hedgers.

Spreads…up 7,493 contracts    The ratio of large speculative shorts to longs went from 2.54-to-one to 2.63-to-one in a week.

  Large speculative holdings liquidated 376 longs and added 6,820 shorts over the latest week. Commercial accounts added 9,672 longs, and covered 1,131 shorts, while small speculators and hedgers liquidated 16,070 longs and covered 12,463 shorts.  Open interest grew by 719 contracts as prices rallied $0.477/mmBtu.  That looks like new buying and is bullish.  The best new buying came from commercial accounts.  There was very heavy short-covering from small specs and hedgers.  Large speculators were getting short while commercials covered a small number of shorts.

  The average large speculator has 1,271 contracts (67) while each large speculative short is holding 2,871 shorts (78).  The average commercial long now has 3,358 contracts long (82) and 2,819 short (64). Average reportable holdings are 2,789 long (218) long and 3,448 short (189).  Large speculators added seven long accounts, which decreased the average long holding by 154 contracts, and added five short accounts, which brought the average down 102 contracts.  The reportable category had 53 fewer longs on average on 10 more accounts while the average reportable short held 80 less contracts with eight more accounts.    

Natural Gas & Utility Generation

Natural gas futures finally grabbed onto something yesterday, and they used it to move in the direction they have been leaning towards for a while, now.  Despite some spectacular missteps, it has been clear on a number of days over the past two weeks that prices really want to move higher.  After spending most of the last week trading between $3.65 and $3.88, gas prices finally broke to the upside yesterday in response to this week’s EIA underground storage figures.  One could argue that the backdrop had been painted by higher oil and commodities prices before the report was out.

It was not all that dramatic a set of figures, but it was clear.  Underground storage increased by 104 bcf, with estimates from Dow Jones and Bloomberg looking for an injection of 110 bcf.  On a dozen other occasions, that might not have meant much.  But, with the market trading in progressively tighter ranges, as the interest in buying or selling waned before flat and stale factors that had been discounted again and again over the last several weeks, a decisive report was enough.  The fact that it conformed to the general sense of buying that has gripped the commodities complex surely could not have hurt.  Prices broke above $3.882/mmBtu and settled a nickel above that.  It now seems that prices have chosen a direction they can follow at least for a while.  We can hope.

In cash trading yesterday, Henry Hub prices were at $3.48-$3.63, up $0.03 and down $0.04 (DJN).  SoCal prices were at $2.57-$2.67, down $0.00-$0.01 on the day.  El Paso Permian prices were down $0.02-$0.11 at $2.48-$2.58.  Katy prices were up $0.11 and down $0.04 at $3.43-$3.65.  Waha prices were down $0.02-$0.06 at $2.63-$2.72.  Transco 6 was down $0.01-$0.04 at $3.84-$3.89/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $23.00-$25.00/mwh.  Northeastern prices last traded at $28.00-$39.25.  Entergy was last at $27.00-$28.00.  Ercot was last at $38.50-$40.25/mwh. 

Yesterday’s upside breakout came from a very narrow band that had not been developed very long.  In that respect, it was hardly a major breakout.  But, in terms of its timing and possible significance, this could turn out to be a major feature.  We do need to get through several days or more than a week without breaking back beneath $3.65 but, if we can, it will signal an important turn in this market.

While this answers one burning question in the energy complex, it begs another.  The question it seemingly answers is whether gas prices would rally or oil would decline to approach each other to narrow the ratio between the two.  It seems that gas will rally.  The question it leaves unanswered for now is whether oil will decline to meet it halfway. 

Yesterday’s activity was important in this market, and it looks like the capper to a number of early signals that seemed to indicate gas was done with the downside.  Those signals have been reinforced by yesterday’s activity.  We now should see gas prices try to advance towards $4.69, the upper boundary of the market’s larger band.

Support is at $3.65-$3.68, $3.55-$3.58, $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 $4.06-$4.07, $4.13-$4.14, $4.25-$4.28, $4.33-$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 finished higher yesterday, breaking out of a recent consolidation with strong support at $3.656-$3.679.

Dollars per million Btu

Jun Natural Gas:          Support:        $3.65-$3.68, $3.57-$3.60, $3.43-$3.46, $3.33-$3.36, $3.25-$3.26, $3.15-$3.17.

                                                    Resistance:    $4.06-$4.07, $4.13-$4.14, $4.24-$4.26, $4.31-$4.35, $4.53-$4.56.

EIA Weekly Storage Figures

This week’s EIA report showed a build of 106 bcf on expectations for a build of 110 bcf.  Stocks are now 568 bcf higher than a year ago, against a surplus of 546 bcf a week ago, a surplus of 524 bcf two weeks ago and a surplus of 514 bcf three weeks ago.  Stocks are now 30.29% higher than a year ago.  They are 438 bcf and 21.84% above the five-year average.

The five-year average for this week was a build of 92.6 bcf.  The eight-year build average was 96.75 bcf.  Last year, there was a build of 80 bcf.  Traders were looking for a build of 110 bcf this week.

EIA Report

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

News & Views

We are caught in a circular feedback loop.  A strengthening economy raises oil prices, which raises fears of inflation, which weakens the dollar, which pushes oil higher, which raises interest rates, which supports the dollar and hurts the recovery, which brings oil prices back down again.  It is more complicated than a time travel paradox.

An Illustrated Look at Energy Market Factors

A Look at the US Dollar Versus the Euro

Dollar-Euro:  One Year Chart

Dollar-Euro:  Three-Month Bar-Chart The US dollar has support just below 70 euro cents, and if the dollar breaks down and settles below that level, it will be extremely bearish for the dollar, which would be extremely bullish for oil prices.  On the other hand, a break and settle above resistance at the neckline around 72.40-72.50 euro cents, it will look like the dollar has formed a bottom, at least near-term.

Source:  http://www.advfn.com/p.php?pid=forexqkchart&curcode1=USD&curcode2=EUR

A Look at Inventories

Distillate inventories dropped in the latest DOE report, but it is difficult to see.

In the greater scheme of things, distillate stocks have not had an appreciable, extended period of stock draws in 2009.

Crude oil inventories declined in this week’s figures, but it was a small draw in the larger picture. 

Crude oil stocks are still nearly 60 million barrels and almost 20% higher than a year ago.

A Look at Imports

After a period of increasing, distillate imports have been on the move lower again recently.

Thirteen-week crude oil imports have just climbed up from their lowest levels in years. 

Recommendations for Specific Market Segments