Prices for June 12th, 2009

Market Review for Friday & the Weekend       

HE oil complex sold off lightly on Friday as traders took profits on long positions established over last week.  The US dollar rallied, which could have also been the result of profit-taking after a week of prices moving predominantly lower.  In any event, Friday’s trading was primarily a correction against moves seen during the bulk of the week. 

For the week, as a whole, crude oil prices gained $3.60/bbl, heating oil prices gained 6.74 cents a gallon and gasoline prices gained 8.85 cents a gallon.  There were the first signs of fundamental support last week, with unexpected drawdowns in crude oil and gasoline stocks and with four-week gasoline demand up for the first time in 2009 and well back into 2008.  Crude oil stocks are almost 60 mln bbls and 20% higher than a year ago, so we are reluctant to put a fine point on it.

The increase in four-week gasoline demand seems to be the result of movement from refiners to resellers three and four weeks ago, and we are reluctant to proclaim a turn higher in gasoline consumption.  Nevertheless, it was a change from a steady diet of higher equities and lower dollar motives.

Over the weekend, we had a number of international political events that may cast shadows over energy trading this week. The first was news that Ahmadinejad had won reelection in Iran.  This seems to have flown in the face of preliminary election results on Friday.  Then, in Nigeria, MEND said on Saturday that it had attacked and destroyed an oil well owned by Chevron in the southern state of Delta.  This followed an assertion that it had blown up another Chevron well on Friday.  And North Korea promised to “weaponize” its entire stockpile of plutonium, and then threatened that any fresh UN sanctions would be tantamount to a declaration of war.  Still, the UN Security Council did impose fresh sanctions.  The UN has prohibited the import into North Korea of any but small arms, although the US admits that this could provoke further “reckless and dangerous actions” by Pyongyang.  Japan plans a ban on exports to North Korea in response to a series of missile and bomb tests by Pyongyang, dating back roughly a month.

Technicals

           The trends are all pointed higher in this complex, and Friday’s decline looks like a minor round of profit-taking.  Nothing happened on Friday that would suggest that the bullish moves in the various oil markets are over, yet.  Despite that outlook, we would reiterate that this market seems to be following the course of the US dollar right now.

Cents per gallon

Above:  A growing contango in heating oil reflects plentiful supplies and low demand nearby.

July crude oil now has buy-stops over $72.63, $73.25, $76.25, $79.17, and $84.83.  Sell-stops are under $70.80, $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 185.17, 187.10, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 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, and 119.00.  July RBOB has buy-stops over 206.36, 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, and 144.60. 

Football: The bears picked up six yards on Friday on fourth and 39, which was not enough.  It is the bulls’ first down today.

Technical Support & Resistance

Jul crude oil                          Support:             $70.80-$70.90, $70.40-$70.50, $68.40-$68.50, $66.75-$66.85, $65.90-$66.10.

                                           Resistance:        $72.55-$72.63, $73.10-$73.25, $76.10-$76.25, $79.00-$79.17, $84.75-$84.83.

Jul heating oil       Support:             183.05-183.15, 181.05-181.25, 177.55-177.65, 174.00-174.15, 173.50-173.70.

                             Resistance:        185.10-185.17, 187.00-187.06, 188.90-189.10, 191.95-192.12, 193.30-193.45.

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

    After last week’s bullish report, this week’s statistics will mean more than normal.  We need to see if the gasoline demand four-week figure (up 0.4%) was an aberration or the start of a new trend.  We need to see if refineries are done increasing utilization (they typically are by Independence Day), and we need to see if there will be any respite in crude oil i8mports, which have been well below normal for weeks now.  Another bullish report could force bears to throw in the towel.

    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 19,147 contracts on Thursday, when prices were higher.  That looks like new buying and is supportive.    

      Heating oil open interest grew by 3,107 contracts on Thursday, when prices were higher.  That looks like new buying, which would be supportive. 

      RBOB open interest rose by 3,402 contracts on Thursday, when prices were higher.  That looks like new buying, which would be supportive. 

      Natural gas open interest grew by 10,721 contracts on Thursday, when prices were higher.  That looks like new buying, which would be bullish.  Volume reached 368,263 contracts on Thursday, which we expect is a record.  It is bullish.

Thursday’s Open Interest Changes:  

Crude 1,227,918  up 19,147        Heat 284,212   up 3,107       RBOB 223,759  up 3,402       Nat gas 738,063  up 10,721 

CFTC Commitments of Traders  (for the period ended Tuesday, June 9th)   

As of June 9th:                 Long                   Short:

Crude oil                   204,490               156,607                           -contracts held by speculators:  1.31 long

                                         589,809               656,131                               held by the trade

                                         120,632               102,193                               held by small specs and hedgers.

Spreads….up 9,191 contracts   The ratio went from 1.25-to-one short to 1.31-to-one long in the last report.

   Large speculators added 4,993 long contracts and covered 3,203 shorts over the week under review.  Commercials liquidated 7,792 longs and added 1,809 shorts.  Small specs and hedgers added 5,649 longs and added 4,244 shorts.  Open interest grew by 12,041 contracts as prices rallied $1.46/barrel.  We had an increase of 52,000 contracts two weeks ago, followed by an increase of 95,773 contracts, and now 12,041 contracts.  We do seem to be running out of buying. 

   The average large speculator has 2,087 long contracts (98 accounts), or 116 more contracts on average on 2 less accounts, and 1,684 shorts (93 accounts), or an average of 2 contracts more on 2 less accounts.  Commercials held 7,761 longs (76) or 102 fewer longs on average on the same accounts, and 7,372 shorts (89), or 336 more shorts on 4 fewer accounts. Reportables held 4,150 longs (261, up 1 acct) and 4,406 shorts (250 accts, dn 8).  Average longs were up 9, shorts were up 167.

Heating oil                 41,241                  12,901                           - contracts held by speculators:  3.20 to 1 long

                                         156,361               201,622                              held by the trade.

                                           44,232                 27,311                               held by small specs and hedgers.

Spreads….dn 772 contracts.    The ratio of large speculative longs to shorts went from 2.49-to-one to 3.20-to-one in 3 weeks.

       Large speculators added 5,200 longs and covered 1,217 shorts.  Commercial accounts added 7,687 longs and added 18,232 shorts.  Small speculators and hedgers added 1,694 longs and covered 2,434 shorts.  Open interest grew by 13,809 contracts as prices rallied 0.97 cents. That looks like heavy new buying, which came from large speculators and commercials.

       The average large speculative long is holding 1,213 contracts (up 87 lots on 34 accounts, 2 more account), while the average short has 561 contracts (dn 53 lots on 23 accts, same).  The average commercial long is holding 2,482 contracts (up 230 contracts on 63 accts, dn 3 accts) compared to the average short holding of 3,102 contracts (up 365 lots on 65 accts, dn 2 accts).  The average reportable position is 1,978 long (up 85 lots on 120 accts, up 1) while the average short holding is 2,230 (up 86 lots on 114 accts, up 3).  The shorts remain in stronger hands, here.

Rbob Gasoline           73,923                 10,947                          -contracts held by speculators:  6.75 to 1 long

                                          106,225               173,418                             held by the trade.

                                            19,781                 15,564                              held by small specs and hedgers.

Spreads…up 316 contracts   The ratio of large speculative longs to shorts went from 7.62-to-one to 6.75-to-one in 2 weeks.

     Large speculative holdings grew by 2,850 longs and grew by 862 shorts over the latest week. Commercial holdings grew by 37 longs and grew by 3,100 shorts.  Small speculators and hedgers’ positions grew by 1,016 longs and fell by 59 shorts.  Open interest grew by 4,219 contracts as prices rallied 4.15 cents.  That looks like new buying, which would be supportive.  The best buying came from large speculators and then from smaller speculators. 

   The average holdings are 1,103 contracts for each large speculative long (68) and 521 for each large speculative short (25).  The average commercial long now has 1,362 contracts long (78) and 2,016 short (86). Average reportable holdings are 1,210 long (166) against 1,486 short (138).  Large speculators added three new long accounts, which increased the average holding by 10 lots, and added two new short accounts, which increased the average short by 83 contracts.  Shorts are in stronger hands.

Naturalgas              103,569               243,222                           -contracts held by speculators:  2.35 to 1 short

                                         277,029               183,172                               held by the trade.

                                           91,303                 45,507                           held by small specs and hedgers.

Spreads…dn 5,958 contracts    The ratio of large speculative shorts to longs went from 2.63-to-one to 2.35-to-one in a week.

  Large speculative holdings liquidated 18,408 longs and added 19,302 shorts over the latest week. Commercial accounts added 1,654 longs, and added 2,751 shorts, while small speculators and hedgers added 16,391 longs and added 14,400 shorts.  Open interest grew by 30,495 contracts as prices dropped $0.389/mmBtu.  That looks like new selling and is bearish.  There was almost even buying and selling from each category, and that highlights what a battle has been raging in this market.  Longs and shorts added decent numbers – on both sides – across the spectrum.  Speculators were more active than commercial accounts.

  The average large speculator has 1,400 contracts (74) while each large speculative short is holding 3,040 shorts (80).  The average commercial long now has 3,298 contracts long (84) and 2,694 short (68). Average reportable holdings are 2,716 long (229) long and 3,356 short (199).  Large speculators added seven long accounts, which increased the average long holding by 129 contracts, and added two short accounts, which brought the average down 60 contracts.  The reportable category had 73 fewer longs on average on 11 more accounts while the average reportable short held 92 less contracts with 10 more accounts.    

Natural Gas & Utility Generation

Natural gas futures were fractionally lower on Friday, as longs booked profits ahead of the weekend.  Even though prices ended the week with a net loss of 1.1 cents/mmBtu, they more or less finally confirmed the new trend higher on Thursday with a powerful 22-cent rise, accompanied by 368,000 contracts in volume and 10,700 new contracts added to the open interest.  Taken together, those factors give us a bullish technical advance.  We believe that the market has now turned its back on the downside, and would be surprised to see quotes back beneath $3.50 anytime soon.

Of course, it would be easy for bears to remind us that inventories are ample and demand is low – which are true.  But, all of the economic and dollar-denominated arguments used to keep pushing oil prices higher should also extend to natural gas.  If equities at higher levels (than in March) are a sign of a resurgent economy and stronger oil demand, then surely the same could be said about gas.  If a weak dollar makes crude attractive, one could say the same about gas.  Clearly, US natural gas cannot as easily move to Europe or Asia, but as we increase our ability to import LNG and ultimately to export it, that will change.  Most of the dollar argument is being made as a purely financial transaction, anyway, with no actual physical movement.  Gas is cheap relative to oil, and that helps build the case for a natural gas bottom, even if crude turns back down for a while.

In cash trading yesterday, Henry Hub prices were at $3.50-$3.71, up $0.02-$0.08 (DJN).  SoCal prices were at $2.58-$2.68, up $0.01-$0.01 on the day.  El Paso Permian prices were up $0.00-$0.08 at $2.56-$2.58.  Katy prices were down $0.00-$0.08 at $3.43-$3.57.  Waha prices were down $0.01 and up $0.05 at $2.68-$2.71.  Transco 6 was up $0.00-$0.06 at $3.84-$3.95/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $25.00-$25.75/mwh.  Northeastern prices last traded at $36.50-$37.50.  Entergy was last at $31.50-$32.50.  Ercot was last at $38.15-$39.00/mwh. 

Last week’s activity followed on in the pattern seen the week before and on the Thursday the previous week, as it appears that natural gas prices are trying to turn the corner.  Although the fundamentals are still bearish, the $10.50 decline in prices almost certainly discounted the bearish factors in this market.  Recent technical activity suggests that the market is ready to start with a clean slate, here. 

Last week’s technical activity also suggests that natural gas prices may try to close the huge gap with the oil complex.  Last week saw crude oil reach a ratio of more than 19-to-one against natural gas.  That is more than a factor of 10 above the average since 2002 of 8.57-to-one.  For years at a time earlier this decade, the ratio was between 4-to-one and 10-to-one.

Friday’s selling looked like profit-taking, and it followed a heavy-volume move higher on Thursday in response to a supportive underground storage report.  If the bullish signals in this market are genuine, we will need to see prices build on the bullish developments seen last week.  Above all, prices need to avoid repudiating last week’s positive signals.

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

Last 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

In a Nutshell:  The fundamentals are poor, but improved fractionally last week.  That makes this week’s DOE report more important.  Petropolitical events have come to a head contemporaneously in Iran, North Korea and Nigeria. The economy seems to be improving unevenly, but higher interest rates threaten.  And the dollar trumps them all, absurdly.

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 will look like the dollar has formed a bottom, at least near-term.  That could help generate a selloff in oil prices.

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

A Look at Overbought-Oversold Oscillators

They are different colors on all three charts, with each plot point being Friday’s settlement divided by the 89-day, then 55-day and finally the 34-day moving average.  Like any oscillator, these are designed to show momentum and overbought or oversold pressures.  The theory is akin to a rubber-band; at some point, the rubber band is stretched too far and must bounce back.  One looks at history for indications on breaking points.  The most overbought oscillator right now is the 89-day oscillators (in red on the top and bottom charts and in blue in the middle chart).  They argue for corrections lower.

Recommendations for Specific Market Segments