Prices for June 16th, 2009

Market Review for Tuesday           

IL prices started yesterday’s session with a solid rally, but it was slowly eaten away until prices finished in negative territory by the final bell.  Refined products managed to hold onto gains, but the final prices were well removed from the higher prices seen earlier in the day. 

The US dollar was under selling pressure early yesterday, but it rallied through the day.  The DJIA was stronger earlier, but it ended the day with losses of more than 100 points.  Market observers and participants seem to be coming to the conclusion that even though the worst may be over, it will take a long time before the economy gets materially better.  The line drawn between higher equities prices, an improving economy and higher oil demand suddenly seems untenable.

Yesterday afternoon’s API report showed a crude oil drawdown of 1.262 million barrels, which was less than generally expected.  Wire services are calling for a draw of 1.7 million to 2.0 million barrels in crude oil inventories.  Refined products stocks increased in the API report, by 881,000 bbls in distillate and by 2.140 million bbls in gasoline stocks.  At the same time, though, refinery utilization dropped 0.8% to 83.3%.  That could moderate stock draws in crude oil at the same time that it may curb refined products output and the growth of those inventories. 

Traders will look at this morning’s DOE report through the lens of last night’s API statistics.  The API numbers have lowered the bar on any crude oil build and it has pushed refinery utilization into a more central role in this morning’s report. 

Having said all this, one might get the impression that we feel that supply and demand will be the major focus moving forward.  We would like that to be the case, but we know that we need continuing strength in the US dollar to enjoy that “luxury.”  A higher dollar is not just bearish for oil on its own; it is bearish because it allows oil traders to look again at oil market fundamentals.

Technicals

           Crude oil prices finished with very minor losses while refined products ended mixed to higher.  The entire complex was higher in early trading, but prices came under selling pressure as the dollar firmed and equities weakened.  Gasoline and heating oil prices made new recent highs, but could not build on them.    

Dollars per barrel

Above:  The crack spread finished at its highest level since February 13th, yesterday.

July crude oil now has buy-stops over $72.77, $73.25, $76.25, $79.17, and $84.83.  Sell-stops are under $69.55, $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 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 178.77, 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 211.24, 214.00, 222.70, 228.86, 240.10, 250.40, 252.00, 265.10, and 267.85.  Sell-stops are under 204.60, 200.00-200.40, 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 bulls lost another yard on second and 24 to go, yesterday, making it third and 25 to go, today.

Technical Support & Resistance

Jul crude oil                            Support:             $69.55-$69.65, $68.40-$68.50, $66.75-$66.85, $65.90-$66.10, $64.95-$65.10.

                                           Resistance:        $72.63-$72.77, $73.10-$73.25, $76.10-$76.25, $79.00-$79.17, $84.75-$84.83.

Jul heating oil         Support:             178.75-178.90, 177.55-177.65, 174.00-174.15, 173.50-173.70, 171.00-171.20.

                             Resistance:        187.00-187.06, 187.90-188.05, 188.90-189.10, 191.95-192.12, 193.30-193.45.

Jul Rbob                        Support:             204.60-204.75, 200.40-200.60, 196.35-196.45, 193.40-193.50, 192.00-192.15.

                                           Resistance:        207.55-207.63, 211.10-211.24, 213.90-214.00, 217.25-217.50, 222.50-222.70.

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 imports, which have been well below normal for weeks now.  Last night’s API figures suggest a smaller draw in crude and a drop in utilization.

    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 1,198 contracts on Monday, when prices were lower.  That looks like new selling and is bearish. 

      Heating oil open interest grew by 775 contracts on Monday, when prices were lower.  That looks like new selling, which would be bearish. 

      RBOB open interest rose by 3,469 contracts on Monday, when prices were higher.  That looks like new buying, which would be supportive. 

      Natural gas open interest fell by 8,490 contracts on Monday, when prices were higher.  That looks like short-covering, which would be bearish.    

Monday’s Open Interest Changes:  

Crude 1,207,462  up 1,198        Heat 286,301   up 775       RBOB 225,591  up 3,469       Nat gas 721,126  dn 8,490         

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 higher in early trading yesterday, but profit-taking pushed quotes back down and ultimately into negative territory before the final bell sounded.  It seems that natural gas succumbed to the same selling that drove oil prices back from the day’s highs.  It will be difficult for gas prices to advance steadily without any major correction, given the abundant supplies and reduced demand that currently exist in this market.  We do not believe that they are capable any more of pushing quotes to fresh lows, but they will be able to break up or hold rallies.

Of course, additional builds in this market will need to be taken on board.  If stocks should increase the surpluses against year-ago and five-year average figures, then traders will need to adjust their thinking on the fly.  But, we do need to remember that natural gas still has its post-selloff rally in front of it.  In crude oil, prices had a rally from $32.40 to $73.23 (or maybe more if we see it) as a post-decline rally.  We have yet to see anything like that in natural gas, yet.  If we were to see the same thing in natural gas, we could expect to see a rally to more than $6.00, possibly even $6.50/mmBtu.  There has been a good deal of talk about investment money moving into commodity and energy ETF’s, and it is possible that this buying will tip the balance in natural gas prices. 

In cash trading yesterday, Henry Hub prices were at $4.09-$4.20, up $0.31-$0.34 (DJN).  SoCal prices were at $3.10-$3.44, up $0.20-$0.25 on the day.  El Paso Permian prices were up $0.36-$0.48 at $3.28-$3.39.  Katy prices were up $0.32-$0.37 at $4.05-$4.13.  Waha prices were up $0.36-$0.39 at $3.39-$3.52.  Transco 6 was up $0.32-$0.35 at $4.45-$4.55/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $28.50-$33.50/mwh.  Northeastern prices last traded at $30.75-$40.75.  Entergy was last at $38.50-$39.50.  Ercot was last at $45.75-$46.25/mwh. 

It has long been difficult trying to figure out which factors are most important in this market, and when traders are likely to focus on one over another.  We do believe that the existing inventory surplus has already been discounted, but additional increases in the surplus will still be a factor.  This week’s EIA underground storage report is likely to generate a reaction in prices, especially if it should turn out to be bullish.  Reuters’ early estimates have builds between 95 and 111 bcf.  We will see a number of more tightly honed estimates out later today. 

Temperatures are starting to be more significant in traders’ thinking right now, and they are expected to be hotter than normal in the Midwest and in Texas next week.  Both regions use natural gas heavily for space-cooling needs, and any brutally hot readings are likely to spur decent buying in cash markets to fill needs.  It will be unseasonably cold in the Northeast today, with temperature lows expected to come in near the mid-fifties.  The trend towards colder temperatures, which has been in place since early November, is still very much in place in the Northeast right now. 

Support is at $4.06-$4.08, $3.82-$3.84, $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 $4.38-$4.39, $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 continued moving higher yesterday, but they sold off, like oil prices did, before the final bell, ending with losses.

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 78.4 bcf.  The eight-year build average was 86.63 bcf.  Last year, there was a build of 57 bcf.  Early estimates are falling between builds of 95 and 111 bcf.

EIA Report

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

News & Views

Today’s DOE report will be strategically important in this market, and should set the stage for the next week.  Our first look will be at gasoline demand, although utilization and stocks will catch their share of attention.  And the activity in the dollar is still capable of trumping just about anything, it seems right now. 

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 was back down slightly yesterday, but prices are still above the neckline of the minor head & shoulders bottom that they broke over on Monday.  At this stage, we still have an objective to the 74.75 area.  There is still major support just under 70.00 euro cents, around 69.75, and a decisive breakdown below that level would be bearish.

This breakout to the upside looks bullish for the dollar.

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

A Look at Oscillators

The oil complex remains extremely overbought, which leaves prices poised for a sharp decline.

Recommendations for Specific Market Segments