Prices for June 18th, 2009

Market Review for Thursday                  

HE US dollar traded close to unchanged yesterday, and equities were lightly higher, providing a small measure of support for oil prices yesterday.  It was a very mixed kind of “support,” though.  Crude oil prices posted very light, fractional gains on the day, while heating oil and gasoline futures ended with light losses. 

The main focus yesterday was employment.  Data released yesterday showed people claiming state unemployment benefits in June down by the largest number since November, 2001, Dow Jones noted in its market roundup.  It also noted Mid-Atlantic manufacturing activity in June down by the lowest figure since September, and it reported the Conference Board’s index of leading indicators up 1.2% in May.  These reports and numbers suggest that the recession is past its nadir.

And, it is apparent that some oil traders are still willing to draw a straight line from these improvements to higher energy demand.  We are seeing signs of that, with gasoline demand now up 1.14% against a year ago (comparing four-week aggregate averages).  That is the best gasoline demand comparison in months, possibly nearly a year. 

But, that is not the entire story.  While people are using more gasoline than a year ago, distillate demand has fallen off a cliff.  We have noted here recently that we have been forced to rescale demand charts, which had served us for years, and it looks like we may need to rescale them again next week.  Consumption is actually plunging through the bottom of our charts, which is quite a graphic way of illustrating falling demand.

Curiously enough, though, the commodity with a slight inventory deficit and higher demand than a year ago has been the laggard recently, while the one with the almost 30% inventory surplus and demand almost 9% lower than a year ago, with its consumption figures falling off our charts, is the one making new recent highs.  That defies any oil-specific explanation, and it focuses discontent with the market’s ability to act as a reasonable price-discovery platform.  It is leading to a sharp disagreement over the role of investors in oil markets, just as the government is about to address the issue. 

Technicals

           Crude oil prices were higher yesterday, but heating oil and gasoline quotes dropped.  The complex is having a really hard time getting on the same page on any given day, and we see that as another sign that the complex is in the process of constructing a top.  At this stage, though, the trend is still higher. 

Dollars per barrel

Above:  Crude prices ended near the day’s highs with minor gains, for a second day running.

August crude oil now has buy-stops over $72.35, $72.77, $73.25, $76.25, $79.17, and $84.83.  Sell-stops are under $70.20, $69.00, $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, and $48.00.  July heating oil has buy-stops over 187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 182.65, 180.00, 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, and 129.50.  July RBOB has buy-stops over 204.36, 207.20, 211.24, 214.00, 222.70, 228.86, 240.10, 250.40, 252.00, 265.10, and 267.85.  Sell-stops are under 200.65, 199.20, 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 gained three yards on fourth and 19 to go.  That gives the bears a first down today.

Technical Support & Resistance

Aug crude oil                          Support:             $70.20-$70.35, $69.00-$69.20, $68.40-$68.50, $66.75-$66.85, $65.90-$66.10.

                                           Resistance:        $71.60-$71.75, $72.63-$72.77, $73.10-$73.25, $76.10-$76.25, $79.00-$79.17.

Jul heating oil         Support:             182.65-182.80, 180.00-180.15, 178.75-178.90, 177.55-177.65, 174.00-174.15.

                             Resistance:        187.30-187.45, 187.90-188.05, 188.90-189.10, 191.95-192.12, 193.30-193.45.

Jul Rbob                        Support:             200.65-200.80, 199.20-199.40, 196.35-196.45, 193.40-193.50, 192.00-192.15.

                                           Resistance:        204.20-204.36, 207.55-207.63, 211.10-211.24, 213.90-214.00, 217.25-217.50.

Oil Inventory Reports

    This week’s DOE report showed a much bigger build in gasoline inventories than had been expected, and it showed a larger draw in crude stocks.  Distillate stocks had a build in line with this week’s API report, so was more or less expected.  The DOE showed utilization rates steady, compared to the API report, which showed a decline.  The most important figure was the four-week gasoline demand figure, which is now up 1.14% against the same period a year ago.

    Distillate stocks are now 34.2 million bbls, or 29.53%, higher than a year ago.  Heating oil inventories are 15.1 mln bbls, or 59.21%, higher than they were a year ago.  Gasoline stocks are 3.3 mln bbls (dn 1.58%) lower against a year ago.  Crude oil stocks are now 57.9 million bbls, or 19.31%, higher than a year ago.  Residual stocks are 3.1 mln bbls (7.58%) lower than a year ago, jet fuel stocks are 1.8 mln bbls, (4.50%) higher than a year ago.  Utilization is 3.40% lower than a year ago and is 7.88% below the eight-year average.  It is 10.10% 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 fell by 13,208 contracts on Wednesday, when prices were higher.  That looks like short-covering ahead of the contract expiration.  It is a bearish development.

      Heating oil open interest grew by 2,500 contracts on Wednesday, when prices were higher.  That looks like light, new buying, which would be supportive. 

      RBOB open interest fell by 6,551 contracts on Wednesday, when prices were lower.  That looks like long liquidation, which would be supportive.

      Natural gas open interest fell by 3,341 contracts on Wednesday, when prices were higher.  That looks like short covering, which would be bearish.

Wednesday’s Open Interest Changes:  

Crude 1,184,974  dn 13,208        Heat 289,492   up 2,500       RBOB 220,771  dn 6,551       Nat gas 717,087  dn 3,341   

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 dropped 16 cents yesterday as traders reacted to this week’s EIA underground storage figures.  There was a build of 114 bcf on expectations for a build of 104 bcf.  And, since the estimate for a build of 104 bcf would still have given us a larger injection than we have had in previous years, we see yesterday’s 16-cent decline as a sturdier reaction that we might have expected.  This week’s build is bearish, but traders do not seem inclined to pile previous builds on top of this latest build.

According to Dow Jones, the DOE has a five-year average build of 80 bcf for this week, using the same date.  Our five-year average seen on similar Friday’s came in at 78.4 bcf.  Last year, for the same date, the DOE is now recording a build of 60 bcf.  When we dig out last year’s reports, we see a build of 57 on the corresponding Friday a year ago.  The differences are not major, but we use similar Friday’s because we do not have access to numbers for each day of the year the way the EIA has.  Any way one cuts it, though, this year’s increase was substantially above builds seen in previous years.  So far this new century, we have had builds this week (using Friday) of 57-114 bcf.  The last 114 bcf build was seen in 2003.  This time around, the build shows production has not yet dropped, nor has consumption yet increased.  Those factors are drags on this market.

In cash trading yesterday, Henry Hub prices were at $4.06-$4.22, up $0.14-$0.16 (DJN).  SoCal prices were at $3.34-$3.47, up $0.02-$0.09 on the day.  El Paso Permian prices were up $0.03-$0.05 at $3.27-$3.37.  Katy prices were up $0.14-$0.17 at $4.04-$4.13.  Waha prices were up $0.05-$0.09 at $3.40-$3.52.  Transco 6 was up $0.06-$0.26 at $4.35-$4.62/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $30.00-$32.00/mwh.  Northeastern prices last traded at $32.00-$43.75.  Entergy was last at $42.50-$43.50.  Ercot was last at $43.00-$46.00/mwh. 

We have spoken here in the recent past about the $10.50/mmBtu decline in prices (from last July’s high of $13.69 to the recent major low of $3.15) as having discounted all of the bearish fundamentals existing to that point.  In that respect, the market more or less paid for its ‘sins’ and has started out with a clean slate, sort of like it went to confession and was given a fresh start (with no disrespect meant in any way or to anyone). 

That does not mean that the surplus against a year ago or against the five-year average is no longer meaningful.  But it has already been paid for, discounted by lower prices.  Traders seem to be looking much more closely at weather forecasts, as we wait uneasily for the huge decline in rig counts to start pulling production numbers lower.  There is no sign of that happening, yet, and we expect that it will become a factor just as consumption will start to increase from the impetus of lower prices – both in absolute terms and comparative terms, in relation to coal and oil prices.  There is a bullish move in this market’s future – almost everyone agrees – but its timing is open to the widest and wildest permutations, starting with the economy.

Support is at $4.03-$4.06, $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 $4.31-$4.33, $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 were lower yesterday, and it looks like it will be hard going from here.

Dollars per million Btu

Jun Natural Gas:          Support:        $4.03-$4.06, $3.82-$3.84, $3.65-$3.68, $3.57-$3.60, $3.43-$3.46, $3.33-$3.36.

                                                    Resistance:    $4.31-$4.33, $4.38-$4.39, $4.06-$4.07, $4.13-$4.14, $4.24-$4.26, $4.31-$4.35.

EIA Weekly Storage Figures

This week’s EIA report showed a build of 114 bcf on expectations for a build of 104 bcf.  Stocks are now 622 bcf higher than a year ago, against a surplus of 568 bcf a week ago, a surplus of 546 bcf two weeks ago and a surplus of 524 bcf three weeks ago.  Stocks are now 32.14% higher than a year ago.  They are 472 bcf and 22.64% above the five-year average.

The five-year average for this week was a build of 78.4 or 80 bcf.  The eight-year build average was 86.63 bcf.  Last year, there was a build of 57 or 60 bcf.  Dow Jones was calling for a build of 104 bcf.

EIA Report

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

News & Views

The oil complex remains subject to changes in equities prices and changes in the US dollar.  Its own fundamentals still seem to be taking a back seat, and that figures prominently in the thinking of many who want to see strict position limits enforced against investment banks that have been exempted up until now.  A battle is looming over this – and prices.

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 steady, yesterday, and we still get the impression that prices are trying to build a bottom, at least temporarily.  We still have an objective to the 74.75 area, and there is still major support just under 70.00 euro cents, around 69.75.  A decisive breakdown below that level would be bearish.

This bulls need to establish firmer control, or they will lose the initiative.

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

A Look at Inventories

Distillate stocks have started their rebuilding season at very high levels.

Crude oil inventories have been falling recently, largely because of very low imports (see next page).

A Look at Imports

Distillate demand is threatening again to drop through the bottom of our chart.  Where other indicators suggest recovery, distillate demand suggests a worsening economy, not a better one.

Crude oil imports are at extremely low levels, as refiners try to keep stocks from increasing further.

Recommendations for Specific Market Segments