Prices for June 19th, 2009

Market Review for Friday & the Weekend 

ASOLINE prices dropped 5.17% on Friday, and prices finished the week 18.80 cents below the intraday high seen on Tuesday.  For the week, gasoline prices surrendered 11.87 cents, with heating oil quotes off 5.08 cents a gallon and crude oil down $2.49/barrel. 

The most perplexing aspect of Friday’s steep decline in gasoline was weakness in the US dollar, which suggests that traders were either looking at technical overbought pressures, fundamental sloppiness in the form of ample inventories and weak demand, or equities, which were lower Friday.  Curious also was the choice of gasoline as the leader in Friday’s decline, because inventories are slightly lower than a year ago and demand has recently ticked higher in the four-week averages.

Were one to ask us which of the oil complex contracts is the fundamentally weakest right now, gasoline would come in third, behind both heating oil and crude oil.  But gasoline does present itself as the most readily accessible to consumers, and the pain of and antagonism to the recent advance has found its focal point there.  Prices have also been historically overbought recently. 

We have been expecting to see a big selloff for weeks, now.  The logic for this decline was even more compelling before the latest DOE statistics, but it does seem to take time for prices to catch up with fundamentals.  While we would like to see in Friday’s selloff the beginnings of something larger, the relative strength in crude oil prices leaves the bulls with a strong rallying point, should they decide that this decline was premature.

Having said that, though, we have to note the long history of this complex to resist bearish fundamentals – right up to the point that they start to improve.  Last week’s DOE report cut the year-to-year surpluses in both crude and distillate and saw four-week gasoline demand into positive territory, up 1.14%, after months of negative comparisons.  Petropolitical events were also blossoming in unforeseen ways in Iran, Nigeria and North Korea.  None of them looks close to a satisfactory resolution - nor seems about to halt oil supplies.

Technicals

           Oil prices dropped on Friday, with gasoline quotes down steeply, falling more than twice as much as heating oil prices did.  In the process, the crack spread also declined.  Crude oil still has support just below the market, but a close beneath Friday’s low would be bearish.    

Dollars per barrel

Above:  Crude prices have support at $68.90-$69.11.  A close beneath that would be bearish.

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 185.90, 187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 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 203.75, 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 191.60, 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 gained 18 yards on first down, and that gives them another first down.

Technical Support & Resistance

Aug crude oil                          Support:             $68.90-$69.11, $68.40-$68.50, $66.75-$66.85, $65.90-$66.10, $64.95-$65.10.

                                           Resistance:        $72.10-$72.35, $72.63-$72.77, $73.10-$73.25, $76.10-$76.25, $79.00-$79.17.

Jul heating oil         Support:             177.36-177.55, 174.00-174.15, 173.50-173.65, 171.00-171.20, 167.80-168.00.

                             Resistance:        185.70-185.90, 187.30-187.45, 187.90-188.05, 188.90-189.10, 191.95-192.12.

Jul Rbob                        Support:             191.60-191.80, 189.40-189.55, 185.90-186.10, 184.80-185.00, 178.00-178.20.

                                           Resistance:        203.60-203.75, 204.20-204.36, 207.55-207.63, 211.10-211.24, 213.90-214.00.

Oil Inventory Reports

    We will look at this week’s DOE report for confirmation of last week’s increase in gasoline demand against a year ago.  Stock increases will be seen as being bearish, but we ultimately believe that the four-week demand aggregates and refinery utilization are the keys to the supply and demand picture in this market.  Crude oil stocks should increase this week, historically, but we expect to see another drawdown, because imports are lower than utilization – which is well below the weekly average.

    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 20,113 contracts on Thursday, when prices were higher.  That looks like heavy short-covering ahead of the contract expiration and is bearish.

      Heating oil open interest fell by 238 contracts on Thursday, when prices were lower.  That looks like light, new selling, which would be bearish. 

      RBOB open interest grew by 3,392 contracts on Thursday, when prices were lower.  That looks like new selling, which would be bearish.

      Natural gas open interest fell by 125 contracts on Thursday, when prices were lower.  That looks like light long liquidation and is supportive.

Thursday’s Open Interest Changes:  

Crude 1,1648614  dn 20,113        Heat 289,254   dn 238       RBOB 224,163  up 3,392       Nat gas 716,962  dn 125        

CFTC Commitments of Traders  (for the period ended Tuesday, June 16th)   

As of June 16th:                 Long                   Short:

Crude oil                   201,362               174,932                           -contracts held by speculators:  1.15 long

                                         614,337               660,678                               held by the trade

                                         102,922                 83,011                               held by small specs and hedgers.

Spreads….dn 9,187 contracts   The ratio went from 1.31-to-one short to 1.15-to-one long in the last report.

   Large speculators liquidated 3,128 long contracts and added 18,325 shorts over the week under review.  Commercials added 24,528 new longs and added 4,547 shorts.  Small specs and hedgers liquidated 17,710 longs and covered 19,182 shorts.  Open interest fell by 5,497 contracts as prices rallied $0.46/barrel.  We have had increases of 52,000 contracts, 95,773 contracts, and then 12,041 contracts.  Commercials bought 24,528 contracts, large specs sold 18,325 lots, but small traders got out of more.

   The average large speculator has 2,189 long contracts (92 accounts), or 102 more contracts on average on 6 less accounts, and 1,767 shorts (99 accounts), or an average of 83 contracts more on 6 more accounts.  Commercials held 7,776 longs (79) or 16 more longs on average on three more accounts, and 7,682 shorts (86), or 310 more shorts on 3 fewer accounts. Reportables held 4,245 longs (258, dn 3 accts) and 4,570 shorts (244 accts, dn 6).  Average longs were up 95, shorts were up 164.

Heating oil                 40,145                   9,769                           - contracts held by speculators:  4.11 to 1 long

                                         161,122               206,604                              held by the trade.

                                           44,572                 29,466                               held by small specs and hedgers.

Spreads….up 1,408 contracts.    The ratio of large speculative longs to shorts went from 2.49-to-one to 4.11-to-one in 4 weeks.

       Large speculators liquidated 1,096 longs and covered 3,132 shorts.  Commercial accounts added 4,761 longs and added 4,982 shorts.  Small speculators and hedgers added 340 longs and added 2,155 shorts.  Open interest grew by 5,413 contracts as prices rallied 1.74 cents. That looks like decent new buying, which came from commercials.

       The average large speculative long is holding 1,115 contracts (dn 98 lots on 36 accounts, 2 less account), while the average short has 488 contracts (dn 73 lots on 20 accts, dn 3).  The average commercial long is holding 2,557 contracts (up 75 contracts on 63 accts, same) compared to the average short holding of 3,228 contracts (up 126 lots on 64 accts, dn 1 acct).  The average reportable position is 1,971 long (dn 7 lots on 123 accts, up 3) while the average short holding is 2,341 (up 111 lots on 110 accts, dn 4).  The shorts increased their average reportable holdings, on fewer accounts, which shows they have deeper pockets.

Rbob Gasoline           72,308                  9,917                          -contracts held by speculators:  7.29 to 1 long

                                          116,899               185,514                             held by the trade.

                                            20,920                 14,696                              held by small specs and hedgers.

Spreads…up 2,495 contracts   The ratio of large speculative longs to shorts went from 6.75-to-one to 7.29-to-one in 1 week.

     Large speculative holdings fell by 1,615 longs and fell by 1,030 shorts over the latest week. Commercial holdings grew by 10,674 longs and grew by 12,096 shorts.  Small speculators and hedgers’ positions grew by 1,139 longs and fell by 868 shorts.  Open interest grew by 12,693 contracts as prices rallied 10.44 cents.  That looks like new buying, which would be supportive.  The best buying came from commercials, who tend to buy near the end of moves, it seems.  More were selling, though.

   The average holdings are 1,112 contracts for each large speculative long (65) and 472 for each large speculative short (21).  The average commercial long now has 1,480 contracts long (79) and 2,183 short (85). Average reportable holdings are 1,266 long (163) against 1,530 short (139).  Large speculators closed three long accounts, which increased the average holding by 90 lots, and closed four short accounts, which decreased the average short by 49 contracts.  Shorts are in stronger hands.

Naturalgas                80,357               233,720                           -contracts held by speculators:  2.91 to 1 short

                                         294,883               189,931                               held by the trade.

                                           93,175                 44,764                           held by small specs and hedgers.

Spreads…up 10,604 contracts    The ratio of large speculative shorts to longs went from 2.35-to-one to 2.91-to-one in a week.

  Large speculative holdings liquidated 23,212 longs and covered 9,502 shorts over the latest week. Commercial accounts added 17,854 longs, and added 6,759 shorts, while small speculators and hedgers added 1,872 longs and covered 743 shorts.  Open interest grew by 7,118 contracts as prices rallied $0.398/mmBtu.  That looks like new buying and is bullish.  The new buying came from commercials and from spread trades.  Small specs and hedgers were also buying.  Large speculators were also covering shorts.  Commercials were also selling short in this market.

  The average large speculator has 1,044 contracts (77) while each large speculative short is holding 2,782 shorts (84).  The average commercial long now has 3,553 contracts long (83) and 2,922 short (65). Average reportable holdings are 2,739 long (229) long and 3,430 short (197).  Large speculators added three long accounts, which decreased the average long holding by 356 contracts, and added four short accounts, which brought the average down 258 contracts.  The reportable category had 23 more longs on average on the same accounts while the average reportable short held 74 more contracts with 2 fewer accounts.    

Natural Gas & Utility Generation

Natural gas futures started out moving higher on Friday, but they failed to build on those gains and sold off on profit-taking later in the session.  Even with Friday’s losses, natural gas prices gained 17.5 cents/mmBtu for the week as a whole, which is the lion’s share of the 19.7 cents gained so far this month (since June 1st).  We have had four “big” sessions with gains of more 22.5 cents since May 28th, with an important low reached intraday on May 26th.  Since that low, prices have gained 51.7 cents per million Btu.

Since May 1st, we have had five days that have traded beneath $3.50, and none of them ended below that figure.  In fact, natural gas prices have settled under $3.50 just six times since the fourth quarter of 2002.  All six of those settles have occurred on the recent decline, during the month of April.  We do not believe that prices are comfortable below $3.50 any more.  Even though inventories are substantially higher than a year ago and more than 22% higher than the five-year average for this time of year, it is clear that prices are fundamentally too low below $3.50 right now.  Or, so it would seem, from where we sit today.  Of course, once that has become established in the minds of traders, $4.00 gas has to start to look appealing.  If the downside is limited, as it now seems to be, it leaves the upside open.  The first objective has to be the upper end of the range, at $4.69.

In cash trading on Friday, Henry Hub prices were at $3.97-$4.07, down $0.09-$0.15 (DJN).  SoCal prices were at $3.09-$3.22, down $0.25-$0.25 on the day.  El Paso Permian prices were down $0.15-$0.16 at $3.09-$3.22.  Katy prices were down $0.13-$0.19 at $3.85-$4.00.  Waha prices were down $0.14-$0.15 at $3.25-$3.38.  Transco 6 was down $0.04-$0.22 at $4.31-$4.40/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $28.50-$32.50/mwh.  Northeastern prices last traded at $34.00-$41.25.  Entergy was last at $42.50-$43.50.  Ercot was last at $44.25-$45.75/mwh. 

In the first recorded increase in the rig count since February, the number of rigs actively drilling for natural gas increased in the most recent week by seven, to 692, according to Baker Hughes.  Of course, the number of active gas rigs is less than half the number seen at the peak last September, when drillers were still reacting to the highs seen in the first half of 2008. 

Natural gas prices averaged $10.11 over the first six months of 2008, with monthly averages falling between January’s low of $7.99 and June’s high of $12.78/mmBtu.  Each month in 2008 had a progressively higher dollar figure ‘handle,’ with January having a $7 handle and June averaging a $12 handle.  The monthly averages turned last July, which averaged $11.07, with August averaging $8.30 and September averaging $7.49.  Since that was the turning point with drilling, one might extrapolate that producers are unlikely to increase rig counts dramatically until we see monthly averages back above $7.50/mmBtu.

Perhaps that is taking the figures too literally.  Or, it could be possible that $7.50 is a level high enough to encourage twice as many rigs as we have operating now.  We could start getting incremental drilling back at monthly averages over $5.00 or $6.00.  One thing we feel confident about: We are not going to be adding rigs at averages beneath $4.00/mmBtu. 

Support is at $4.01-$4.05, $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 $4.15-$4.16, $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 slightly lower on Friday, but gained 17.5 cents on the week.

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:    $4.15-$4.16, $4.31-$4.33, $4.38-$4.39, $4.06-$4.07, $4.13-$4.14, $4.24-$4.26.

EIA Weekly Storage Figures

Last 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 83.0 bcf.  The eight-year build average was 92.25 bcf.  Last year, there was a build of 90 bcf. 

EIA Report

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

News & Views

There was a good deal of bearish promise in Friday’s price declines, with the most encouraging factor being the fact that the dollar was weaker even as oil prices declined.  Recently, every tick lower in the dollar has been accompanied by a rally in oil prices.  If this independent weakness in oil is suddenly helped by a stronger dollar, we could see a real oil price decline.

An Illustrated Look at Energy Market Factors

A Look at Other News Items

In a sign that last week’s four-week gasoline consumption number might actually make some sense, Bloomberg wrote on Friday that the Federal Highway Administration had reported April vehicle miles traveled higher, for the first time in 16 months running.  “Motorists drove 0.6% more miles in April than a year earlier,” Bloomberg quoted the US government as having said. 

“Vehicle miles traveled rose by 1.4 billion from April, 2008 to 249.5 billion,” the article stated.  “Driving had fallen in each of the previous 16 consecutive months … .”  The turnaround ended the “steepest driving decline in the 66 years the government has collected data … .”  Miles driven increased most in the West, where there was a 1.3% increase, year on year.

Last week, the Conference Board showed consumer confidence up in April “by the most since 2005,” according to Bloomberg.  “The Conference Board April report parallels figures from public-opinion polls that show for the first time in four years most Americans say the US is going in the right direction.”

On Sunday, Dow Jones reported that MEND had claimed to have initiated an attack on Shell in Nigeria, this time targeting an oil platform.  It was the third attack on Shell facilities in 24 hours, with two attacks on pipelines in the Eastern Delta.  This follows reports on Friday that MEND had attacked and blown up a pipeline owned by Agip, which carries crude to the Brass export terminal.  Bloomberg reported that MEND had claimed responsibility in an e-mail.  Last Wednesday, MEND attacked a Shell pipeline that delivers crude to the Forcados oil terminal. 

In a completely different vein, Shell made a natural gas discovery “at a record depth in the northern Norwegian Sea that may equal the size of Norway’s annual production of the fuel,” Bloomberg wrote on Friday afternoon.  Norway produced 99 billion cubic meters last year.  A shell spokesperson cautioned that the data so far gathered has come from “one point of data.”  Some experts suggest that it could take as many as 10 years to start production, but the find represents a large field that could reverse a severe decline in Norway’s reserve replacement rate in natural gas. 

A Look at the US Dollar Versus the Euro

Dollar-Euro (dollar in euro cents):  Three-Month Bar-Chart  The US dollar was lower on Friday, but we do still get the impression that prices are trying to build an important 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.

The bulls have managed to prevent prices from selling off below major support, and they need to convert that into strength this week.  A break above last week’s high (green arrow) would be a strong sign that a bottom is in place.

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

A Look at Overbought/Oversold Oscillators

The oscillators above represent the ratio of today’s settlement divided by the 24, 55 and 89-day moving averages.

We then look for signs of momentum and overbought or oversold pressures and compare these oscillators to their own history.  They have come down from very overbought levels.  Every time that they have been as overbought as they were last week, and started to decline, we have seen fairly significant moves, in this case, lower.

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