Prices for June 22nd, 2009

Market Review for Monday           

HE oil complex dropped again yesterday, and that suggests that prices are now in a genuine, full-fledged correction.  There are two worries from a bearish perspective.  We usually get a final short-covering rally in bear moves, and June declines have a nasty tendency to end quickly (after a short period of time) and suddenly (without much warning). 

There is also a mitigating factor.  Usually, June declines start two or three weeks earlier than this one did.  And that is one reason that they so often end on or around July 4th.  That leaves us wondering whether prices will follow the June model by ending on Independence Day or follow last year’s model, which would give us a full-bodied test of the lows reached last December.  That gives us a couple factors to watch for, starting with an Independence Day low if prices fall steeply here.

Oil traders will not be the only ones watching this market for signs of future economic activity.  If price weakness continues unabated through Independence Day, and if prices ultimately signal an intention to test the December lows, then one might extrapolate a double-dip recession, potentially.  There has been a good deal of talk about future inflation, and the path this complex follows from here will tell us if that is a legitimate worry, still, or was just a passing concern.

We noted here yesterday that oil prices declined despite a weaker US dollar on Friday.  Yesterday, though, the dollar was stronger and that brought in a fresh source of selling.  To our eyes, the dollar seems to be constructing a decent bottom, with a head & shoulders pattern that needs to be reconfirmed, now.  If that comes to pass, the oil markets will have been outflanked by the bears, and a strong dollar will roll up the market’s bullish flank while the fundamental oil bears hammer away at the center.  It is too early to proclaim a rout, and the bulls may rally, but the oil bears are in a better position for a decisive victory now than they have been at any time in 2009.  Our biggest source of concern is that the existing top has taken only two weeks to construct, while the major triple bottom formation took from late December to the end of February to build.  The bottom is much bigger, although we would note that last July’s top was not very broad at all. 

Technicals

           The oil complex worked lower yesterday, with a number of important support levels broken in the process.  There are still plenty of untouched support levels beneath the market, here.  We need to be aware that there are typically short-covering rallies at some point during major declines. They can come weeks later, like they did last summer, though. 

Dollars per barrel

Above:  Crude prices broke support at $68.90 and now have support at $66.78 and again at $64.95.

August crude oil now has buy-stops over $70.30, $72.35, $72.77, $73.25, $76.25, $79.17, and $84.83.  Sell-stops are under $66.65, $65.90, $64.95, $64.65, $62.75, $62.19, $59.50, $56.55, $56.15, $55.46, and $53.50.  July heating oil has buy-stops over 180.60, 185.90, 187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 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 193.85, 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 182.65, 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 26 yards on first down yesterday, and that gives them another first down.

Technical Support & Resistance

Aug crude oil                          Support:             $66.65-$66.85, $65.90-$66.10, $64.95-$65.10, $64.65-$64.75, $62.75-$62.90.

                                           Resistance:        $70.00-$70.30, $72.10-$72.35, $72.63-$72.77, $73.10-$73.25, $76.10-$76.25.

Jul heating oil         Support:             171.00-171.20, 167.80-168.00, 162.35-162.45, 159.45-159.60, 154.75-154.90.

                             Resistance:        180.45-180.60, 185.70-185.90, 187.30-187.45, 187.90-188.05, 188.90-189.10.

Jul Rbob                        Support:             182.65-182.80, 178.00-178.20, 167.70-167.85, 166.35-166.50, 165.00-165.20.

                                           Resistance:        193.70-193.85, 203.60-203.75, 204.20-204.36, 207.55-207.63, 211.10-211.24.

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 3,345 contracts on Friday, when prices were lower.  That looks like long liquidation, which would be supportive.

      Heating oil open interest fell by 319 contracts on Friday, when prices were lower.  That looks like light, long liquidation, which would be supportive.

      RBOB open interest fell by 630 contracts on Friday, when prices were lower.  That looks like long liquidation, which would be constructive. 

      Natural gas open interest fell by 4,138 contracts on Friday, when prices were lower.  That looks like long liquidation and is supportive.

Friday’s Open Interest Changes:  

Crude 1,161,516  dn 3,345        Heat 288,935   dn 319       RBOB 223,533  dn 630       Nat gas 712,824  dn 4,138            

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 were lower yesterday, as gas traders sold contracts based on weakness in oil markets and a weak economic outlook by the World Bank.  Despite the weakness in natural gas, the ratio of crude-to-gas continued to decline, settling yesterday at 17.02-to-one.  On June 10th, the ratio ended at 19.24-to-one.  Traders, especially commercial traders with fuel-switching capabilities, are starting to see natural gas as an inexpensive hydrocarbon. 

Prices started out stronger yesterday, but the weakness in oil markets filtered over to the natural gas trading ring.  Equities markets were also under selling pressure yesterday, and that led traders to see the more vulnerable side of the economy – with its attendant potential weakness in industrial demand for gas. 

Traders were also trying to integrate Friday’s Baker Hughes report, which showed a minor increase in the active rig count, into their thinking.  It was the first increase in the rig count since February, and traders are trying to figure out if this is the beginning of something more pronounced or if it is a one-week reprieve.  It will take time for any pattern to become clear, but we expect to see new lows in the number of active rigs, within a newly established sideways to lower range.  We are not expecting a sudden recovery or a “V” bottom in the rig count.

In cash trading yesterday, Henry Hub prices were at $3.86-$4.06, down $0.01-$0.11 (DJN).  SoCal prices were at $3.15-$3.39, up $0.06-$0.17 on the day.  El Paso Permian prices were up $0.10-$0.11 at $3.20-$3.32.  Katy prices were down $0.05-$0.05 at $3.80-$3.95.  Waha prices were up $0.04-$0.09 at $3.34-$3.42.  Transco 6 was down $0.00-$0.06 at $4.25-$4.40/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $29.00-$32.20/mwh.  Northeastern prices last traded at $35.25-$45.25.  Entergy was last at $45.00-$48.00.  Ercot was last at $46.00-$48.50/mwh. 

Yesterday’s selloff was damaging on the charts, but the essentials of this market seem to have established themselves for the summer.  As we see them today, they are these: One, the big decline from $13.69 discounted most of the weak fundamentals that took quotes to $3.15.  Two, prices beneath $3.50 are officially low, and they might be dangerous because they could encourage technical traders to go hunting for sell-stops that are sure to exist below $3.15 all the way down to $2.94.  If prices print $3.29, there will be a sudden interest in triggering the whole slate of sell-stops.  Three, it will require something dramatic to launch prices on any kind of sustained advance.

Taken together, these factors argue against enduring trends here and now, and they suggest that this market may be doomed to repeating something it is renowned for – posting a series of disjointed and seemingly unrelated days in sequence.  We expect gas to slowly gain against crude oil, and we expect prices to build a longer-term bottom, but each day will react to its own spurs or triggers.  As each day passes, the accumulating effect of declining rig counts will imperceptibly move closer to the market’s horizon, until eventually we will see and feel its pull higher, as production figures drop.  At the same time, demand will grow.

Support is at $3.82-$3.86, $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 lower yesterday, apparently in sympathy with oil prices.

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

Traders will be getting ready for tonight’s API report and tomorrow’s DOE report as we move through the day, today. The US dollar seems to be on the verge of an important technical breakout to the upside, and the base beneath prices has been building, which could give us a stronger rally in the US currency.

An Illustrated Look at Energy Market Factors

A Look at the US Dollar Versus the Euro

Dollar-Euro:  One Year Chart

Dollar-Euro (dollar in euro cents):  Three-Month Bar-Chart  The US dollar advanced yesterday, and we just need a break over last week’s high (indicated by the green arrow above) to indicate a genuine breakout higher.  At this stage, the bulls have weathered a number of assaults by the bears, held the lows and kept the head & shoulders bottom formation in play.  It suggests an objective to the 74.75 area. 

There is still major support just under 70.00 euro cents, around 69.75.  A decisive breakdown below that would be bearish.

The bulls have started this week with the required strength to put the bears on their back heels.

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

A Look at Crack Spreads

The crack spreads have been trading predominantly sideways recently, within ranges.

Recommendations for Specific Market Segments