Prices for June 25th, 2009

Market Review for Thursday                   

HERE were signs that funds were back in buying yesterday, which dovetails well with comments made by some large investment banks recently.  We know it has not been traditional commercial oil traders or normal, long-time speculators that follow charts.  It is not weather-related, seasonal or psychological.  The buying we are seeing here is the same buying we saw in April and May, when the back-story was that the economy was improving and that it would ultimately lead to higher oil demand.  Yesterday’s buyers view oil as an “asset class,” not as a commodity with supply & demand factors.  Equities were higher yesterday, and that brought back the buying-because-the-economy-is-getting-stronger (and that will give us better energy demand) argument.  A lower US dollar rounded out the asset class equation. 

There has been a lot of talk lately about the role of index funds in commodities.  Congress recently blamed the CFTC for high prices in an essential consumer staple a year ago, by not applying strict position limits in wheat trading.  The index funds insist that they are hedging positions put on with them by investors (which they are doing).  But that does not necessarily justify waivers.  The biggest problem with index funds and the best argument for stricter position limits is that index funds use the dollar and interest rates as global indicators, one-size-fits-all default modes that ignore traditional factors like growing conditions in agricultural commodities or inventories in oil.  Simply put, they ignore supply and demand in markets that have worked well following supply and demand factors for decades.  And they cannot prove a need to use oil or wheat in lieu of treasuries, currencies or equities – markets that already exist to discount interest rates, inflation and economic conditions.   

The market advanced yesterday in sympathy with equities – even as we have been forced to rescale our distillate demand charts to show consumption that has fallen out of bed.  The oil markets discounted the possibility of higher future demand because of stronger equities prices in March, April and May, so, at some point, it would be nice to see actual demand turning up, rather than making new lows.  An estimated $15 billion went into commodities through index funds in the second quarter, according to Barclay’s Capital (DJN).

Technicals

           Oil prices rallied yesterday, and crude settled above the upper end of their small range between $66.37 and $69.89.  Heating oil prices are in a range between 170.72 and 180.60, and did not break higher yesterday.  Neither did gasoline, which has prices are in a range between 182.67 and 193.84.  The bears are on their heels after yesterday. 

Cents per gallon

Above:  Gasoline prices are still in a range between 182.67 and 193.84, near-term.    That is bad news for refiners.

August crude oil now has buy-stops over $70.93, $72.35, $72.77, $73.25, $76.25, $79.17, and $84.83.  Sell-stops are under $68.06, $66.35, $65.90, $64.95, $64.65, $62.75, $62.19, $59.50, $56.55, $56.15, and $55.46.  July heating oil has buy-stops over 179.82, 180.60, 185.90, 187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 173.36, 170.70, 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 192.43, 193.85, 203.75, 204.36, 207.20, 211.24, 214.00, 222.70, 228.86, 240.10, 250.40, 252.00, and 265.10.  Sell-stops are under 183.65, 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 lost 16 yards yesterday, and that makes it fourth and 37 yards to go, today. 

Technical Support & Resistance

Aug crude oil                          Support:             $68.00-$68.10, $66.35-$66.50, $65.90-$66.10, $64.95-$65.10, $64.65-$64.75.

                                           Resistance:        $70.85-$70.93, $72.10-$72.35, $72.63-$72.77, $73.10-$73.25, $76.10-$76.25.

Jul heating oil         Support:             173.35-173.50, 170.70-171.00, 167.80-168.00, 162.35-162.45, 159.45-159.60.

                             Resistance:        179.75-179.82, 180.45-180.60, 185.70-185.90, 187.30-187.45, 187.90-188.05.

Jul Rbob                        Support:             183.65-183.90, 182.65-182.80, 178.00-178.20, 167.70-167.85, 166.35-166.50.

                                           Resistance:        192.30-192.43, 193.70-193.85, 203.60-203.75, 204.20-204.36, 207.00-207.20.

Oil Inventory Reports

    This week’s DOE report showed a bigger drawdown than expected in crude oil stocks, but it showed larger-than-anticipated builds in distillate and gasoline stocks.   Utilization increased, and the builds along with the utilization increase were bearish.  Demand dropped this week, and the four-week demand aggregates were all weaker in comparison with a year ago than they were a week ago.  It was a mostly bearish report.

    Distillate stocks are now 34.3 million bbls, or 29.12%, higher than a year ago.  Heating oil inventories are 14.0 mln bbls, or 52.83%, higher than they were a year ago.  Gasoline stocks are 0.1 mln bbls (up 0.05%) higher against a year ago.  Crude oil stocks are now 55.9 million bbls, or 18.76%, higher than a year ago.  Residual stocks are 3.5 mln bbls (8.50%) lower than a year ago, jet fuel stocks are 1.8 mln bbls, (4.51%) higher than a year ago.  Utilization is 1.50% lower than a year ago and is 6.10% below the eight-year average.  It is 7.70% 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 13,978 contracts on Wednesday, when prices dropped.  That looks like new selling and is bearish.  After Monday’s short-covering rally, it is bearish.

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

      RBOB open interest fell by 5,649 contracts on Wednesday, when prices were lower.  That looks like long liquidation, which would be constructive. 

      Natural gas open interest rose by 10,351 contracts on Wednesday, when prices were lower.  That looks like new selling and is constructive. 

Wednesday’s Open Interest Changes:  

Crude 1,123,254  up 13,978        Heat 287,825   dn 238       RBOB 209,589  dn 5,649       Nat gas 709,646  up 10,351    

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 rallied yesterday, as traders reacted to this week’s EIA underground storage figures.  The report showed a build of 94 bcf on expectations for a build of 99-100 bcf.  Despite the fact that storage levels are still dramatically higher than a year ago, traders focused on this week’s smaller-than-expected build.  That reinforces our feeling that prices have already discounted the huge overhangs in supply that have existed in this market for a long time now.

Underground storage levels are still 31% higher than they were at this stage in 2008 and they are 22% than they have been on average, over the last five years.  Temperatures have been mild or moderate, so far, this summer (and through late spring), but we are expecting some brutally hot readings in Texas and through the southern Plains over the next week.  Day-ahead peak electricity prices in Ercot (Electric Reliability Council of Texas) were up $80-$100/kwh from Wednesday levels, as traders bought in front of an anticipated bout of hot weather.  The question traders are trying to answer is what effect any extended period of hot weather could have on demand in this market. 

Activity has been reflecting this afternoon’s July contract expiration for as long as a week, now, so we would be surprised to see any unexpectedly large increase or decline in prices today.

In cash trading yesterday, Henry Hub prices were at $3.76-$3.86, down $0.01-$0.01 (DJN).  SoCal prices were at $3.13-$3.39, up $0.09-$0.10 on the day.  El Paso Permian prices were up $0.04-$0.10 at $3.35-$3.45.  Katy prices were up $0.00-$0.02 at $3.72-$3.79.  Waha prices were up $0.08 and down $0.05 at $3.35-$3.62.  Transco 6 was up $0.01-$0.03 at $4.22-$4.32/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $29.00-$32.50/mwh.  Northeastern prices last traded at $38.00-$55.75.  Entergy was last at $42.00-$45.00.  Ercot was last at $150.00-$185.00/mwh. 

Prices are almost smack dang in the middle of their longer-term trading range between $3.15 and $4.69.  A quick look at the chart below shows prices working in ever-narrowing triangles as prices look for a comfort level.  And, the first-look estimate that prices are near their average over the last few months is spot on.  So far, the second-quarter average settlement price is $3.86, just 1.4 cents higher than last night’s settling level.  Prices seem to be gravitating towards their own recent averages. 

It is difficult to get terribly bullish in a market that has nearly a third again as much gas in storage as it had a year ago, and which has a fifth again as much as the five-year average, or what might be considered “normal.  Still, after five days lower, yesterday’s report turned out to have been a bullish surprise.  It’s just a one-week deal, but it could be an early sign of reduced production.  We are all waiting for output to decline, and it will doubtless begin with five bcf less injected here and there.

In the meantime, prices are searching for identity within a broader range ($3.15 to $4.69).  Most expect prices to break to the upside, ultimately, but it is going to be an uphill struggle, given the current state of storage and industrial consumption. 

Support is at $3.71-$3.72, $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 $3.98-$4.01, $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, for the fifth day in a row.

Dollars per million Btu

Jun Natural Gas:          Support:         $3.71-$3.72, $3.65-$3.68, $3.57-$3.60, $3.43-$3.46, $3.33-$3.34, $3.25-$3.26.

                                                    Resistance:    $3.98-$4.01, $4.15-$4.16, $4.31-$4.33, $4.38-$4.39, $4.06-$4.07, $4.13-$4.14.

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 631 bcf higher than a year ago, against a surplus of 622 bcf a week ago, a surplus of 568 bcf two weeks ago and a surplus of 546 bcf three weeks ago.  Stocks are now 31.23% higher than a year ago.  They are 482 bcf and 22.22% 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.  Estimates for this week’s report were for a build of 99-100 bcf.

EIA Report

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

News & Views

Oil prices are rising on the vague hopes for higher oil demand furnished by higher equities quotes.  Soon, corporate profits for the second quarter will start to be released, and we may see oil prices rise because of the potential impact on future oil demand from better profits at Google, Pfizer, Goldman or EBay.  Meanwhile, real oil demand is in a fizzle.

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  Yesterday, the US dollar was weaker, and prices ended lower. 

Prices need to break above the horizontal green line drawn above.  Prices are effectively in a range between 69.75 and 72.75 (give or take a few points; those are not precise numbers).  Whichever way prices break from here will be significant.

Major support is still just under 70.00 euro cents, around 69.75. 

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

A Look at Inventories

Where’s Winter?

As demand falls off the bottom of our demand chart, it is starting to look like inventories may need us to rescale the charts on the upside.  In one of the strangest years we have had, the trend in stocks has been higher for more than a year now.

There never really was a winter downtrend.

Inventories are declining – from near-record levels.  The only factor keeping them moving lower is imports (next page).

A Look at Imports

Crude oil imports are at extremely low rates, which is the only way to keep stocks from growing more.

Recommendations for Specific Market Segments