Prices for June 26th, 2009

Market Review for Friday & the Weekend            

RICES were lower on Friday as the pendulum swung back the other way.  On this swing, traders were concerned that perhaps the economy is not getting that much stronger, in part because of lower equities prices.  The Dow Jones Industrial Average (DJIA) finished the week with a loss of more than 100 points.  And, whenever equities prices are lower, traders tend to feel that the economy may not be rebounding as well as is considered the case when equities are higher – in which case the assumption seems to be that the recession is ending and oil demand will be robust again, at some vague and distant time.  When equities and the euro are lower (dollar is higher), oil demand is seen as being weaker. When the stock market and euro are higher, it is considered just a matter of time before oil demand will be brisk, again.

The problem with all this is that it rarely seems to take oil market fundamentals into consideration.  Only when the dollar is strong and equities weak are oil market factors allowed to shine through.  And we do not seem to be seeing trends that are conducive to this as a trend. 

Seasonally, June was supposed to be weaker, followed by a steady rise in prices from Independence Day to Columbus Day.  But, with prices making new highs in early June and failing to decline with just days to go before Independence Day, we need to be on alert for a trend change around the coming holiday.  In that respect, we could see something more along the lines of last year’s activity.  Of course, given recent relationships, one would have to expect any serious weakness in oil prices to be accompanied by weakness in equities or strength in the US dollar.  Exceptionally poor distillate demand, in combination with inventories approaching multi-year highs, is bearish on its own, but equities and the dollar are trump suits now.  As a result, we feel compelled to follow the progress of both the US dollar (see page 7) and equities for clues on oil prices.  Still, holidays have seen important highs and lows, with last year’s high coming near Independence Day, and the triple bottom in crude had $32.40 just a few days before Christmas, $32.70 on the Tuesday after Martin Luther King Day and $33.81 on the Friday before Presidents’ Day.  We have seen this pattern for years, with the major low of $10.35 in 1998 coming just before Christmas.

Technicals

           Oil prices dropped on Friday, and crude squandered some of its positive momentum by getting above $69.89 on Thursday.  Heating oil prices are in a range between 170.72 and 180.60, and that needs to be watched.  Gasoline prices are in a range between 182.67 and 193.84.  The bears regained some momentum, but the bulls still have the initiative.

Cents per gallon

Above:  Gasoline is still in a range between 182.67 and 193.84, near-term.   Prices have alternated strong and weak closes.

August crude oil now has buy-stops over $71.30, $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 172.189 170.70, 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 192.46, 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 185.93, 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 gained 11 yards on Friday, but it was fourth and 37, meaning that the bulls got the ball back for 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:        $71.20-$71.30, $72.10-$72.35, $72.63-$72.77, $73.10-$73.25, $76.10-$76.25.

Jul heating oil         Support:             172.15-172.30, 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:             185.90-186.10, 183.65-183.90, 182.65-182.80, 178.00-178.20, 167.70-167.85.

                                           Resistance:        192.30-192.46, 193.70-193.85, 203.60-203.75, 204.20-204.36, 207.00-207.20.

Oil Inventory Reports

    Refinery utilization more often than not peaks on or around Independence Day, with Labor Day being the second most frequent time to see a high during any given year.  As a result, we almost have to expect utilization to increase, as it has in six of the last eight years.  Because of this tendency, crude oil imports have typically increased, refined products stocks have built and crude oil inventories have declined.  For more, see page 6.

    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 28,219 contracts on Thursday, when prices rallied.  That looks like heavy, new buying and is supportive.  It looks like fund buying. 

      Heating oil open interest rose by 3,336 contracts on Thursday, when prices were higher.  That looks like new buying which would be constructive.

      RBOB open interest grew by 4,188 contracts on Thursday, when prices were higher.  That looks like good new buying and is supportive. 

      Natural gas open interest fell by 6,315 contracts on Thursday, when prices were higher.  That looks like short-covering, which would be bearish. 

Thursday’s Open Interest Changes:  

Crude 1,151,473  up 28,219        Heat 291,161   up 3,336       RBOB 213,777  up 4,188       Nat gas 703,331  dn 6,315   

CFTC Commitments of Traders  (for the period ended Tuesday, June 23rd)   

As of June 23rd:                 Long                   Short:

Crude oil                   201,463               162,093                           -contracts held by speculators:  1.24 long

                                         572,646               624,003                               held by the trade

                                           80,975                 68,988                               held by small specs and hedgers.

Spreads….dn 24,048 contracts   The ratio went from 1.15-to-one short to 1.24-to-one long in the last report.

   Large speculators added 101 new long contracts and covered 12,839 shorts over the week under review.  Commercials liquidated 41,691 longs and covered 36,675 shorts.  Small specs and hedgers liquidated 21,947 longs and covered 14,023 shorts.  Open interest fell by 87,585 contracts as prices dropped $1.92/barrel.  We had increases of 52,000 contracts, 95,773 contracts, and then 12,041 contracts, and now 87,585 were taken off.  Commercials and small specs got out of the most.

   The average large speculator has 2,398 long contracts (84 accounts), or 209 more contracts on average on 8 less accounts, and 1,671 shorts (97 accounts), or an average of 96 contracts less on 2 less accounts.  Commercials held 7,635 longs (75) or 141 less longs on average on 4 less accounts, and 6,857 shorts (91), or 825 less shorts on 5 more accounts. Reportables held 4,255 longs (242, dn 16 accts) and 4,358 shorts (239 accts, dn 5).  Average longs were up 10, shorts were down 212.

Heating oil                 39,163                   7,816                           - contracts held by speculators:  5.01 to 1 long

                                         162,875               209,371                              held by the trade.

                                           45,217                 30,068                               held by small specs and hedgers.

Spreads….dn 821 contracts.    The ratio of large speculative longs to shorts went from 2.49-to-one to 5.01-to-one in 5 weeks.

       Large speculators liquidated 982 longs and covered 1,953 shorts.  Commercial accounts added 1,753 longs and added 2,767 shorts.  Small speculators and hedgers added 645 longs and added 602 shorts.  Open interest grew by 595 contracts as prices dropped 5.60 cents. That looks like light, new selling and is bearish.

       The average large speculative long is holding 1,004 contracts (dn 111 lots on 39 accounts, 3 more account), while the average short has 521 contracts (up 33 lots on 15 accts, dn 5).  The average commercial long is holding 2,468 contracts (dn 89 contracts on 66 accts, up 3) compared to the average short holding of 3,221 contracts (dn 7 lots on 65 accts, up 1 acct).  The average reportable position is 1,924 long (dn 47 lots on 126 accts, up 3) while the average short holding is 2,384 (up 43 lots on 108 accts, dn 3).  The shorts increased their average reportable holdings, on fewer accounts, and they have deeper pockets.

Rbob Gasoline           65,559                 10,312                          -contracts held by speculators:  6.36 to 1 long

                                          115,730               175,147                             held by the trade.

                                            18,658                 14,488                              held by small specs and hedgers.

Spreads…dn 1,904 contracts   The ratio of large speculative longs to shorts went from 7.29-to-one to 6.36-to-one in 1 week.

     Large speculative holdings fell by 6,749 longs and grew by 395 shorts over the latest week. Commercial holdings fell by 1,169 longs and fell by 10,367 shorts.  Small speculators and hedgers’ positions fell by 2,262 longs and fell by 208 shorts.  Open interest fell by 12,084 contracts as prices dropped 17.79 cents.  That looks like long liquidation, which we saw in all three major categories, and it is considered supportive. 

   The average holdings are 1,057 contracts for each large speculative long (62) and 607 for each large speculative short (17).  The average commercial long now has 1,523 contracts long (76) and 1,968 short (89). Average reportable holdings are 1,268 long (155) against 1,487 short (135).  Large speculators closed three long accounts, which decreased the average holding by 55 lots, and closed four short accounts, which increased the average short by 135 contracts.  Shorts are still in stronger hands.

Naturalgas                75,220               229,028                           -contracts held by speculators:  3.04 to 1 short

                                         295,530               187,362                               held by the trade.

                                           85,801                 40,161                           held by small specs and hedgers.

Spreads…dn 9,269 contracts    The ratio of large speculative shorts to longs went from 2.35-to-one to 3.04-to-one in 2 weeks.

  Large speculative holdings liquidated 5,137 longs and covered 4,692 shorts over the latest week. Commercial accounts added 647 longs, and covered 2,569 shorts, while small speculators and hedgers liquidated 7,374 longs and covered 4,603 shorts.  Open interest fell by 21,133 contracts as prices dropped $0.250/mmBtu.  That looks like long liquidation and is supportive.  Large and small speculators were liquidating positions.  They also were covering shorts.  Commercials bought a couple hundred new longs and covering shorts.  Traders were getting out of existing positions, which makes activity less likely to continue. 

  The average large speculator has 977 contracts (77) while each large speculative short is holding 2,759 shorts (83).  The average commercial long now has 3,560 contracts long (83) and 2,839 short (66). Average reportable holdings are 2,667 long (230) long and 3,329 short (198).  Large speculators kept the same number of long accounts and reduced holdings by an average of 67 contracts, and cut out one short account, reducing the average short by 23.  Commercials added one short account and increased average long holdings by 7 contracts and reduced average shorts by 23 contracts.    

Natural Gas & Utility Generation

Natural gas futures rallied on Friday, in what most traders saw as effort to balance books at the end of the month and in front of the July contract expiration.  For the week, prices were down 8.3 cents, but only after a more than 10-cent rally on Friday.  It was actually this market’s second day higher in a row, following five days in a row lower.  Thursday’s rally came in response to a smaller-than-forecast build in underground storage figures, although we fully expect to see prices drop at some point this week, with the commonly-accepted reason being “abundant stocks and poor demand,” a combination of factors that was used (and we believe should have been largely discounted) to justify the decline in prices from $13.69 to $3.15.  At some point, and we believe we should have reached it by now, that argument becomes used up. 

In any event, the smaller-than-expected build in storage on Thursday was almost certainly a continuing factor as traders balanced their books on Friday, but it is unlikely to carry through this week.  The market will be closed on Friday, and many traders will be taking this week off.  This is the official start of vacation season, and traders, who are always keen to maximize the bang for their buck will not have missed the fact that four vacation days this week can get them nine days in a row off.  That makes it likely to be a quiet week, but it also means that prices can be more easily ‘bossed’ around.

In cash trading on Friday, Henry Hub prices were at $3.77-$3.86, up $0.00-$0.01 (DJN).  SoCal prices were at $3.04-$3.31, down $0.08-$0.09 on the day.  El Paso Permian prices were down $0.20-$0.20 at $3.15-$3.25.  Katy prices were up $0.02 and down $0.03 at $3.69-$3.81.  Waha prices were down $0.00-$0.17 at $3.35-$3.45.  Transco 6 was down $0.17-$0.18 at $4.05-$4.14/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $33.00-$35.25/mwh.  Northeastern prices last traded at $31.75-$41.50.  Entergy was last at $37.50-$38.50.  Ercot was last at $160.00-$275.00/mwh. 

Prices have major resistance overhead at $4.105, $4.253 and $4.387.  Above that, the top level of near-term resistance is at $4.69/mmBtu.  Each layer of resistance has selling, and is then ‘topped’ by buy-stops which, if triggered, will represent fresh buying.  As we noted in Friday’s report, prices were near the average for the second-quarter, which was $3.86 on Thursday afternoon.  Prices are above that level, now, and the next major average is the one for 2009-to-date, which is now at $4.139/mmBtu.

The big traders, which include those pushing index funds, have decided to use natural gas as the bear leg of their spread positions.  As a result, we have not seen the same amounts of money poured into natural gas.  In a curious sort of Dorian Gray effect, natural gas prices could be showing what oil prices would look like without all the asset-class buying.  We can’t believe it is because gaseous molecules are not physically tangible, but natural gas just has not attracted the buying we have seen in its liquid counterparts in the energy complex.  The fundamentals are possibly better than heating oil or distillate, where inventories are 53% and 29% higher, respectively, and where demand is down 9.3% (for distillates).  Funds are not buying gas as an asset. 

Support is at $3.77-$3.80, $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, and $2.64-$2.66.  Resistance is at $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 finished the week on a positive note.

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

Last 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 88.4 bcf.  The eight-year build average was 89.12 bcf.  Last year, there was a build of 85 bcf. 

EIA Report

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

News & Views

The oil complex has a long history of changing direction around holidays, with crude oil making a high of $147.27 on July 11th, a week after Independence Day a year ago, and with triple bottom lows of $32.40 on December 19th, $32.70 on the Tuesday after Martin Luther King Day, and $33.81 on the Friday before Presidents’ Day.  Gasoline reached its low of 78.50 on Christmas Eve in 2008.  We would keep a weather eye out over the next nine trading days for a possible turn.

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 dollar continues to work sideways, presumably trying to build a bottom.  It could just be a continuation pattern, which would be the case if prices drop through the low around 69.75 euro cents.  They need to break the recent high, around 72.50-72.75 euro cents to go higher and confirm that a bottom has been built. 

The course of this market could determine the course of oil prices.

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

Recommendations for Specific Market Segments

 Please note:  We will not publish reports this week on either Thursday or Friday mornings.  Friday, the markets will be closed for Independence Day, and we are taking Thursday off as a vacation day.  We do not regularly take vacations of a week or two, but take an additional day off on market holidays to recharge our batteries.  We apologize for any inconvenience and can provide prices for any vacation days, in this case for Thursday, upon request.  We will have an expanded report out on Monday, a week from today.  We wish all of our readers a healthy, happy, safe and enjoyable Independence Day. Thank you.