Prices for July 17th, 2009

Market Review for Friday & the Weekend       

IL prices continued to rally on Friday, as traders made it three days running on renewed hope that the economy is improving.  Equities were slightly higher on Friday and that helped, but oil prices seem to have been advancing on a kind of momentum higher.  Neither equities nor the US dollar moved significantly enough on Friday for us to consider either of them a major factor in the move higher.  And oversold pressures had been relieved earlier in the week.  As a result, we are hard-pressed to find a smoking gun for Friday’s move higher.  There was short-covering in the expiring August crude oil contract, but few observers saw that as the major factor in the market.  Housing starts were up 3.6% in June, but many observers were quick to point out that we need to see existing houses selling before construction on new homes can be seen as anything more than an unwelcome addition to inventories. 

Almost 37,000 crude oil contracts have been liquidated (or covered) over the last two reporting sessions (Wednesday & Thursday), so that brings us back to the expiration factor, and it seems that short-covering has been the leading source of buying, especially towards the end of last week.  Still, one would like to see a little more than a positive housing number and a 32-point rally in the Dow Jones Industrial Averages (DJIA) as a strong reason for prices to gain a dollar-and-a-half in crude oil futures. 

Despite a rally in the DJIA, General Electric reported a decline of 47% against a year ago in its second-quarter earnings.  Apparently, its energy infrastructure division was one of the stronger parts of the company in the three months ended with June, according to Dow Jones in its energy wrap for the week.  It illustrates how far afield people were looking for reasons for Friday’s advance in oil prices.

Traders also seem to have found comfort in seasonal factors.  Oil prices traditionally rise from early July until mid-October.  Of course, that generally is preceded by weakness during the month of June, which is something we did not see this year.  Bearish traders would point at last year’s activity as a possible blueprint for this year’s move, because both years saw strong advances into Independence Day, but fell around that time.  The fundamentals remain weak, and we see plenty of reasons to expect prices to return to test the lows seen early last week. 

Technicals

           Oil prices were higher again on Friday, and they are now getting overbought, at least on shorter-term oscillators.  Longer-term, the oversold pressures have been more than relieved.  The real question to be answered this week is whether prices are still in a longer-term bull move from the start of the year, or if the recent move lower is the new trend.

Dollars per barrel

Above:  The bigger question now is whether the trend higher is still intact, or if the short term trend is now lower.

August crude oil now has buy-stops over $64.00, $64.91, $67.17, $69.75, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $61.00, $60.00-$60.25, $59.65, $58.30, $56.55, $56.15, and $55.46, $54.65, $49.90, $48.80, $48.25, $46.20, and $44.60.  August heating oil has buy-stops over 165.71, 171.00, 179.00, 187.32-187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 157.45, 155.85, 151.65, 148.70, 147.70, 141.30, 140.90, 137.50, 132.00, and 129.50.  August RBOB has buy-stops over 177.35, 180.00, 186.96-187.00, 198.10, 203.75, 204.36, 207.20, 211.24, 214.00, 222.70, 228.86, and 240.10.  Sell-stops are under 169.70, 168.00, 165.25, 160.10, 157.50, 156.60, 150.35, and 144.60. 

Football: The bulls gained 15 yards on second and five, giving the bulls another set of downs.

Technical Support & Resistance

Aug crude oil                        Support:             $61.00-$61.20, $60.25-$60.35, $59.65-$59.80, $59.15-$59.30, $58.30-$58.45.

                                           Resistance:        $63.90-$64.00, $64.80-$64.91, $67.05-$67.17, $69.60-$69.75, $73.25-$73.38.

Aug heating oil     Support:             157.45-157.60, 155.85-156.10, 151.65-151.80, 149.55-149.70, 148.70-148.85.

                             Resistance:        164.10-164.21, 165.60-165.71, 170.85-171.00, !78.85-179.00, 187.32-187.45.

Aug Rbob                     Support:             169.70-169.85, 168.00-168.20, 165.25-165.40, 162.40-162.55, 160.10-160.25.

                                           Resistance:        177.20-177.35, 179.85-180.00, 186.95-187.00, 197.95-198.10, 203.60-203.75.

Oil Inventory Reports

    Over the last eight years, this report showed seven years with builds in distillate stocks, six draws in crude oil stocks, 6 declines in refinery utilization, and five draws in gasoline stocks.  Refinery utilization has averaged 92.59% and crude oil imports have averaged 10.283 million bpd over the last five years.  Refinery utilization declined by an average of 1.73% in the six years that it declined, with the largest decline, of 3.4% coming in 2005.  In the five years before Hurricane Katrina, refinery utilization averaged 93.88%; over the eight years, it averaged 92.59%, with the last three years averaging 90.43%.

    Distillate stocks are now 34.9 million bbls, or 28.05%, higher than a year ago.  Heating oil inventories are 16.1 mln bbls, or 54.21%, higher than they were a year ago.  Gasoline stocks are 4.9 mln bbls (up 2.33%) higher against a year ago.  Crude oil stocks are now 48.9 million bbls, or 16.54%, higher than a year ago.  Residual stocks are 4.2 mln bbls (10.53%) lower than a year ago, jet fuel stocks are 3.0 mln bbls, (7.44%) higher than a year ago.  Utilization is 1.60% lower than a year ago and is 5.86% below the eight-year average.  It is 7.44% 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 17,610 contracts on Thursday, when prices rallied, which suggests heavy short-covering, which is a negative development.  Over the end of last week, the best buying came from short-covering. 

      Heating oil open interest grew by 3,262 contracts on Thursday, when prices were higher.  That looks like new buying and is supportive.

      RBOB open interest fell by 411 contracts on Thursday, when prices rallied.  That looks like light short-covering and is bearish.

      Natural gas open interest dropped by 2,928 on Thursday, when prices rallied.  That looks like short-covering and is bearish.

Thursday’s Open Interest Changes:  

Crude 1,166,935  dn 17,610        Heat 297,726   up 3,262       RBOB 203,248  dn 411       Nat gas 756,998  dn 2,928      

CFTC Commitments of Traders  (for the period ended Tuesday, July 14th)   

 As of July 14th:                 Long                   Short:

Crude oil                   194,213               178,056                           -contracts held by speculators:  1.09 long

                                         641,755               670,225                               held by the trade

                                         103,350                 91,037                               held by small specs and hedgers.

Spreads….dn 388 contracts   The ratio stayed at 1.09-to-one long over the latest week.

   Large speculators added 346 long contracts and covered 454 shorts over the week under review.  Commercials added 20,943 longs and added 21,533 shorts.  Small specs and hedgers added 20,231 longs and added 20,441 shorts.  Open interest grew by 41,132 contracts as prices dropped $3.41/barrel.  What was interesting about this report was the relatively small changes in the large speculator category, with commercials and small specs and hedgers both adding 20,000 contracts long and short.

   The average large speculator has 2,088 long contracts (93 accounts), or 166 less contracts on average on 7 more accounts, and 1,619 shorts (110 accounts), or an average of 25 contracts more on 2 less accounts.  Commercials held 7,826 longs (82) or 343 less longs on average on 6 more accounts, and 7,285 shorts (92), or 258 less shorts on 6 more accounts. Reportables held 4,106 longs (268, up 7 accts) and 4,076 shorts (273 accts, up 13).  We had 20 new accounts established (7 long, 13 short).

Heating oil                 36,831                 19,582                           - contracts held by speculators:  1.88 to 1 long

                                         185,116               207,157                              held by the trade.

                                           38,028                 33,236                               held by small specs and hedgers.

Spreads….dn 1,783 contracts.    The ratio of large speculative longs to shorts went from 5.01-to-one to 1.88-to-one in 3 weeks.

       Large speculators liquidated 2,392 longs and added 8,971 shorts.  Commercial accounts added 16,006 longs and added 3,726 shorts.  Small speculators and hedgers liquidated 332 longs and added 585 shorts.  Open interest grew by 11,914 contracts as prices dropped 8.88 cents.  That looks like heavy, new selling and is bearish.  The best new selling came from large speculators, and the best new buying came from commercials.

       The average large speculative long is holding 1,270 contracts (up 149 lots on 29 accounts, 6 less accts), while the average short has 612 contracts (up 117 lots on 32 accts, up 11).  The average commercial long is holding 2,645 contracts (dn 174 contracts on 70 accts, up 10) compared to the average short holding of 2,959 contracts (dn 171 lots on 70 accts, up 5).  The average reportable position is 2,062 long (dn 4 lots on 124 accts, up 6) while the average short holding is 2,135 (dn 113 lots on 122 accts, up 11).  The shorts still have slightly deeper pockets.

Rbob Gasoline           46,550                   8,608                          -contracts held by speculators:  5.41 to 1 long

                                          120,785               156,044                             held by the trade.

                                            12,775                 15,458                              held by small specs and hedgers.

Spreads…up 2,282 contracts   The ratio of large speculative longs to shorts went from 4.99-to-one to 5.41-to-one in 1 week.

     Large speculative holdings fell by 7,829 longs and fell by 2,288 shorts over the latest week. Commercial holdings grew by 7,738 longs and fell by 878 shorts.  Small speculators and hedgers’ positions fell by 1,618 longs and grew by 1,457 shorts.  Open interest grew by 573 contracts as prices dropped 8.62 cents.  That looks like light, net, new selling and is bearish.  Small speculators were selling and commercials were buying during the week under review.

   The average holdings are 970 contracts for each large speculative long (48) and 319 for each large speculative short (27).  The average commercial long now has 1,589 contracts long (76) and 1,734 short (90). Average reportable holdings are 1,252 long (147) against 1,268 short (143).  Large speculators closed 13 long accounts, which increased the average holding by 79 lots, and opened six short accounts, which decreased the average short by 200 contracts.  Shorts are still in stronger hands.

Naturalgas                99,055               263,737                           -contracts held by speculators:  2.66 to 1 short

                                         305,396               193,504                               held by the trade.

                                           94,701                 41,911                           held by small specs and hedgers.

Spreads…up 7,452 contracts    The ratio of large speculative shorts to longs went from 3.04-to-one to 2.66-to-one in 3 weeks.

  Large speculative holdings added 553 longs and added 4,754 shorts over the latest week. Commercial accounts liquidated 8,990 longs, and added 126 shorts, while small speculators and hedgers added 10,735 longs and covered 2,942 shorts.  Open interest grew by 10,098 contracts as prices were unchanged.  That looks like heavy, new position-taking, and prices ultimately went higher.  Small speculators and hedgers were the best buyers, while large speculators sold heavily and commercials liquidated longs heavily.  Reportable positions added shorts while non-reportable positions increased their short holdings.

  The average large speculator has 1,125 contracts (88) while each large speculative short is holding 2,664 shorts (99).  The average commercial long now has 3,510 contracts long (87) and 2,932 short (66). Average reportable holdings are 2,639 long (248) long and 3,245 short (218).  Large speculators added four new long accounts, which increased the average long holding by 48 contracts, and they added 2 new short accounts, which cut the average short holding by 6 contracts.  There were 3 new long accounts and 2 new short accounts in the reportable category, which cut 44 longs and added 31 shorts to positions.

Natural Gas & Utility Generation

Natural gas futures ended fractionally higher on Friday, but it was enough effectively to confirm Thursday’s move higher.  The bears would have liked to have negated Thursday’s move by pushing prices down substantially.  The fact that they did not do that has to be seen  as a positive step.  There was clearly some net short-covering on Thursday, but it was just as apparent from open interest figures that there had been new buying on Thursday, and Friday’s activity suggested both follow-through buying and profit-taking by longs. Leaving prices very close to unchanged by the final bell.  Still, the move looks legitimate after Friday’s activity and we feel that we are starting this new week with the equivalent of a clean slate.

We believe that last week’s advance is giving us firm evidence that the move from $13.69 to $3.155 and then, again, from $4.69 to $3.22 have discounted all the bearish fundamentals of heavy inventories and poor industrial demand – at least up to this point.  From here on, we would expect traders to take a look at rig counts and the bullish side of the last three EIA underground storage reports and anything else that might be bullish over the next two or three months.  Technically, any break above $4.69 would be extremely bullish from here.  That is not imminent, but it is something to watch longer-term.

One of the factors that might end up being bullish is this year’s tropical storm season.  There is a tropical air mass being tracked 800 miles west southwest of the Cape Verde Islands.  This storm is not expected to do much of anything and is apparently already dissipating.  But, it is the sign that the season has begun, and there now could be other depressions or waves coming up behind this one. 

In cash trading on Friday, Henry Hub prices were at $3.33-$3.50, up $0.18-$0.20 on the day (DJN).  SoCal prices were at $3.36-$3.46, up $0.22-$0.26 on the day.  El Paso Permian prices were up $0.13-$0.17 at $3.19-$3.33.  Katy prices were up $0.07-$0.24 at $3.31-$3.42.  Waha prices were up $0.15-$0.16 at $3.23-$3.34.  Transco 6 was up $0.10-$0.11 at $3.65-$3.75/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $39.50-$42.50/mwh.  Northeastern prices last traded at $36.50-$37.25.  Entergy was last at $28.00-$32.00.  Ercot was last at $39.75-$40.25/mwh.    

The activity on Thursday and Friday appears to have changed the picture in this market dramatically.  Since prices touched a low at $3.155, this market has been trying to put the longer-term bearish factors behind it.  The first run up to $4.69 only established a first upside parameter.  The next break above that figure will usher in a new period of lower supply, and that may ultimately be augmented by a period of higher demand.  It is going to take time for prices to realize fully that they are in this new phase, and it could be choppy leading into it, but it now seems that that is where we are headed.  Lower rig counts are the most visible aspect of the “new” market and the sort of factors that we expect will influence our reading of this market.

Support is at $3.22-$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 $3.68-$3.70, $3.78-$3.80, $3.88-$3.90, $3.98-$4.01, $4.08-$4.09, $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.  The trend seems to have turned back up.  We will see.

Natural gas futures rallied sharply yesterday, in the fourth largest upside move in 2009.

Dollars per million Btu

Jun Natural Gas:          Support:         $3.25-$3.26, $3.15-$3.17, $3.10-$3.14, $2.88-$2.91, $2.83-$2.84, $2.74-$2.75.

                                                    Resistance:     $3.68-$3.70, $3.78-$3.80, $3.88-$3.90, $3.98-$4.01, $4.08-$4.09, $4.15-$4.16.

EIA Weekly Storage Figures

Last week’s EIA report showed a build of 90 bcf on expectations for a build of 87 bcf.  Stocks are now 589 bcf higher than a year ago, against a surplus of 601 bcf a week ago, a surplus of 615 bcf two weeks ago and a surplus of 631 bcf three weeks ago.  Stocks are now 25.64% higher than a year ago.  They are 454 bcf and 18.67% above the five-year average.

The five-year average for this week was a build of 55.8 bcf.  The eight-year build average was 63.75 bcf.  Last year, there was a build of 84 bcf.  This week’s averages are brought down by the draw of 7 bcf seen in 2006.  There had been power outages in Queens, New York that summer, and generation use was especially heavy in California. It was the first summer draw.

EIA Report

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

News & Views

Traders continue to draw straight lines from higher equities prices and minor economic data points to a stronger economy and ultimately to stronger oil demand.  So far, though, every increase in oil demand in one product has tended to be followed by weakness somewhere else in the barrel.  There is no sign of stronger demand, yet.

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 was sideways to lower on Friday, but the issue is still very much unresolved right now.  Prices remain in a longer-term trading range, and the final direction of the breakout from the range will almost certainly give us a $10 move in oil prices.  Prices are in a trading range between @69.75 and @72.75.  Prices still have support around 69.75 and resistance around 72.50-72.75.  A break outside this range would be important. 

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

A Look at Crack Spreads

Recommendations for Specific Market Segments

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