Prices for July 20th, 2009

Market Review for Monday           

HE oil complex was higher again, yesterday, as oil traders seem to be impressed by gains in equities prices.  The US dollar was also lower yesterday, and that also helped push oil prices higher.  But, underneath this renewed interest in equities and the dollar is a bigger question.  For a while, there, oil prices were following their own fundamentals and were ignoring equities and the dollar.  We cannot pinpoint a specific reason why it has happened, but last week, the interest in these external factors resurfaced.  We do not know if this is a renewed influence by index funds or if we are still getting short-covering on follow-through trading from last week.  A week ago, it was evident that oversold pressures were playing a part in the oil market’s rally.  Those pressures are gone and have been for the last few days.  But, for some reason, the interest in equities and the dollar, factors that do not generally excite pure oil traders, have returned to the forefront of trading.

Up through Friday’s session, short-covering had been a major part of the movement higher.  With the exception of last Tuesday’s trading, short-covering has been an important part of the recent movement higher, and 40,000 contracts have been covered over the final three sessions last week.  We will not know until a few hours in, today, whether it was short-covering again yesterday.  The fact that the August crude oil contract is expiring this afternoon, though, would argue in favor of fresh short-covering in yesterday’s trading. 

The Dow Jones Industrial Average (DJIA) gained roughly 100 points yesterday, and that was the most obvious factor in trading.  The Conference Board showed a gain of 0.7% in its index of leading indicators, a third consecutive month of gains, and that seemed to add a positive spin to the day’s events.  Oil prices started moving higher, sold off midday and then closed on a firmer note.  Internal and external factors are working at cross purposes.

The part we find hardest to buy into in the “higher-equities-are-bullish-for-oil” scenario is that we have been through this before.  Traders were buying in March and April on the assumption that higher equities prices then would lead to higher oil demand later … but now that it’s later, the demand has not yet developed.  But, it doesn’t matter in this market.  Here we go, again … . 

Technicals

           The oil complex advanced again yesterday, led higher by heating oil.  Technically, prices are overbought on near-term, smaller oscillators, and the longer-term oversold pressures are entirely gone.  Crude has advanced on short-covering; products have moved higher on fresh buying.  Nevertheless, the activity has looked like short-covering.

Dollars per barrel

Above:  At $1.31, the second minus first month contango is back to its highest level since May 7th.

September crude oil now has buy-stops over $65.90, $67.17, $69.75, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $64.20, $62.00-$62.09, $61.00, $60.00-$60.25, $59.65, $58.30, $56.55, $56.15, $55.46, $54.65, $49.90, $48.80, $48.25, $46.20, and $44.60.  August heating oil has buy-stops over 169.70, 171.00, 179.00, 187.32-187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 163.75, 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 179.85-180.00, 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 175.00-175.15, 169.70, 168.00, 165.25, 160.10, 157.50, 156.60, 150.35, and 144.60. 

Football: The bulls gained four yards on first down, making it second and eight to go.

Technical Support & Resistance

Sep crude oil                            Support:             $64.20-$64.35, $62.00-$62.10, $61.00-$61.20, $60.25-$60.35, $59.65-$59.80.

                                           Resistance:        $65.75-$65.90, $67.05-$67.17, $69.60-$69.75, $73.25-$73.38, $76.10-$76.25.

Aug heating oil       Support:             163.75-164.00, 157.45-157.60, 155.85-156.10, 151.65-151.80, 149.55-149.70.

                             Resistance:        169.55-169.70, 170.85-171.00, 178.85-179.00, 187.32-187.45, 187.95-188.05.

Aug Rbob                      Support:             175.00-175.15, 169.70-169.85, 168.00-168.20, 165.25-165.40, 162.40-162.55.

                                           Resistance:        179.85-180.00, 186.95-187.00, 197.95-198.10, 203.60-203.75, 204.20-204.36.

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 3,678 contracts on Friday, when prices rallied, which suggests more short-covering, which is a negative development.  Over the last three days of last week, 40,000 contracts were covered.

      Heating oil open interest grew by 1,742 contracts on Friday, when prices were higher.  That looks like new buying and is supportive.  Open interest is up 12,000 contracts over the last week.

      RBOB open interest rose by 2,922 contracts on Friday, when prices rallied.  That looks like new buying and is supportive.  Over the last week, 10,000 contracts have been added in this contract.

      Natural gas open interest was up by 441 on Friday, when prices were up.  That looks like light buying and is supportive.

Friday’s Open Interest Changes:  

Crude 1,163,257  dn 3,678        Heat 299,468   up 1,742       RBOB 206,170  up 2,922       Nat gas 757,439  up 441         

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 gained two more cents yesterday, but that still constitutes a success on the part of the bulls.  They have now succeeded in keeping the bears at bay since the dramatic victory by the bulls on Thursday.  Honestly, we expected the bears to win that battle and take prices below $3.15 and then below $3.00.  Perhaps it is because it is July, but we cannot help seeing this as the bears’ Gettysburg.  Over the first part of the week, the bears launched assaults on strong points just above $3.22, the Culp’s Hill and Little Round Top of their battle.  On Thursday, they had an EIA report showing a larger build than expected, and it left inventories 25.6% higher than a year ago and 18.7% higher than the five-year average.  They launched a broad frontal attack, but found themselves stopped by the canister of massed buying and short-covering.  At any point last week, the bears seemed on the verge of outflanking the bulls by taking the high ground, but each attack fell just short of success.  By the end of last week’s battle, the bears found themselves bloodied and battered, and forced to retreat.  In the two days since, they have made it clear that they do not have the ability to reorganize for another assault.  Like Gettysburg, we are not sure that the bears will recover from this.  It seems that the tide has turned. 

We apologize to those less familiar with this seminal battle of American History.  Each July, our mind returns to it, having fought in a reenactment there as a young man.  It is a humbling battlefield to walk upon, and it leaves one with an immense respect for both sides and all involved.  So we cannot escape seeing last Thursday’s events in this market in a more historical light.  Everything leading up to Thursday seems to have been washed away, and we now expect that rig counts and weather factors will lead traders to see this market in a fresh and different light. The factors before it are discounted and behind us.

In cash trading yesterday, Henry Hub prices were at $3.36-$3.52, up $0.02-$0.03 on the day (DJN).  SoCal prices were at $3.45-$3.57, up $0.09-$0.11 on the day.  El Paso Permian prices were up $0.13-$0.17 at $3.36-$3.46.  Katy prices were up $0.02-$0.06 at $3.33-$3.48.  Waha prices were up $0.12-$0.16 at $3.39-$3.46.  Transco 6 was up $0.06-$0.11 at $3.76-$3.81/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $46.50-$50.00/mwh.  Northeastern prices last traded at $27.00-$35.85.  Entergy was last at $27.50-$28.50.  Ercot was last at $37.50-$38.75/mwh.    

The activity on Friday and again yesterday seemingly leaves the bulls in control.  If the bears were going to mount a fresh offensive to push quotes below $3.15 and then $3.00, we believe that they would have tried to position themselves for that attack over the last two days.  The bulls only needed to retain control of the battlefield, which they have done.  Ultimately, they will need to launch assaults of their own on $4.09, $4.39 and then $4.69 if they are going to push quotes higher.  Right now, though, they are content in keeping prices from threatening the lows, again.

Support is at $3.51-$3.53, $3.33-$3.37, $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 $3.77-$3.80, $3.88-$3.90, $3.98-$4.01, $4.09-$4.11, $4.15-$4.16, $4.24-$4.28, $4.31-$4.33, $4.37-$4.42, $4.53-$4.56, $4.65-$4.69, $4.85-$4.88, $5.01-$5.03, $5.22-$5.24, & $5.55-$5.57. 

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

Dollars per million Btu

Jun Natural Gas:          Support:         $3.51-$3.53, $3.33-$3.37, $3.22-$3.26, $3.15-$3.17, $3.10-$3.14, $2.88-$2.91.

                                                    Resistance:     $3.77-$3.80, $3.88-$3.90, $3.98-$4.01, $4.09-$4.11, $4.15-$4.16, $4.24-$4.28.

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 have the expiration of the August crude oil contract followed by the API report this afternoon, then the weekly DOE report out tomorrow morning.  Interspersed with those distinctly oil factors, we have no doubt that equities and the dollar will rear their heads as influences upon prices.

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 lower again yesterday, and sell-stops beneath 69.75 are looming as prices near that level.  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 have support @ 69.75 and resistance around 72.50-72.75.  A break below 69.75 euro cents per dollar would be bullish for oil prices and would alter the outlook. 

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

A Look at Jet Fuel Prices

Recommendations for Specific Market Segments

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