Prices for July 21st, 2009

Market Review for Tuesday           

ESTERDAY’S story was the same as it has been for the last few days, with one minor twist.  On Monday, the best buying came from the addition of new contracts, rather than from the subtraction of existing contracts.  It was not short-covering on Monday; it was fresh buying pushing prices higher.  That was especially unexpected coming just a day before the August crude oil contract expiration (which was yesterday). 

Once again, prices advanced on this vague feeling that higher equities prices will lead to a stronger economy and ultimately to stronger oil demand.  We continue to feel that this is not the most logical vein of thinking, and it does not strike us as a classically fundamental perspective.  In fact, through a process of elimination, we can figure out that it either has to be technical buying or the ubiquitous index-fund buying that is coming under scrutiny even as you read this.  No one with a fundamental perspective is buying this market, but it is still rising.  And, on Monday, there was fresh buying in this market.

Despite Monday’s new buying, on balance, we still think that most of the buying on this move has been short-covering.  And, given that August expired yesterday, one might expect that there was short-covering in that contract.  August gained less than September and October on Monday, when there was net buying and, since short-covering is always more urgent than fresh buying, the net new buying was certainly focused in the back months.  Yesterday, the roles were reversed, with August gaining more than the back months.  Once again, though, we would presume that the buying in August was short-covering.

The Dow Jones Industrial Average (DJIA) gained another 68 points yesterday, and it was a factor in the string of “logic” that we enunciated at the start of this section.  The US dollar, on the other hand, was higher yesterday, but it was not a major factor in traders’ thinking, at least not yesterday.  Oil traders, or a segment of those who trade the market, were buying against earnings reports for the second quarter, which have dominated headlines on Wall Street.

Today’s DOE report may bring home the reality of the supply and demand situation.  It is fine to draw lines from Caterpillar’s earnings to some distant increase in oil demand, but it is not here, yet.  And we doubt that today’s statistics are going to change that.

Technicals

           The oil complex was higher, again, yesterday, and there was fresh buying in all three major contracts on Monday.  This follows last week’s pattern of new buying in refined products and short-covering in crude oil prices.  Despite this, the price advances have the definite look of short-covering, which we expect has been an element of the buying.

Dollars per barrel

Above:  Crude oil prices rallied yesterday, and they are now approaching heavier resistance overhead.

September crude oil now has buy-stops over $66.70, $67.17, $69.75, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $63.50, $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 173.75, 179.00, 187.32-187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 167.40, 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 183.20, 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 177.80, 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 seven yards on second and eight, making it third and one to go, here.

Technical Support & Resistance

Sep crude oil                            Support:             $63.50-$63.60, $62.00-$62.10, $61.00-$61.20, $60.25-$60.35, $59.65-$59.80.

                                           Resistance:        $66.55-$66.70, $67.05-$67.17, $69.60-$69.75, $73.25-$73.38, $76.10-$76.25.

Aug heating oil       Support:             167.40-167.55, 163.75-164.00, 157.45-157.60, 155.85-156.10, 151.65-151.80.

                             Resistance:        170.85-171.00, 173.65-173.75, 178.85-179.00, 187.32-187.45, 187.95-188.05.

Aug Rbob                      Support:             177.80-178.00, 175.00-175.15, 169.70-169.85, 168.00-168.20, 165.25-165.40.

                                           Resistance:        183.00-183.20, 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 rose by 8,892 contracts on Monday, when prices rallied, which suggests fresh, net buying, which would be supportive.  Over the last three days of last week, 40,000 contracts were covered.  Now, we have buying.

      Heating oil open interest grew by 3,848 contracts on Monday, when prices were higher.  That looks like new buying and is supportive.  Open interest is up 16,186 contracts since July 13th.  Prices have gained 19.5 cents since then.

      RBOB open interest rose by 877 contracts on Monday, when prices rallied.  That looks like new buying and is supportive.  Since July 13th, open interest is up 10,936 contracts and prices are up 17.26 cents a gallon.  It is constructive activity.

      Natural gas open interest was up by 5,656 on Monday, when prices were up.  That looks like heavy, new buying and is supportive.

Monday’s Open Interest Changes:  

Crude 1,172,149  up 8,892        Heat 303,316   up 3,848       RBOB 207,047  up 877       Nat gas 763,095  up 5,656         

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 another 1.6 cents yesterday, which adds another day of confirmation to the belief that we have had an important sea-change in prices.  Last Thursday stands out clearly in our mind as a critical battle in a long campaign of daily skirmishes with occasional battles at key times.  Over the last year, we have had major battles at $13.694, $3.155, $4.69 and last week above $3.225, although the critical fight came on Thursday, three days after the important low was reached.  Every session is a fight, to be sure, but some sessions – and some prices – are bigger and have longer shadows and ramifications.  Last Thursday falls into that category.  And, while the low of $3.155/mmBtu (4-27-09) will be remembered as the major low at the end of the decline from $13.694, it was last week’s low at $3.225 and the subsequent fight above $3.25 that will have changed the landscape in this market in ways we cannot yet see.  The low at $3.155 was the major low, but it was not until last week’s battle on Thursday that the old fundamentals spent their last bit of influence trying to press quotes lower.  Poor industrial demand and ample underground storage numbers will be with us into the future; we just don’t expect them to have the same amount of gravitational pull on prices, any more. 

Traders are already starting to talk about this market being in a state of “equilibrium,” according to Dow Jones.  And the balancing factors are the ‘old’ factors of abundant supply and poor demand against lower rig counts.  The extremely temperate weather in the North weighs in on the bearish side, now, and any sudden change in temperatures towards the hotter side could tip the balance towards the bulls.  That might be thinking short-term, though; if this pattern of colder-than-usual temperatures persists into November, we will have six months of cold to boost prices. 

In cash trading yesterday, Henry Hub prices were at $3.42-$3.58, up $0.06-$0.06 on the day (DJN).  SoCal prices were at $3.41-$3.54, down $0.03-$0.04 on the day.  El Paso Permian prices were up $0.03 and down $0.01 at $3.39-$3.45.  Katy prices were up $0.00-$0.05 at $3.38-$3.48.  Waha prices were down $0.02-$0.03 at $3.37-$3.43.  Transco 6 was up $0.00-$0.14 at $3.76-$3.95/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $44.00-$49.25/mwh.  Northeastern prices last traded at $29.00-$41.25.  Entergy was last at $29.50-$30.50.  Ercot was last at $36.50-$37.10/mwh.    

The last three EIA underground storage reports have had bullish elements in them, and traders will be looking for nuggets of hope in today’s report.  The average build over the last five years is lower than most have been in recent weeks, and that allows room for the surplus against the five-year average to increase today.  Last year’s build of 84 bcf leaves some room, but not as much as the five-year average.  Still, a bullish report could get some traction this week, in the wake of last week’s major ‘victory’ by the bulls. 

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 were slightly higher yesterday, confirming the departure from the long-term decline.

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

This morning’s DOE report will help decide if this rally will continue or not.  Fundamentally, we see reasons to expect to see prices work back down, again.  Nonetheless, there is still a good deal of interest in equities activity.

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 rallied yesterday, but it is not out of danger, yet.  Prices are still much nearer to a downside break-down than to an upside breakout.  We maintain that any break will be a huge event that will have a very large impact on oil prices – unless the CFTC clips the wings of the big investors that buy oil against a weaker US dollar.  Prices are still 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

Oil prices are slightly overbought on longer-term oscillators, and are more overbought on shorter-term ones.

Recommendations for Specific Market Segments

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