Prices for July 22nd, 2009

Market Review for Wednesday               

EPTEMBER crude oil started its run as the expiring, front month contract by working lower yesterday.  Otherwise, it was more of the same in this market.  Refined products were higher yesterday, despite builds in inventories.  The numbers were remarkably near estimates aggregated into survey results by the major wire services.  Nonetheless, there were fresh concerns about the ability of equities to influence oil demand any time, soon.

This week’s DOE report showed a draw in crude oil stocks as the result of a decline in imports, Dow Jones pointed out in its afternoon report.  Four-week gasoline demand remained subdued at 9.175 million bpd, up 0.70%.  Distillate demand improved slightly, to 3.298 million bpd, down ‘only’ 10.96%.  Last week, it was down 11.69%.  Total product consumption is edging higher, but it is still 938,000 bpd lower than a year ago (4.8%).  Some of the “improvement” is coming from the fact that we are starting to compare this year’s figures against some really poor figures a year ago.

Distillate inventories continued their rise, and they established fresh 24-year highs in yesterday’s report.  Inventories made new highs and four-week demand had an 18,000 bpd bump higher.  We are not sure if that really changes anything.  Any way one looks at it, this market is still fundamentally weak. 

Prices have had an amazing run higher, but equities sold off yesterday, and traders pretended not to notice.  The dollar was fractionally lower, and has not been a major factor over the last few days, but it is on the precipice and is threatening to spill over the edge and break below 69.75.  That would be an unmitigated disaster for the dollar, and it would have dire results for commodities prices.  Index funds have been watching and waiting for any reason to push the buy button hard, and a major breakdown in the US dollar would be a major enough event to get another bubble going. 

This could make the difference between rational markets that still have some sort of connection to the supply-demand equation and markets that will rise on a huge influx of investment money being pumped endlessly into ETF’s and index funds that have no interest in record-breaking inventories or sorry consumption figures.  The dollar has to rally for fundamentals to have a chance.

Technicals

           The oil complex was mostly higher, again, yesterday, although the new expiring front month crude contract, September, was lower in comparison with its settlement on Tuesday.  It was higher than the final August contract settle, but that does not change the net difference to positive.  Near term, prices are overbought and coming to resistance.

Dollars per barrel

Above:  The second-to-first month contango expanded yesterday to its highest level since May 4th.

September crude oil now has buy-stops over $65.80, $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 172.51, 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 184.65, 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 176.75, 175.00-175.15, 169.70, 168.00, 165.25, 160.10, 157.50, 156.60, 150.35, and 144.60. 

Football: The bulls lost two yards on third and one to go, and that makes it fourth and three to go, here, today.

Technical Support & Resistance

Sep crude oil                            Support:             $63.50-$63.76, $62.00-$62.10, $61.00-$61.20, $60.25-$60.35, $59.65-$59.80.

                                           Resistance:        $65.65-$65.80, $66.55-$66.70, $67.05-$67.17, $69.60-$69.75, $73.25-$73.38.

Aug heating oil       Support:             167.40-167.61, 163.75-164.00, 157.45-157.60, 155.85-156.10, 151.65-151.80.

                             Resistance:        172.40-172.51, 173.65-173.75, 178.85-179.00, 187.32-187.45, 187.95-188.05.

Aug Rbob                      Support:             176.75-176.85, 175.00-175.15, 169.70-169.85, 168.00-168.20, 165.25-165.40.

                                           Resistance:        184.55-184.65, 186.95-187.00, 197.95-198.10, 203.60-203.75, 204.20-204.36.

Oil Inventory Reports

    Refinery utilization fell by a little more than 2% in this week’s statistics, and utilization is still significantly below the normal (eight-year average) for this time of year.  The current utilization figure is the lowest that it has been at this point in the 21st Century.  Crude oil imports dropped again, this time by 346,000 bpd to 9.203 million bpd, a very low figure for any July.  Crude oil inventories dropped, but they are still substantially higher than they were a year ago.  Distillate inventories established a new 24-year high in this week’s figures.  Demand numbers were steady to higher in scattered products, but they remain poor.      Distillate stocks are now 34.0 million bbls, or 26.88%, higher than a year ago.  Heating oil inventories are 15.2 mln bbls, or 49.03%, higher than they were a year ago.  Gasoline stocks are 6.7 mln bbls (up 3.21%) higher against a year ago.  Crude oil stocks are now 47.2 million bbls, or 15.97%, higher than a year ago.  Residual stocks are 2.4 mln bbls (6.17%) lower than a year ago, jet fuel stocks are 3.4 mln bbls, (8.35%) higher than a year ago.  Utilization is 1.26% lower than a year ago and is 6.75% below the eight-year average.  It is 8.04% 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 22,350 contracts on Tuesday, when prices rallied, which suggests heavy short-covering on the final day of trading in the August crude oil contract.  More than 62,000 contracts have been covered over the last five days.

      Heating oil open interest fell by 3,189 contracts on Tuesday, when prices were higher.  That looks like short-covering, and would be a rare case for the recent rally.  It is also bearish.

      RBOB open interest fell by 3,216 contracts on Tuesday, when prices rallied.  That looks like short-covering and is bearish.  We had been seeing a steady stream of fresh buying up until Tuesday. 

      Natural gas open interest dropped by 10,686 on Tuesday, when prices were up.  That looks like heavy, short-covering and is the first negative sign in this contract since last Thursday.

Tuesday’s Open Interest Changes:  

Crude 1,149,799  dn 22,350        Heat 300,127   dn 3,189       RBOB 203,831  dn 3,216       Nat gas 752,409  dn 10,686 

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 were up nearly nine cents per million Btu yesterday in the strongest session since last Thursday’s decisive move higher (38.5 cents/mmBtu).  Although three of the last five days have had gains of less than two cents, each of the last five days has finished with gains.  It is the first five-consecutive-day rally in 2009 and the first since the five-day period ended on September 9th, 2008.  This adds yet another positive sign to a number of positive signs accumulated over the last week. 

Natural gas has clearly undergone a major, tectonic change, a “sea-change” in thinking.  For the last nine months, traders have been looking at the weekly rig count figures and placing them on the back-burner, a cloistered segregation of factors that we all knew would become important at some future time.  We now seem to have arrived at that time, or at least its beginning.  We get the impression that each week from now on will include a reference to rig counts in any bullish discussion of price activity.  We also feel that rig counts have not been discounted by current prices.  No actual output has been lost or has declined, yet, but the writing on the wall can no longer be as easily ‘put away’ for some vague future consideration.

Even with one of the mildest northern summers on record, traders are starting to avoid the short side of this market – more than they were a week ago.  Part of that comes from a normal and healthy fear of what this year’s tropical storm season could bring, but part of it is also in recognition of the dramatic change that has occurred in this market.  We are starting to believe that prices beneath $4.00/mmBtu could become historical curiosities – not this summer, but potentially in future years.  It is very possible that last week’s lows will not be seen again for a long time.

In cash trading yesterday, Henry Hub prices were at $3.44-$3.59, up $0.01-$0.02 on the day (DJN).  SoCal prices were at $3.44-$3.61, up $0.03-$0.07 on the day.  El Paso Permian prices were up $0.01 and down $0.08 at $3.31-$3.46.  Katy prices were up $0.00-$0.02 at $3.38-$3.50.  Waha prices were down $0.05 and up $0.01 at $3.32-$3.44.  Transco 6 was up $0.02-$0.07 at $3.83-$3.97/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $43.50-$46.25/mwh.  Northeastern prices last traded at $28.00-$40.10.  Entergy was last at $28.75-$29.25.  Ercot was last at $38.75-$40.00/mwh.  According to Harpers, this year will be the first year since 1945 that electricity use in the US has declined (by 3.5%).

Dow Jones is calling for a build of 68 bcf, which is the average of its weekly underground storage survey.  That is a little bit higher than our records suggest for the eight year average for this time of year (a build of 64 bcf).  But, significantly, it would be 16 bcf lower than the injection seen at this time a year ago.  Temperatures are expected to be normal or cooler than normal over the next 14 days, into early August.    

Support is at $3.60-$3.63, $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 $3.88-$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 higher again yesterday, making it five days higher in a row, although three days had gains of less than two cents.

Dollars per million Btu

Jun Natural Gas:          Support:         $3.60-$3.63, $3.51-$3.53, $3.33-$3.37, $3.22-$3.26, $3.15-$3.17, $3.10-$3.14.

                                                    Resistance:     $3.88-$3.90, $3.98-$4.01, $4.09-$4.11, $4.15-$4.16, $4.24-$4.28, $4.31-$4.33.

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.  Dow Jones’ survey is calling for a build of 68 bcf, Bloomberg is looking for 66-68 bcf in a 62-82 range.

EIA Report

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

News & Views

Oil prices are approaching a band of resistance at the 50% to 61.8% retracement levels.  Bullish sentiment is still almost entirely based on a vague, general sense that the economy is going to improve- while the dollar might not.

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 yesterday, not by a lot, but we are getting nearer to the major support in this market @ 69.75 euro cents.  The dollar was at 70.22 euro cents last night, and that is getting dangerously near the support.  As we have mentioned here before, a decisive break to new lows in the dollar would give us a huge move higher in oil.  Prices are still in a trading range between @69.75 and @72.75.  Prices have support @ 69.75 and resistance @ 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 Gasoline Supply & Demand      

Thirteen-week demand is at 9.161 million bpd, down 1.64% against last year.  Thirteen-week supply is at 9.977 mln bpd, down 2.01%.  Thirteen-week implied demand is at 9.999 mln bpd, down 1.32%.

A Look at Distillate Supply & Demand

Thirteen-week demand is at 3.444 million bpd, down 16.66% against last year.  Thirteen-week supply is at 4.265 mln bpd, down 8.25%.  Thirteen-week implied demand is at 4.065 mln bpd, down 7.42%. 

A Look at Refinery Utilization

Utilization has been trending lower for almost four years, now.

Utilization is 1.26% lower than a year ago and is 6.75% below the eight-year average.  It is 8.04% lower than the five-year, pre-Katrina average. 

Recommendations for Specific Market Segments

For an interesting read (that we would rather not comment on publicly right this minute for legal reasons):

http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine

ABC will air a special on oil trading on Friday night at 10 PM