Prices for July 23rd, 2009

Market Review for Thursday                  

QUITIES soared and oil prices followed, as index funds poured money into long positions, taking no note of high inventories, poor demand or overbought pressures.  The dollar was lower early in yesterday’s trading, but it rallied later in the day.  But yesterday’s story was written entirely on Wall Street, at the NYSE and its sister exchanges.  The story was the same.  Equities rise, index fund managers expect the economy to improve, and they buy oil on the expectation that energy consumption will ultimately improve. 

It seems that the traditional seasonal tendency for prices to advance from Independence Day to Columbus Day may be in effect, again.  It now seems that the recent selloff was just a correction instead of the beginning of a major reassessment in this market.  We cannot say that we see plentiful fundamental reasons to support that, but that is the way it seems right now.  The bears still have a chance, but they will need to see prices turn back from their retracement zones quickly or these prices seem likely to become little more than surrogates for equities prices. 

Dow Jones quoted traders who saw in this week’s DOE report a bullish figure in lower refinery utilization.  We have always held this to be the key to the fundamental picture in this market, because they determine how much production will be seen in refined products. 

While we had a 2% decline in utilization in this week’s report, which will be supportive for refined products, there is another side to the same coin.  Low refining rates also mean lower demand for crude oil, and refineries either need to cut the number of barrels they import each week or they will end up placing barrels in storage. 

Obviously, this chicken-and-egg argument with crude and refined products can cut both ways.  If traders want to look at the bullish side, lower utilization means fewer refined products; if they want a bearish argument, it means lower crude oil demand. 

The fact that it can be interpreted either way makes it a diagnostic tool.  If traders see the bullish aspect of lower refinery utilization, then it is a sign that prices want to go higher.  Traders could just as easily have focused on lower crude demand; the fact that they did not tells us something. 

Technicals

           The oil complex was steeply higher yesterday.  Prices are overbought and the vertical rise has all the earmarks of short-covering, because it looks like the result of urgent buying.  In fact, though, there has been fresh buying in this complex, and that suggests that buying has come from index funds, which are the only ones who buy in this manner.

Ratio: Crude over natural gas

Above:  After a week of improvement, the crude-to-gas ratio erupted to post its second-highest figure this century.

September crude oil now has buy-stops over $67.50, $69.75, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $64.40, $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 177.61, 179.00, 187.32-187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 170.09, 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 192.80, 198.10, 203.75, 204.36, 207.20, 211.24, 214.00, 222.70, 228.86, and 240.10.  Sell-stops are under 183.35, 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 gained 18 yards on fourth and three to go.  That gives the bulls another set of downs.

Technical Support & Resistance

Sep crude oil                            Support:             $64.40-$64.50, $63.50-$63.76, $62.00-$62.10, $61.00-$61.20, $60.25-$60.35.

                                           Resistance:        $67.05-$67.17, $67.45-$67.50, $69.60-$69.75, $73.25-$73.38, $76.10-$76.25.

Aug heating oil       Support:             170.00-170.15, 167.40-167.61, 163.75-164.00, 157.45-157.60, 155.85-156.10.

                             Resistance:        177.50-177.61, 178.85-179.00, 187.32-187.45, 187.95-188.05, 188.95-189.10.

Aug Rbob                      Support:             183.35-183.50, 176.75-176.85, 175.00-175.15, 169.70-169.85, 168.00-168.20.

                                           Resistance:        192.65-192.80, 197.95-198.10, 203.60-203.75, 204.20-204.36, 207.00-207.20.

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 rose by 6,796 contracts on Wednesday, when prices were mixed, with front-month September lightly lower and the deferred months higher.  It looks like new selling in September and buying in the back months.

      Heating oil open interest grew by 88 contracts on Wednesday, when prices were higher.  That looks like net new buying and is supportive.

      RBOB open interest fell by 235 contracts on Wednesday, 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 14,216 on Tuesday, when prices were up.  That looks like heavy, short-covering for a second day running.

Wednesday’s Open Interest Changes:  

Crude 1,156,595  up 6,796        Heat 300,215   up 88       RBOB 203,596  dn 235       Nat gas 738,193  dn 14,216            

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 dropped steeply yesterday on profit-taking by longs.  This week’s EIA underground storage figure was in line with expectations, but traders decided to take profits on the long side when they saw that the report was nothing special enough to spur prices to higher levels.  After five consecutive days higher, it seems that traders had been waiting to see if this week’s figures were strong enough to generate additional price gains.  As soon as it became apparent that was not the case, several days of accumulated selling came into the market.

Under other circumstances, we might have seen this week’s report as a bullish market factor.  It showed a build of 66 bcf, against estimates calling for an average increase of 68 bcf.  The eight-year average of similar Friday’s showed a build of 63.75 bcf, which makes this a pretty “typical” report for this time of year.  After months of giving us larger-than-typical injections or smaller-than-normal pulls (going back to last heating season), the last four reports have shown movement towards more neutral numbers.  If this was the oil complex, going from bearish to neutral numbers would be seen as being wildly and emphatically bullish.  If we had not had five days in a row higher, we think it would have been more supportive, here.

Of course, that’s not the way it played out.  In the process, any longs with doubts in the future course of this market decided to kick out holdings.  The result was steeply lower quotes and the second-highest ratio of crude-to-natural gas this century.  For reasons that completely escape us in terms of logic, the stronger economy so clearly indicated by equities prices was not able to boost natural gas prices.  It worked just fine in oil markets, but the people who are hyping oil index funds feel that the crude-to-gas ratio should actually be higher.  And, so a stronger economy and better energy demand just does not seem to apply to gas.

In cash trading yesterday, Henry Hub prices were at $3.55-$3.69, up $0.10-$0.11 on the day (DJN).  SoCal prices were at $3.58-$3.73, up $0.12-$0.14 on the day.  El Paso Permian prices were up $0.13-$0.22 at $3.53-$3.59.  Katy prices were up $0.14-$0.14 at $3.52-$3.64.  Waha prices were up $0.18-$0.21 at $3.53-$3.62.  Transco 6 was up $0.03-$0.09 at $3.92-$4.00/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $42.75-$45.65/mwh.  Northeastern prices last traded at $28.75-$42.50.  Entergy was last at $32.75-$33.25.  Ercot was last at $42.00-$44.00/mwh.

There is still plenty of natural gas in storage, and some market observers were disappointed by this week’s report.  We feel that it would have been seen differently if prices had not advanced for five consecutive days.  And if higher equities prices are bullish for oil, they should be just as bullish or more bullish for gas.  We think the picture is still positive, but this is a market full of surprises.      

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 sold off steeply yesterday on profit-taking.

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:     $3.88-$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

This week’s EIA report showed a build of 90 bcf on expectations for a build of 87 bcf.  Stocks are now 568 bcf higher than a year ago, against a surplus of 589 bcf a week ago, a surplus of 601 bcf two weeks ago and a surplus of 615 bcf three weeks ago.  Stocks are now 23.82% higher than a year ago.  They are 458 bcf and 18.36% 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 called 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

Right now, it is all about strength in equities leading to index fund buying in the oil complex.

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 at points yesterday, but it was at 70.61 euro cents early last night.  Prices seem to have found support at 70 euro cents, but prices do remain perilously near the major low points.  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 in this market. 

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

A Look at Inventories     

Distillate inventories made new 24-year highs in this week’s DOE report.

A Look at Imports

Crude oil imports remain at historically low levels. 

Recommendations for Specific Market Segments