Prices for July 24th, 2009

Market Review for Friday & the Weekend       

T has been an exciting two weeks for equities holders, because the DJIA has risen in nine of the last 10 sessions after Friday’s nearly 24-point gain.  It was the eighth day higher for the spot month of crude oil on continuation charts, and the two markets’ advances are far from coincidences.  While commercial oil traders threw up their arms in disgust, a seemingly endless supply of investment money - talked into “diversifying” their portfolios with a 10% holding in commodities – used the strength in equities as an excuse to buy oil and a number of other commodities through index funds.

The fact that the reason for this investment money moving into commodities has been defeated ipso facto by connecting the two markets seems to have been lost on those taking and pushing these positions.  The reason for buying commodities for investors with no real interest in these same commodities is diversification.  Commodities holdings are supposed to be hedges against movement lower in equities.  Now that the two are moving together, what we really have is a ‘Texas hedge,’ or positions that actually move together, although they might not be expected to.    

Perhaps one of the most curious casualties and most egregious negation of the arguments being used by large investment banks pushing these dual positions is the failure of natural gas, to date, to benefit from the line of “logic” being used to justify the long positions being taken in oil: The rise in equities is a sign that the economy is recovering and that should eventually bolster energy demand.  It is a splendid argument.  Its only problem is that the people using it to push oil are not using it to push natural gas – because they are short natural gas against crude oil.  If this were not skewing the economy, one might laugh.

This argument has been brought back into the limelight over the last two weeks, but it has been used, on and off (mostly “on”) since March.  Over the last two weeks, while higher equities were supposedly showering the economy with financial blessings certain to boost energy demand (through higher employment and returning industrial and consumer consumption), US businesses and consumers started paying more for gasoline.  As we start this new week, they are paying $124 million a day more for this one fuel.  Since March, higher costs have forced businesses and individuals to shuck out $264 million a day more for gasoline.  With gasoline constituting 49% of oil products supplied, we can effectively double the daily economic impact.  That must be the “hedge:” Oil takes away what equities give.

Technicals

           The oil complex was higher again on Friday, and it was a strong week for the oil complex.  Gasoline prices gained 17.70 cents a gallon, heating oil prices gained 14.03 cents a gallon, and crude oil prices increased by $4.49/barrel.  Prices start this week being overbought, but the buying we are seeing does not seem to take that into account. 

Cents per gallon

Above:  Gasoline prices gained 17.7 cents last week.  They have increased by more than 31 cents over the last two weeks.

September crude oil now has buy-stops over $68.20, $69.75, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $66.40, $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, and $49.90.  August heating oil has buy-stops over 179.55, 187.32-187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 175.75, 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 193.68, 198.10, 203.75, 204.36, 207.20, 211.24, 214.00, 222.70, 228.86, and 240.10.  Sell-stops are under 189.50, 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 nine yards on first down on Friday, and that makes it second and one to go, here.

Technical Support & Resistance

Sep crude oil                          Support:             $66.45-$66.60, $64.40-$64.50, $63.50-$63.76, $62.00-$62.10, $61.00-$61.20.

                                           Resistance:        $68.00-$68.20, $69.60-$69.75, $73.25-$73.38, $76.10-$76.25, $79.00-$79.17.

Aug heating oil     Support:             175.75-175.90, 170.00-170.15, 167.40-167.61, 163.75-164.00, 157.45-157.60.

                             Resistance:        178.85-179.00, 179.45-179.55, 187.32-187.45, 187.95-188.05, 188.95-189.10.

Aug Rbob                     Support:             189.50-189.70, 183.35-183.50, 176.75-176.85, 175.00-175.15, 169.70-169.85.

                                           Resistance:        193.55-193.68, 197.95-198.10, 203.60-203.75, 204.20-204.36, 207.00-207.20.

Oil Inventory Reports

    This coming week has a marked tendency for higher refinery utilization rates, with seven of the last eight years having seen increases.  The average increase over those seven years was 1.03%.  In 2006, utilization dropped 1.7%; the rest of the years this new century saw increases, with the biggest jump (2.5%) seen in 2004.  That year also witnessed a large increase in crude oil imports, in that year 1.403 million bpd.  The average over the last five years was an increase in imports of 89,600 bpd to 10.373 million bpd.  Over the last eight years, distillate stocks increased while crude oil and gasoline stocks decreased (see pp 6).

     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 23,375 contracts on Thursday, when prices were higher.  That looks like heavy, new buying, which we expect would be index-fund buying.  It is bullish. 

      Heating oil open interest grew by 1,472 contracts on Thursday, when prices were higher.  That looks like net new buying and is supportive.

      RBOB open interest rose by 1,498 contracts on Thursday, when prices rallied.  That looks like new buying, and it is supportive. 

      Natural gas open interest grew by 1,207 on Thursday, when prices dropped.  That looks like new selling, which would be a negative development. 

Thursday’s Open Interest Changes:  

Crude 1,179,970  up 23,375        Heat 301,687   up 1,472       RBOB 205,094  up 1,498       Nat gas 739,400  up 1,207   

CFTC Commitments of Traders  (for the period ended Tuesday, July 21st)   

 As of July 21st:                 Long                   Short:

Crude oil                   191,829               189,611                           -contracts held by speculators:  1.01 long

                                         633,889               645,398                               held by the trade

                                            71,443                62,152                               held by small specs and hedgers.

Spreads….dn 388 contracts   The ratio went from at 1.09-to-one long to 1.01-to-one long over the latest week.

   Large speculators liquidated 2,384 long contracts and added 11,555 shorts over the week under review.  Commercials liquidated 7,866 longs and covered 24,827 shorts.  Small specs and hedgers liquidated 31,907 longs and covered 28,885 shorts.  Open interest fell by 53,930 contracts as prices rallied $5.20/barrel.  That looks like heavy short-covering, which is what we saw by both commercials and small specs and hedgers.  No one added any new long positions in this report.

   The average large speculator has 2,063 long contracts (93 accounts), or 25 fewer contracts on average on the same accounts, and 1,841 shorts (103 accounts), or an average of 222 contracts more on 7 less accounts.  Commercials held 8,024 longs (79) or 198 more longs on average on 3 less accounts, and 7,252 shorts (89), or 33 fewer shorts on 3 fewer accounts. Reportables held 3,994 longs (270, up 2 accts) and 4,136 shorts (263 accts, dn 10).  We had 2 new long accounts and 10 short accounts closed.

Heating oil                 43,773                 21,039                           - contracts held by speculators:  2.08 to 1 long

                                         186,233               212,801                              held by the trade.

                                           35,963                 32,129                               held by small specs and hedgers.

Spreads….up 447 contracts.    The ratio of large speculative longs to shorts went from 1.88-to-one to 2.08-to-one in 1 week.

       Large speculators added 6,942 longs and added 1,457 shorts.  Commercial accounts added 1,117 longs and added 5,644 shorts.  Small speculators and hedgers liquidated 2,065 longs and covered 1,107 shorts.  Open interest grew by 6,441 contracts as prices rallied 18.65 cents.  That looks like decent, new buying and is bullish.  The best new buying came from large speculators, and the best new selling came from commercials.

       The average large speculative long is holding 1,270 contracts (up 56 lots on 33 accounts, 4 more accts), while the average short has 619 contracts (up 7 lots on 34 accts, up 2).  The average commercial long is holding 2,623 contracts (dn 22 contracts on 71 accts, up 1) compared to the average short holding of 2,956 contracts (dn 3 lots on 72 accts, up 2).  The average reportable position is 1,986 long (dn 76 lots on 133 accts, up 9) while the average short holding is 2,077 (dn 58 lots on 129 accts, up 7).  Both reportable holdings were diluted slightly by new accounts.

Rbob Gasoline           52,271                10,349                          -contracts held by speculators:  5.05 to 1 long

                                          121,815               163,596                             held by the trade.

                                            14,869                 15,010                              held by small specs and hedgers.

Spreads…dn 1,821 contracts   The ratio of large speculative longs to shorts went from 5.41-to-one to 5.05-to-one in 1 week.

     Large speculative holdings grew by 5,721 longs and rose by 1,741 shorts over the latest week. Commercial holdings grew by 1,030 longs and grew by 7,552 shorts.  Small speculators and hedgers’ positions grew by 2,094 longs and fell by 448 shorts.  Open interest grew by 7,024 contracts as prices rallied 16.54 cents.  That looks like good, net, new buying and is bullish.  All three categories were buying during this latest week. 

   The average holdings are 1,045 contracts for each large speculative long (50) and 357 for each large speculative short (29).  The average commercial long now has 1,523 contracts long (80) and 1,859 short (88). Average reportable holdings are 1,251 long (151) against 1,349 short (140).  Large speculators added two new longs and two new shorts, which increased average holdings by 75 and 48 contracts, respectively.  There were four more longs and three fewer shorts in the reportable category.

Naturalgas                88,207               246,643                           -contracts held by speculators:  2.80 to 1 short

                                         321,954               204,504                               held by the trade.

                                           85,008                 44,022                           held by small specs and hedgers.

Spreads…up 7,152 contracts    The ratio of large speculative shorts to longs went from 2.66-to-one to 2.80-to-one in 1 week.

  Large speculative holdings liquidated 10,848 longs and covered 17,094 shorts over the latest week. Commercial accounts added 16,558 longs, and added 11,000 shorts, while small speculators and hedgers liquidated 9,693 longs and added 2,111 shorts.  Open interest grew by 3,169 contracts as prices gained 27.6 cents.  That looks like light, net, new buying and is constructive.  Commercials were the best new buyers, even though they sold more than they bought.  Large speculators covered a large number of shorts, as well. 

  The average large speculator has 1,131 contracts (78) while each large speculative short is holding 2,466 shorts (100).  The average commercial long now has 3,788 contracts long (85) and 3,146 short (65). Average reportable holdings are 2,816 long (237) long and 3,357 short (211).  Large speculators liquidated 10 accounts, which increased the average holding by six contracts.  Shorts added one new account, which reduced the average holding by 198 contracts.  The reportable category liquidated 11 long accounts and closed 7 short accounts, boosting average holdings by 177 longs and 112 shorts.

Natural Gas & Utility Generation

Natural gas futures were back up again on Friday, reinforcing the basic thrust of last week’s trading.  That basic thrust has been to see natural gas in a new light after its strong rally a week ago.  Since then, prices have moved higher more frequently than lower, and it looks like they have turned a major corner. 

High inventories and lower demand are likely to remain a part of this market for the foreseeable future, but they may have done as much as they can in terms of influencing prices.  They were the main reason that prices dropped from $13.69 to $3.15, and they were cited again as market factors on the decline from $4.69 to $3.22, last week.  What the activity on Thursday, nearly 10 days ago, tells us is that those older factors have been discounted.  Now, traders seem to be looking at slightly smaller inventory builds, lower rig counts and the possibility of tropical storm activity as reasons why prices might be undervalued.

Right now, temperatures are not one of the factors inducing traders to buy in this market.  Forecasts continue to suggest that the existing trend will hold, at least into early or mid-August.  Since the start of the heating season, last November, temperatures have consistently tended towards the cooler side.  That has been the case all summer, in the upper Midwest and Northeast.

We now believe that natural gas prices have built a very solid foundation upon which to build.  The longer-term bears seem to be reassessing their positions and, even without any major new bullish news, one can make a case for prices moving higher.  The ratio between crude and natural gas is still at historically high levels, and traders have not yet discounted in natural gas all of the economic optimism that has been so “helpful” in lifting oil prices, especially over the last two weeks.  Gas prices could rise two dollars, without anything changing, just to bring thinking in line with what is going on in oil.

In cash trading on Friday, Henry Hub prices were at $3.27-$3.50, down $0.19-$0.28 on the day (DJN).  SoCal prices were at $3.36-$3.50, down $0.22-$0.23 on the day.  El Paso Permian prices were down $0.16-$0.26 at $3.27-$3.43.  Katy prices were down $0.14-$0.22 at $3.30-$3.50.  Waha prices were down $0.24-$0.26 at $3.27-$3.38.  Transco 6 was down $0.23-$0.23 at $3.69-$3.77/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $42.50-$46.50/mwh.  Northeastern prices last traded at $31.75-$45.25.  Entergy was last at $33.75-$34.25.  Ercot was last at $36.00-$38.00/mwh.

Despite the initial reaction to last week’s underground storage data, we feel that it fits into a continuing pattern.  Recent builds have been close to expectations, but they have critically come in at numbers below those seen in earlier months this year in comparison with previous years.  In other words, we are not seeing numbers that are as bearish as many of the numbers seen in the first two quarters this year.      

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:     $3.69-$3.71, $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 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 new week was a build of 47.0 bcf (Friday), while the eight-year average was a build of 56.9 bcf.  Last year, there was a build of 47 bcf (Friday).

EIA Report

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

News & Views

Trading is quiet as we start this week, and traders seem to be looking for reasons to buy or sell.

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 on Friday, and it was at 70.36 euro cents over the weekend.  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.  The oil bulls have been building a big position and they may force a breakdown here to trigger a steep rise in oil prices.

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

A Look at the Ratio of Crude to Natural Gas       

The ratio dropped to 18.42-to-one on Friday, but it is evident that some large traders are trying to keep this as high as possible.  It is preventing natural gas from reaching an equilibrium price that makes any sense in terms of Btu’s.

Recommendations for Specific Market Segments