Prices for July 27th, 2009

Market Review for Monday           

HE oil complex continued moving higher yesterday, although there was very little “fire” in the buying.  We are now into the heart of family vacation season, and it is likely to give us quieter sessions through Labor Day.  Equities traded on both sides of unchanged yesterday, finishing in light positive territory.  Oil prices reached their highest point earlier in the trading day and then eased on profit-taking.  Volume was on the lighter side as traders struggled to find new reasons to do the same things.  Despite a number of bearish fundamental factors in this market, the traders in control only seem to have eyes and ears for the bullish factors driving prices higher right now.  Those of us who have watched these markets every day, who remember the first trading days in all three contacts, and have seen entire decades go by with barely a reference to equities or the US dollar, see these new factors seem as interlopers, temporary headline grabbers that may or may not be important to oil traders a year or five from now.  Still, for right now, these are the main factors in the oil complex, and they are leading crude oil, heating oil and gasoline prices higher. 

Yesterday was the ninth consecutive day higher for oil prices, and prices seem to be advancing without remembering why.  Yesterday, it definitely felt lie prices were higher on autopilot.  Equities prices were lower earlier in the session and oil prices were essentially treading water until equities returned to higher prices on the day.  The reasoning that higher equities mean improving economic conditions and therefore higher oil demand is just a background factor at this point.  It has become a knee-jerk reaction; if equities are higher, people buy oil futures.

The fact that yesterday’s crop of corporate earnings reports were neutral to “disappointing,” according to Dow Jones, did not seem to generate much selling by those already long.  And that may have more to do with the nature of the recent buyers than with market factors.  Many of the recent buyers have bought shares in index funds or ETF’s that buy and hold oil as an “investment” rather than as bona fide speculators.  Some of these recent buyers may not sell out their long holdings for months or even years.  They were talked into buying commodities in general and oil in specific as a kind of ‘hedge’ against weaker equities – and now equities are the tail wagging the oil dog.  It is ironic. 

Technicals

           Oil prices were higher yesterday on light volume and with little genuine enthusiasm.  In a number of respects, yesterday’s gains seem to have come on follow-through momentum of a sort.  Prices are now overbought and they are coming into resistance, but if they pay no attention to fundamentals, we are not sure they will heed the charts. 

Dollars per barrel

Above:  The crack spread representing refinery margins has improved over the last week or so.

September crude oil now has buy-stops over $69.00, $69.75, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $67.60, $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 180.95-181.00, 187.32-187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 177.00-177.10, 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 194.36, 198.10, 203.75, 204.36, 207.20, 211.24, 214.00, 222.70, 228.86, and 240.10.  Sell-stops are under 190.70, 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 three yards on second and one to go, and that gives the bulls another first down.

Technical Support & Resistance

Sep crude oil                            Support:             $67.60-$67.75, $66.45-$66.60, $64.40-$64.50, $63.50-$63.76, $62.00-$62.10.

                                           Resistance:        $68.90-$69.00, $69.60-$69.75, $73.25-$73.38, $76.10-$76.25, $79.00-$79.17.

Aug heating oil       Support:             177.00-177.20, 175.75-175.90, 170.00-170.15, 167.40-167.61, 163.75-164.00.

                             Resistance:        179.55-179.70, 178.85-179.00, 187.32-187.45, 187.95-188.05, 188.95-189.10.

Aug Rbob                      Support:             190.70-190.85, 189.50-189.70, 183.35-183.50, 176.75-176.85, 175.00-175.15.

                                           Resistance:        194.25-194.40, 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 fell by 21,386 contracts on Friday, when prices were higher.  That looks like heavy, short-covering, which would be bearish.  We continue to see waves of fund buying at the market followed by short-covering.

      Heating oil open interest fell by 678 contracts on Friday, when prices were higher.  That looks like net short-covering, which would be bearish.  Once short-covering is over, theoretically prices should fall – in the absence of discerning buyers.

      RBOB open interest fell by 689 contracts on Friday, when prices were up.  That looks like short-covering and is bearish. 

      Natural gas open interest fell by 19,015 on Friday, when prices were up.  Here, as well, we had short-covering, which would be bearish.

Friday’s Open Interest Changes:  

Crude 1,158,584  dn 21,386        Heat 301,009   dn 678       RBOB 204,405  dn 689       Nat gas 720,385  dn 19,015       

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 dropped yesterday as the ratio of crude to gas increased to 18.97-to-one.  There was also a bout of profit-taking by longs, who have seen the strongest market in months here.  Having profits in long positions is something of a new concept for many holders in 2009.  There was also buying in crude and selling in gas by large traders, we were told.  We cannot vouch for its veracity, but the ratio did reach its second-highest figure this century. 

Dow Jones quoted meteorologists who are forecasting that “unusually cool weather will cover the Great Lakes, Upper Midwest and portions of the Northeast over the next two weeks.”  This does not surprise us because temperatures clearly do trend, as we have noted here a number of times.  It generally requires a three-week period of dramatically different weather to end one trend and usher in a new one, we have found, after watching this phenomenon over the last 30 years.  This trend started almost immediately with last year’s heating season, with cooler-than-normal temperatures experienced here in the Northeast on November 2nd.  While temperature trends have ended in August and September, the most likely month for trends to end and then begin is October.  April is the next most likely month.  In any event, there is no sign of this cooler trend changing.

Dow Jones noted that meteorologists have told clients that this has been the coolest July on record in a number of locations.  We have noticed it ourselves very late at night or early in the morning, when it definitely feels like autumn, even though it is still clearly summer.  It has definitely been the coolest summer we can recall.  Granted, it is always cooler in New England than in the Mid-Atlantic states or points west or south, but this summer has been cooler than normal.  That has removed potential air-conditioning demand throughout the North this summer. 

In cash trading yesterday, Henry Hub prices were at $3.42-$3.54, up $0.04-$0.15 on the day (DJN).  SoCal prices were at $3.43-$3.52, up $0.02-$0.07 on the day.  El Paso Permian prices were up $0.00-$0.09 at $3.36-$3.43.  Katy prices were up $0.00-$0.09 at $3.39-$3.50.  Waha prices were up $0.03-$0.05 at $3.32-$3.41.  Transco 6 was up $0.14-$0.18 at $3.83-$3.95/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $45.25-$47.00/mwh.  Northeastern prices last traded at $32.00-$53.00.  Entergy was last at $30.00-$31.50.  Ercot was last at $37.00-$40.00/mwh.

Cooler temperatures are keeping electrical generation demand from eating into production, far less inventories.  As a rule of thumb, we need extreme heat or cold in the Midwest, the Northeast and South simultaneously to eat into production and inventories.  With entire northern tier of states cooler than normal now, it has been impossible, so far, to push generation needs to eat into inventories.  That does not seem to be the main thrust of this market right now, though, and traders seem to shifting attention to the recovering economy and low rig counts.

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 lower yesterday.

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

It is clear that the US absolutely must find a way to get Iran to the negotiating table over its nuclear program, or Israel will feel obliged to attack Iran’s nuclear facilities.  Iran has threatened to block the Straits of Hormuz if this occurs. 

More immediately, the US dollar is on the precipice and could be thrown over any day, bringing funds in to buy oil.

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 and finished at 70.00 euro cents yesterday.  That places them perilously close to major support around 69.75, and one has to expect that there will be heavy sell-stops below that level.  We also know that some very big monied interests are long oil, and a decisive break in the dollar would give them the opportunity to run oil prices dramatically higher, disregarding everything else.  We fully expect them to try.  It will be a major battle for the heart of a currency and the soul of the oil markets. 

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

A Look at Transportation Fuels

Gasoline prices have returned to their normal summer premium over heating oil futures.  It seems that last year’s inversion of this normal relationship was caused by Chinese paranoia that it might run out of diesel at the Olympics.

Ethanol prices had a perfect swing objective to $1.50, reached it and have been trading sideways to higher ever since.  Prices broke out of a trading range in early May, but it turns out to have been a false signal.  Prices are now in a very large trading zone between $1.50 and $1.91. 

Recommendations for Specific Market Segments