Prices for July 28th, 2009

Market Review for Tuesday           

HE Case-Shiller price index of home prices for May increased for the first time in three years, at the same time that the Richmond Federal Reserve manufacturing index increased, suggesting that the recession has ended.  On the other side of the coin, the Conference Board showed Consumer Confidence down.  The DJIA was down about 12 points, and that contributed to a decline in oil prices. 

Yesterday’s selloff was long overdue, and fundamental traders may want to see the start of something more, here.  In terms of supply and demand, we would love to agree.  This market should be much lower.  The biggest risk we can identify – an Israeli attack on Iran’s nuclear facilities followed by an irrational response by Teheran – is almost certainly months away.  Still, it is an awfully critical “almost” we use in that sentence.  Israel cannot allow Iran to threaten its existence with nuclear weapons, and the element of surprise is one of the tactical resources Israel will feel compelled to use.  In that respect, the attack will come sooner than we expect it to, because it really has to.  This is brinkmanship on the highest level.

Iran does not want to give up its pursuit of nuclear weapons, and it is unclear what the US has to offer Teheran to get Iran to back away.  At this stage, Iran is using delaying tactics.  The US knows it is in a race against time, here, and that race is one that Israel and Iran are hoping to win themselves.  Iran hopes to develop any weapon before an Israeli attack; Israel has to destroy the facilities before one has been produced.  The US has to keep Israel from attacking, but it also has to get Teheran to stop producing enriched uranium before Israel feels it has no time left.  It is the biggest factor in front of us.

The distantly second biggest risk – a breakdown of the US dollar below the support @69.75 euro cents – was averted yesterday, but the risk is not gone.  We need a big rally by the dollar to push it out of range.  If the dollar decisively breaks its lows, we have to expect a $10.00 rally in crude oil prices.  We only call it a distantly second biggest risk because it will not add $10 in a day.  Nonetheless, it is something to think about. 

The US and China agreed yesterday to a four-point plan of cooperation that will involve the two countries trading places, as it were.  China will try to boost consumer spending while the US will try to boost consumer savings.  China’s savings rate – like the US consumption rate – is very high and both need to take a card from each other’s hand.

Technicals

           Oil prices sold off yesterday for the first time in nine or 10 sessions.  And that now leaves us wondering if this will turn out to be a correction in a market that will immediately turn back up and give us another several days higher, or if this is the start of a change in trend that will push us lower for a while.    

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 $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 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 194.75, 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 lost 11 yards yesterday, which makes it second and 21 yards to go.  The bears need defense, 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:        $68.85-$69.00, $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:        180.35-180.45, 180.85-180.95, 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:        194.60-194.75, 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 11,857 contracts on Monday, when prices were higher.  That looks like new buying, which would be supportive.  We have been alternating buying with short-covering fairly consistently, recently.

      Heating oil open interest grew by 1,266 contracts on Monday, when prices were higher.  That looks like net new buying and is supportive. 

      RBOB open interest fell by 573 contracts on Monday, when prices were up.  That looks like short-covering and is bearish. 

      Natural gas open interest fell by 4,172 on Monday, when prices dropped.  This looks like long liquidation, which would be supportive for prices.

Monday’s Open Interest Changes:  

Crude 1,170,441  up 11,857        Heat 302,275   up 1,266       RBOB 203,832  dn 573       Nat gas 716,213  dn 4,172      

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 lower again yesterday, as traders took profits on long positions ahead of this afternoon’s August contract expiration.  The last two weeks have seen some of the most definitively bullish activity that has been seen since last June (2008) and traders are looking for something they can get their arms around on the bullish side before taking prices higher near term.  In the meantime, some traders felt it would be wiser to take profits before expiry.

Dow Jones once again ascribed yesterday’s weakness to weather forecasts, which remain on the cooler side.  Right now, and remaining in place into this coming weekend, the Northeast is expected to be reasonably hot, hazy and humid.  Temperatures are expected to reach into the mid-eighties, which is warm enough for the Northeast, but which is hardly record-breaking.  After that, cooler temperatures are expected to return.  Dow Jones noted that the National Weather Service (NWS) is calling for “below-normal temperatures in the Midwest and Northeast, and above-normal temperatures in Texas and the Southeast.”  Partially because of cooler weather and partially because of previous injections, the news service extrapolates that “natural gas stocks are on pace to reach record levels by the end of the summer injection season” this year.

While previous surpluses have been discounted by this market, already, fresh increases in the surpluses could put prices under selling pressure.  The last four EIA underground storage reports have provided us with reasons to be optimistic over the market’s possible future.  While the injections have fallen short of being bullish, they have started to become much more neutral, and they are starting to reflect a gradual bottoming in the economy. 

In cash trading yesterday, Henry Hub prices were at $3.44-$3.51, up $0.02 and down $0.03 on the day (DJN).  SoCal prices were at $3.40-$3.51, down $0.01-$0.03 on the day.  El Paso Permian prices were down $0.02-$0.04 at $3.32-$3.41.  Katy prices were up $0.01 and down $0.04 at $3.40-$3.46.  Waha prices were up and down $0.01 at $3.33-$3.40.  Transco 6 was up $0.05-$0.07 at $3.90-$4.00/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $41.75-$43.00/mwh.  Northeastern prices last traded at $26.50-$47.75.  Entergy was last at $30.00-$33.50.  Ercot was last at $47.00-$51.00/mwh.

Where oil prices have already discounted an economic recovery well under way, natural gas prices have only just started to reflect an end to any economic worsening.  In that vein, the oil-to-gas ratio kicked out to 18.97-to-one, the new second-highest level this century.  The highest ratio, 19.24-to-one, was seen on June 10th.  Anyone that can switch fuels almost certainly has, but one has to believe that what is good for the goose is good for the gander.  If a high stock market is a sign of higher diesel and gasoline demand, it has to be telling us that natural gas demand will be up, too.  We have to expect higher electricity use before new hires boost commuting needs for gasoline.  Gas is undervalued.

Support is at $3.51-$3.53, $3.45-$3.47, $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 $3.66-$3.67, $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, but they rallied from their lows to finish mid-range.

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

We need to be alert to the possibility of a fade day after this morning’s DOE report.

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 rebounded to 70.59 yesterday, and maybe the dollar still has some hope.  It still remains very close to its major support and sell-stops beneath 69.75 euro cents, and we continue to worry about big money interests that are long commodities and may see a break in the US dollar as the key ingredient needed for a rally in commodities prices.  The dollar is still in a trading range with a low at 69.75 euro cents, and we will continue to monitor prices here.

Yesterday’s rally in the dollar was triggered by the Conference Board’s consumer confidence number, which caused a flight to safety.  As investors develop a stronger desire for risk, they are likely to buy other currencies and sell greenbacks.

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

A Look at Transportation Fuels

After reaching a high of 11.94 cents, the third minus the front month has dropped dramatically, although the cost of carry is still more than represented at 5.57 cents.

The second month contango in crude oil finished yesterday at 1.75, its highest level since April 24th.

This more than covers the cost of physically storing and retendering the crude for a month. 

It also buttresses the carry between spot and winter deliveries, in which months the carry comes in.

Recommendations for Specific Market Segments