Prices for July 29th, 2009

Market Review for Wednesday 

ROM a bear’s perspective, yesterday was a “perfect storm” of factors that all came together at once to push prices dramatically lower.  It started with lower equities prices, but added in a huge rally in the US dollar, overbought pressures in oil and was capped by a much larger-than-expected build in crude oil stocks and a new 24-year high in distillate stocks.  There were minor improvements in some demand components and there was a draw in gasoline stocks and a decline in refinery utilization, but the picture was overwhelmingly bearish, on the whole, yesterday. 

It was the biggest one-day decline since April 20th, and it was the first stock build since May.  It was all the more bearish because analysts and market observers had been looking for a drawdown of 1.2 to 1.5 million barrels, according to surveys conducted by the three major wire services.  Crude oil imports were up 821,000 bpd to 10.024 million bpd, and refinery utilization dropped to 84.6%.  The combination of less consumption (the processing of crude) and higher crude oil imports contributed to the surprising increase in crude oil stocks. 

The Commerce Department reported yesterday that durable goods orders had fallen by 2.5% in June, which was the largest decline in durable goods orders since January, according to Dow Jones.  Since July 13th, oil prices had risen for nine to 10 consecutive days on the direct line drawn from higher equities prices to a recovering economy and from there to the assumption that oil demand will start to increase.  If it seemed to have been a familiar theme, it was; prices advanced from March into late June on largely the same connection.  During the two-week period through this past Monday, higher equities prices obscured or out-pointed weak fundamental factors. 

Yesterday, the decline in equities (the DJIA was down 26 points) and the steep rally in the US dollar allowed the fundamentals to shine through in the oil complex.  It was a coincidence that a fresh set of bearish fundamental factors were being released at the precise moment that the market seems to have been most ready for them.  There was also talk that index funds, which had been bossing prices higher with an endless stream of equity-spurred buy orders, were subdued yesterday as they came to grips with developing CFTC regulations regarding position limits. 

Technicals

           The oil complex sold off steeply yesterday, partially in reaction to overbought pressures.  The chart below leads us to wonder if prices just had one of those steep short-covering rallies that are so often seen in major moves lower.  Other traders are wondering how prices rallied back so strongly after a month’s move lower.  It sets up a fight ahead.

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 $67.01, $69.00, $69.75, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $62.70, $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 176.55, 180.95-181.00, 187.32-187.45, 188.05, 189.10, 192.12, 193.45, and 199.20. Sell stops are under 165.80, 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 191.35, 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 182.60, 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 39 yards yesterday, which makes it third and 60 yards to go.  That was pretty good bears’ defense.

Technical Support & Resistance

Sep crude oil                          Support:             $62.70-$62.85, $62.00-$62.10, $61.00-$61.20, $60.00-$60.25, $59.65-$59.75.

                                           Resistance:        $66.85-$67.01, $68.85-$69.00, $69.60-$69.75, $73.25-$73.38, $76.10-$76.25.

Aug heating oil     Support:             165.80-166.00, 163.75-164.00, 157.45-157.60, 155.85-156.00, 151.65-151.75.

                             Resistance:        176.45-176.55, 180.35-180.45, 180.85-180.95, 187.32-187.45, 187.95-188.05.

Aug Rbob                     Support:             182.60-182.70, 176.75-176.85, 175.00-175.15, 169.70-169.85, 168.00-168.20.

                                           Resistance:        191.25-191.35, 194.60-194.75, 197.95-198.10, 203.60-203.75, 204.20-204.36.

Oil Inventory Reports

    This week’s DOE report was seen as being mostly bearish, and traders latched onto the surprisingly large build in crude oil inventories as the biggest factor in this market.  Distillate inventories, already at 24-year highs, increased to register new recent highs.  There were bullish factors, but they were less compelling.  Gasoline stocks were lower and some demand components were marginally better, but the overall picture is still one of plentiful supplies and poor demand. 

     Distillate stocks are now 34.1 million bbls, or 26.53%, higher than a year ago.  Heating oil inventories are 14.1 mln bbls, or 43.65%, higher than they were a year ago.  Gasoline stocks are 5.3 mln bbls (up 2.55%) higher against a year ago.  Crude oil stocks are now 52.4 million bbls, or 17.74%, higher than a year ago.  Residual stocks are 3.2 mln bbls (8.44%) lower than a year ago, jet fuel stocks are 4.2 mln bbls, (10.24%) higher than a year ago.  Utilization is 2.60% lower than a year ago and is 8.66% below the eight-year average.  It is 10.30% 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 3,139 contracts on Tuesday, when prices were lower.  That looks like new selling, which would be bearish. 

      Heating oil open interest fell by 2,479 contracts on Tuesday, when prices were lower.  That looks like long liquidation, which would be supportive. 

      RBOB open interest rose by 1,144 contracts on Tuesday, when prices dropped.  That looks like new selling and is bearish. 

      Natural gas open interest fell by 5,221 on Tuesday, when prices dropped.  This looks like long liquidation, which would be supportive for prices.

Tuesday’s Open Interest Changes:  

Crude 1,173,580  up 3,139        Heat 299,796   dn 2,479       RBOB 204,976  up 1,144       Nat gas 710,992  dn 5,221     

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 more than 15 cents yesterday, as gas traders were influenced by the decline in oil futures.  Yesterday was the expiration of the August natural gas contract, and it seems that there were some left over longs in the contract that needed to sell yesterday.  With mild to cooler-than-normal temperatures still on the horizon for early August in northern states, there was no screaming need for incremental supplies as the August contract went off the board. 

There was also selling interest in gas that came from the crude-to-gas ratio.  Some larger concerns have reportedly been long crude and short gas, and the large decline in crude helped to generate selling interest in gas, presumably by traders with an interest in this ratio. 

More than anything, though, the continuing mild forecasts seem to have brought selling interest into this market.  The National Weather Service (NWS) is still predicting cooler-than-usual readings in the upper Midwest and Northeast into the first week of August, and there is no sign, yet, of major tropical activity in the Atlantic.  That is not altogether unusual; some years, it does not typically develop until we get into August. 

As we move through today’s session, traders will anticipate and then react to this morning’s EIA figures.  Bloomberg has a range of estimates for builds of 69 to 80 bcf, with the average expectation coming in at 73 bcf.  Dow Jones also is looking at an average estimate of 73 bcf.  Our own records show a five-year average build of 47 bcf with an eight-year average build of 56.87 bcf.  Last year, we had a build of 65 bcf, for the corresponding Friday. 

In cash trading yesterday, Henry Hub prices were at $3.29-$3.44, down $0.07-$0.15 on the day (DJN).  SoCal prices were at $3.29-$3.40, down $0.11-$0.11 on the day.  El Paso Permian prices were down $0.10-$0.12 at $3.20-$3.31.  Katy prices were down $0.05-$0.15 at $3.25-$3.41.  Waha prices were down $0.08 at $3.25-$3.32.  Transco 6 was down $0.10-$0.10 at $3.80-$3.90/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $38.00-$39.25/mwh.  Northeastern prices last traded at $26.65-$46.75.  Entergy was last at $27.50-$31.00.  Ercot was last at $49.50-$50.50/mwh.

We continue to believe that natural gas have the same reason to discount a future recovery as oil prices have.  It actually makes more sense to us that there would be a rebound in electricity use before there will be a rebound to diesel or gasoline use, because factories or industries are likely to stay open an hour or two at first, rather than rush out to hire new employees, which would be the heart of any increase in driving.  We think people are likely to put in overtime working on their computers before new drivers hit the road or before new products deliveries are made.  In any event, oil has started to discount a recovery and gas has not. 

Support is at $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 $3.54-$3.56, $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).  Estimates suggest a build of 73 bcf today.

EIA Report

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

News & Views

We seem to need a stronger dollar and weaker equities prices for the fundamentals to shine through.

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 continued its remarkable rebound, which gained momentum yesterday.  It still remains very close to its major support and sell-stops beneath 69.75 euro cents, but the last two days have pushed it out of immediate danger, it seems.  The dollar is still in a trading range with a low at 69.75 euro cents, and we will continue to monitor prices here.

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 Gasoline Supply & Demand

Thirteen-week demand is at 9.163 million bpd, down 1.85% against last year.  Thirteen-week supply is at 9.990 mln bpd, down 1.63%.  Thirteen-week implied demand is at 9.986 mln bpd, down 1.41%.

A Look at Distillate Supply & Demand

Thirteen-week demand is at 3.431 million bpd, down 17.08% against last year.  Thirteen-week supply is at 4.262 mln bpd, down 8.81%.  Thirteen-week implied demand is at 4.059 mln bpd, down 7.81%. 

A Look at Refinery Utilization

Utilization is 2.60% lower than a year ago and is 8.66% below the eight-year average.  It is 10.30% lower than the five-year, pre-Katrina average. 

Recommendations for Specific Market Segments