Prices for July 30th, 2009

Market Review for Thursday        

VERY time the DJIA explodes higher, it increases the likelihood that people without work will find jobs eventually, and it suggests that some form of increased prosperity will return to the world.  And it is very hard to “root” against things like that.  Unfortunately, though, because exchange-traded funds and index funds have lost any interest in oil supply or demand, inventories or output, they have decided to place billion-dollar bets on oil based on equities.  In years gone by, they would have seen a strong day like yesterday as the perfect time to buy Exxon or Valero – which is exactly how they should see it – for those and every other oil company.  In the brave new world of funds, though, the first reaction is to buy oil and other commodities.  And if equities don’t generate the signal they want, which is pretty much only ever a buy signal, they will go to the dollar, and if it is weak, they will buy commodities, too.  We have no problem with stronger equities or a weaker dollar being two of a dozen factors, including supply, demand, Opec output, Iran’s nuclear program, Nigeria’s cease-fire, higher Iraqi output, the time of year, oscillators, charts, volume and open interest.  Ignoring all of those just seems wrong.

We had the “perfect storm” of a weaker stock market, stronger dollar and fresh bearish news on Wednesday.  The first two factors allowed the third factor to shine through with other updated fundamental factors.  Yesterday, that was all swept away as equities shot higher in what is being seen as a massive vote of confidence in the economic recovery.  The DJIA hit its highest point this year and investors previously sitting cautiously on cash rushed into stocks and commodities to take big bites of additional risk into their portfolios. 

For most of our lives (for anyone old enough to invest), higher commodities prices have almost always been drags on equities.  The thinking for most of the last 30 years has been that higher commodities prices signaled higher inflation and higher interest rates, which have traditionally been the bane of equities.  Equities languished during most of the seventies because of inflation, and the big bull market starting in 1982 came after oil prices peaked in 1980.  Strong equities and low oil prices were partners in the 80’s and 90’s. 

Yesterday’s hot-button item was a report from the Labor Department suggesting a lower-than-expected increase in unemployment.  Investors see in that the seeds of stronger driving demand by commuters still driving to work.

Technicals

           The oil complex turned back up yesterday, erasing all of Wednesday’s losses and making it very clear that Wednesday’s selloff was the correction in an ongoing move higher.  Gasoline prices made new recent highs and heating oil and crude oil prices are in position to do the same, soon.  Oil is taking its marching orders from equities.

Dollars per barrel

Above:  The second month contango has widened to $1.98, its highest level since April 24th.

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 194.77, 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 gained 36 yards yesterday, which makes it fourth and 24 yards to go.  We spoke too soon yesterday.

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:             184.50-184.70, 182.60-182.70, 176.75-176.85, 175.00-175.15, 169.70-169.85.

                                           Resistance:        194.60-194.77, 197.95-198.10, 203.60-203.75, 204.20-204.36, 207.00-207.20.

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 fell by 8,341 contracts on Wednesday, when prices were lower.  That looks like long liquidation, which would be supportive.

      Heating oil open interest rose by 2,650 contracts on Wednesday, when prices were lower.  That looks like new selling and was bearish. 

      RBOB open interest fell by 3,234 contracts on Wednesday, when prices dropped.  That looks like long liquidation and was supportive.

      Natural gas open interest fell by 4,669 on Wednesday, when prices dropped.  This looks like long liquidation, which would be supportive for prices.

Wednesday’s Open Interest Changes:  

Crude 1,165,239  dn 8,341        Heat 302,446   up 2,650       RBOB 201,742  dn 3,234       Nat gas 706,323  dn 4,669     

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 up almost 20 cents/mmBtu yesterday, as traders took their cue from stronger equities and higher oil prices.  Curiously, the ratio of crude to gas fell to 17.88-to-one, its lowest level since July 22nd.  We find that unusual because every other time that the energy complex has rallied, natural gas prices have come out of the deal the worse for it, in relation to crude oil.  Even though we had a big rise in oil yesterday, natural gas did not just hold its own, it beat crude oil moving higher.  This is one of the few times that has happened during recent price increases.  More typically, natural gas has made up ground against crude oil on general declines.  Clearly, it is far too early to see any kind of trend at work here after one day, but it is encouraging for those who feel that gas in undervalued against oil prices, here. 

Another problem that gas prices have had recently has been their inability to rise (regularly) on the same economic factors that have inspired funds trading oil futures.  It has become something akin to a mantra in oil, since March, that stronger equities prices suggest a recovering economy which, in turn, should lead to heavier energy use.  That has worked overtime in crude, but has not really taken hold in natural gas – yet.  If this is a sign that gas prices are going to start discounting a recovery, it’s major. 

So far, one of the biggest mysteries has been why natural gas prices have not yet really started to discount an economic recovery.  And, at the heart of this inability is the major reason that the crude-to-gas ratio has gone from 11 or 12-to-one to 17-19-to-one.  Crude oil prices have discounted an economic recovery, and possibly as much as $20 or $25/bbl has come this year in anticipation of higher energy use at some point, all because of higher equities prices. 

In cash trading yesterday, Henry Hub prices were at $3.30-$3.38, down $0.06 and up $0.01 on the day (DJN).  SoCal prices were at $3.20-$3.30, down $0.09-$0.10 on the day.  El Paso Permian prices were down $0.06-$0.12 at $3.14-$3.19.  Katy prices were down $0.07 and up $0.01 at $3.26-$3.34.  Waha prices were down $0.09-$0.10 at $3.16-$3.22.  Transco 6 was down $0.13-$0.16 at $3.67-$3.74/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $34.00-$37.00/mwh.  Northeastern prices last traded at $22.95-$43.50.  Entergy was last at $29.50-$30.50.  Ercot was last at $37.50-$38.00/mwh.

This week’s EIA underground storage figures showed a slightly lower-than-expected build.  The build was 71 bcf on an estimate of 73 bcf.  That is not a large amount, but it does make it five weeks now with some slightly positive aspect to them.  That’s a start.  So yesterday had some bullish features.  Five decent reports, a weather report that suggests some more typical weather in the North in early August and possibly the beginning of this market discounting an economic recovery.  Natural gas prices seem to be firming as the picture slowly turns more bullish, here.    

Support is at $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 $3.74-$3.76, $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 rallied sharply yesterday in an advance that looks incongruous on the charts. 

Dollars per million Btu

Jun Natural Gas:          Support:         $3.45-$3.47, $3.33-$3.37, $3.22-$3.26, $3.15-$3.17, $3.10-$3.14, $2.88-$2.91.

                                                    Resistance:     $3.74-$3.76, $3.88-$3.90, $3.98-$4.01, $4.09-$4.11, $4.15-$4.16, $4.24-$4.28.

EIA Weekly Storage Figures

This week’s EIA report showed a build of 71 bcf on expectations for a build of 73 bcf.  Stocks are now 571 bcf higher than a year ago, against a surplus of 568 bcf a week ago, a surplus of 589 bcf two weeks ago and a surplus of 601 bcf three weeks ago.  Stocks are now 23.29% higher than a year ago.  They are 478 bcf and 18.78% 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 suggested a build of 73 bcf.

EIA Report

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

News & Views

With equities and the dollar seemingly able to trump supply and demand factors, the market has systemic bullish factors.

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 sold off yesterday, and finished at 70.75, a euro-cent above its major support.  There is major support and should be heavy sell-stops beneath 69.75 euro cents.  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.

A breakdown here could push oil prices dramatically higher.

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

A Look at Gasoline Supply & Demand

Distillate stocks have made yet new 24-year highs this week.

A Look at Distillate Supply & Demand

Recommendations for Specific Market Segments