Prices for August 13th, 2009

Market Review for Thursday        

IL prices were mostly higher yesterday, although there were some minus signs on the screen for the first two contract months in gasoline futures.  A weaker US dollar helped push quotes higher, but those gains were short-lived as traders hedged their bets after the latest retail sales report came out on the disappointing side. 

Dow Jones noted its market roundup that France and Germany reported similar second quarter growth rates of 0.3%.  While that is hardly blistering growth, it is growth, and that means that the recession is officially over in the European Union’s twin engines of growth (at least on the continent).  Despite yesterday’s higher oil prices, oil traders continue to see signs of weakness in an economy that is supposed to be improving, here in the US.  In addition to a disappointing retail sales figure, jobless claims were also higher in yesterday’s figures, reflecting the first week of August.  It caught traders leaning the other way, after the unemployment figure for July had seemed so full of potential promise.  And the biggest problem with lost jobs, from an oil bull’s perspective, is that those losses immediately translate into fewer miles traveled (by commuters).

This week’s statistics, taken all together, have painted a picture of fresh struggles.  As we noted here yesterday, gasoline demand, over the four-week period ended last Friday, has turned into fractionally negative territory.  Four-week demand had not really ever been strong, but it had been between 0.4% and 1.0% higher, on average, for most of the last two or three months.  This is its first turn into negative territory in months. 

The Commerce Department reported Retail Sales down 0.1%.  Excluding autos, it was down 0.6%.  Estimates had been for an increase of 0.7%, and 0.1% higher, excluding autos.  Capital Economics (CE) noted that “falling employment, slowing wage growth and limited access to credit are still taking their toll on spending.” (US Data Response).

The Labor Department reported initial unemployment claims up to 558,000 from the previous week’s 554,000.  Expectations had been that the figure would decline to 545,000.  Continuing claims fell 141,000 to 6.202 million.  The Commerce Department is expected to release a business inventories figure down 0.9% for the month of June.  Business inventories were down 1% for May, and are now down for nine consecutive months.

Technicals

           The oil complex is still locked into trading ranges.  Gasoline is in a range between 198.84 and 208.55/211.24.  Heating oil is in a range between 182.56 and 197.38.  Crude oil is in a trading range between $68.84 and $72.84/$73.38.  If crude breaks over $72.84, there is resistance at $73.38, same with gasoline and 208.55 and 211.24.

Ratio: Crude to gas

Above:  The crude-to-gas ratio continued to increase, reaching an extraordinary 21.14-to-one yesterday, its highest this millennium.

September crude oil now has buy-stops over $72.21, $72.85, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $70.00, $68.70, $64.95, $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.  September heating oil has buy-stops over 193.30, 194.65, 196.21, 197.40, 199.20, 209.40, 215.00, 221.13, 225.80, 227.05, 229.08, and 242.00. Sell stops are under 189.00, 188.20, 184.80, 182.55, 171.65, 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.  September RBOB has buy-stops over 208.55, 211.24, 214.00, 222.70, 228.86, 240.10, 250.40, 252.00, 265.10, 267.85, 270.85, 272.00, and 280.25.  Sell-stops are under 200.00-200.20, 198.80, 194.90, 184.50, 182.60, 176.75, 175.00-175.15, 169.70, 168.00, 165.25, and 160.10. 

Football: The bears lost four yards yesterday, on second and 17, and that makes it third and 21 to go, today.  It is possible.

Technical Support & Resistance

Sep crude oil                            Support:             $70.00-$70.15, $69.00-$69.15, $68.70-$68.80, $64.95-$65.10, $62.70-$62.85.

                                           Resistance:        $72.10-$72.21, $72.70-$72.84, $73.25-$73.38, $76.10-$76.25, $79.00-$79.17.

Sep heating oil         Support:             188.85-189.00, 188.20-188.40, 184.80-185.00, 182.55-182.70, 171.65-171.80.

                             Resistance:        193.15-193.30, 194.50-194.65, 196.10-196.21, 197.30-197.40, 199.00-199.20.

Sep Rbob                        Support:             200.75-200.90, 200.00-200.20, 198.80-199.00, 194.90-195.10, 184.50-184.70.

                                           Resistance:        206.60-206.76, 207.00-207.20, 207.75-207.85, 208.31-208.55, 211.10-211.25.

Oil Inventory Reports

    Refinery utilization fell by a full percentage point in this week’s report, and that should be supportive for refined products output in next week’s report.  We see that as the most bullish feature of this week’s statistics, especially in light of the severely lower utilization rates already in effect.  Refineries are running almost 11% below the average seen in the first five years of this millennium (century, decade, take your pick), before Hurricanes Katrina and Rita changed processing levels significantly.  Last year’s rate was well below anything seen in 25 years; this year is 2.4% lower than that.

     Distillate stocks are now 31.0 million bbls, or 23.61%, higher than a year ago.  Heating oil inventories are 13.4 mln bbls, or 38.95%, higher than they were a year ago.  Gasoline stocks are 7.3 mln bbls (up 3.57%) higher against a year ago.  Crude oil stocks are now 55.4 million bbls, or 18.68%, higher than a year ago.  Residual stocks are 2.5 mln bbls (6.74%) lower than a year ago, jet fuel stocks are 5.1 mln bbls, (12.35%) higher than a year ago.  Utilization is 2.40% lower than a year ago and is 9.11% below the eight-year average.  It is 10.84% 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 grew by 8,406 contracts on Wednesday, when prices were higher.  That looks like new buying, which would be constructive. 

      Heating oil open interest grew by 4,728 contracts on Wednesday, when prices were lower.  That looks like new selling, which would be bearish.

      RBOB open interest rose by 6,836 contracts on Wednesday, when prices dropped. That looks like selling and is bearish.

      Natural gas open interest grew by 16,437 on Wednesday, when prices dropped.  This looks like heavy, new selling and is bearish.  We have seen more than 35,000 contracts of fresh selling over the last six reporting days.

Tuesday’s Open Interest Changes:  

Crude 1,180,791  up 8,406        Heat 310,551   up 4,728       RBOB 222,393  up 6,836       Nat gas 749,423  up 16,437   

CFTC Commitments of Traders  (for the period ended Tuesday, Aug. 4th)   

 As of Aug. 4th:                 Long                   Short:

Crude oil                   219,556               185,411                           -contracts held by speculators:  1.18 long

                                         621,573               658,316                               held by the trade

                                            87,885                75,287                               held by small specs and hedgers.

Spreads….up 18,221 contracts   The ratio went from at 1.02-to-one long to 1.18-to-one long over the latest week.

   Large speculators added 19,902 new long contracts and covered 9,667 shorts over the week under review.  Commercials liquidated 18,895 longs and added 13,640 shorts.  Small specs and hedgers added 9,790 new longs and added 6,824 shorts.  Open interest grew by 29,018 contracts as prices rallied $4.19/barrel.  That looks like new buying, and we did see new buying by large speculators and small specs and hedgers.  Commercials and small specs & hedgers were selling into the rally.

   The average large speculator has 2,152 long contracts (102 accounts), or 42 less contracts on average on 11 more accounts, and 2,060 shorts (90 accounts), or an average of 184 contracts more on 14 fewer accounts.  Commercials held 7,400 longs (84) or 411 less longs on average on 2 more accounts, and 7,186 shorts (93), or 295 more shorts on 2 less accounts. Reportables held 3,995 longs (279, up 7 accts) and 4,404 shorts (256 accts, dn 10). There 7 new long and 10 less short accounts.

Heating oil                 47,963                 13,239                           - contracts held by speculators:  3.62 to 1 long

                                         174,043               217,985                              held by the trade.

                                           38,550                 29,332                               held by small specs and hedgers.

Spreads….dn 807 contracts.    The ratio of large speculative longs to shorts went from 1.88-to-one to 3.62-to-one in 3 weeks.

       Large speculators added 2,060 longs and covered 2,835 shorts.  Commercial accounts liquidated 4,805 longs and added 1,772 shorts.  Small speculators and hedgers added 2,127 longs and added 445 shorts.  Open interest fell by 1,425 contracts as prices rallied 11.30 cents.  That looks like net short-covering and is bearish.  The best new buying came from both types of speculators, and there was short-covering by large speculators.  Commercials sold short and liquidated longs.

       The average large speculative long is holding 1,499 contracts (up 149 lots on 32 accounts, 2 less accts), while the average short has 602 contracts (dn 41 lots on 22 accts, dn 3).  The average commercial long is holding 2,678 contracts (up 48 contracts on 65 accts, dn 3) compared to the average short holding of 3,159 contracts (up 114 lots on 69 accts, dn 2).  The average reportable position is 2,112 long (up 86 lots on 123 accts, dn 7) while the average short holding is 2,339 (up 172 lots on 115 accts, dn 10).  Seven long and 10 short accounts were closed during the week being reviewed.

Rbob Gasoline            64,444                  7,885                          -contracts held by speculators:  8.17 to 1 long

                                           113,124              174,278                             held by the trade.

                                             16,398                11,803                              held by small specs and hedgers.

Spreads…up 1,818 contracts   The ratio of large speculative longs to shorts went from 10.09-to-one to 8.17-to-one in 1 week.

     Large speculative holdings grew by 4,313 longs and grew by 1,923 shorts over the latest week. Commercial holdings fell by 1,386 longs and grew by 5,382 shorts.  Small speculators and hedgers’ positions grew by 1,359 longs and fell by 3,019 shorts.  Open interest grew by 6,104 contracts as prices rallied 17.75 cents, which looks like new buying and would be supportive.  The ratio of longs to shorts dropped, though, even though there was new buying.  That is because there was only a little more than two new longs for each new short.  Large speculators were the best new buyers and commercials were the best new sellers.

   The average holdings are 1,151 contracts for each large speculative long (56) and 358 for each large speculative short (22).  The average commercial long now has 1,571 contracts long (72) and 1,854 short (94). Average reportable holdings are 1,289 long (151) against 1,434 short (139).  There were nine fewer reportable long accounts and four more short accounts, increasing average longs by 102 contracts and increasing average shorts by 25 contracts.

Naturalgas                83,827               245,047                           -contracts held by speculators:  2.92 to 1 short

                                         303,977               189,037                               held by the trade.

                                           80,852                 34,572                           held by small specs and hedgers.

Spreads…up 13,264 contracts    The ratio of large speculative shorts to longs went from 2.80-to-one to 2.92-to-one in 1 week.

  Large speculative holdings dropped by 5,231 longs and dropped by 4,961 shorts over the latest week. Commercial accounts added 909 longs, and added 1,792 shorts, while small speculators and hedgers liquidated 7,505 longs and covered 8,658 shorts.  Open interest rose by 1,437 contracts as prices rose 31.4 cents.  That looks like net, new buying, which would be supportive.  The problem is that there was very little actual new buying.  Only commercials added new longs, 909 of them, and the rest came from new spreads.  The real buying came from speculative short-covering, more of which came from small specs and hedgers.

  The average large speculator has 1,022 contracts (82) while each large speculative short is holding 2,785 shorts (88).  The average commercial long now has 3,576 contracts long (85) and 2,780 short (68). Average reportable holdings are 2,688 long (235) long and 3,307 short (205).  Large speculators added 3 new long accounts, which decreased the average holding by 105 contracts.  Shorts took off 2 accounts, which increased the average holding by 7 contracts.  The reportable category added 10 long accounts and added 5 short accounts, cutting average holdings by 79 longs and 27 shorts.

Natural Gas & Utility Generation

Natural gas futures were down 14.3 cents/mmBtu yesterday, making it the sixth consecutive day lower.  Prices have declined steeply and steadily, like moles through soft dirt.  We cannot put our fingers on it, but there is something very odd going on here.  The fingerprints of someone leaning on prices, forced to liquidate or accumulating a big short position against something else on the long side, are there.  Someone, or a company or group of traders, is just selling without regard, and it is evident in the price activity.  There is no evidence of the urgency of loss, but it is steady and consistent. 

The lack of urgency and the increase in open interest (up @38,000 contracts since August 5th) tell us that it is not long liquidation, and that takes us to accumulation of a position.  Since it is on the short side, that rules out most of the index and exchange traded funds.  That leaves us with commercial and large speculative traders.  The steady selling suggests a very well-organized trading outfit, and the consistency over six trading days tells us that there is an underlying justification for the accumulation of holdings.  Our theory is that this is some kind of hedging, although we do not think it is straight-up hedging.

It seems that it could be hedging against over-the-counter positions or options, and it looks like a new position rather than one that has been on for a while.  If it has been on for a while, it is already profitable because of the way it is being established.  The selling has been deliberate, patient and clearly towards an objective.  And it seems that part of the objective is to press this market down below major support, presumably before any hurricane or tropical storm threatens the US Gulf.  We are not sure if the objective is to make other short holdings profitable or to establish a long line for the future.  Either way, it leads to buying in the future, once a certain level has been reached.  It looks like one entity may be responsible for the wind at this market’s back.

In cash trading yesterday, Henry Hub prices were at $3.28-$3.40, down $0.02-$0.04 on the day (DJN).  SoCal prices were at $3.20-$3.28, down $0.00-$0.17 on the day.  El Paso Permian prices were down $0.01-$0.07 at $3.14-$3.22.  Katy prices were down $0.03-$0.07 at $3.22-$3.30.  Waha prices were down $0.03-$0.07 at $3.17-$3.25.  Transco 6 was down $0.01-$0.01 at $3.54-$3.65/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $31.00-$34.25/mwh.  Northeastern prices last traded at $28.75-$42.05.  Entergy was last at $32.00-$33.00.  Ercot was last at $36.75-$37.00/mwh.

Given what we have written above, we see a huge battle setting up.  If open interest had been falling, this decline would have been long liquidation by traders who do not care where prices go next.  Whomever is selling now cares, and we don’t think will be happy to sell cheaper contracts just to see prices rally.  In order to trigger automatic selling, this seller needs to break prices down under $3.22 and preferably even under $3.00.  And those lower prices are likely to bring in buying – which will need to be absorbed and pressed beneath to achieve the desired objective.

Support is at $3.45-$3.47, $3.31-$3.35, $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 $3.59-$3.61, $3.73-$3.77, $3.85-$3.86, $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 prices were lower for a sixth straight day, and they continue to look extremely weak.

Dollars per million Btu

Sep Natural Gas:          Support:         $3.31-$3.35, $3.22-$3.26, $3.15-$3.17, $3.10-$3.14, $2.88-$2.91, $2.83-$2.84.

                                                    Resistance:     $3.59-$3.61, $3.73-$3.77, $3.85-$3.86, $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 63 bcf on expectations for a build of 64-66 bcf.  Stocks are now 592 bcf higher than a year ago, against a surplus of 580 bcf a week ago, a surplus of 571 bcf two weeks ago and a surplus of 568 bcf three weeks ago.  Stocks are now 23.12% higher than a year ago.  They are 517 bcf and 19.62% above the five-year average.

The five-year average for this week was a build of 42-44.60 bcf (Friday vs date), the eight-year average was a build of 45.12 bcf.  Last year, there was a build of 50-51 bcf (Friday).   Estimates were for a build of 64-66 bcf.

EIA Report

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

News & Views

Prices continue to advance, but the reasons for price strength are sketchy, and it is difficult to forecast which way these extraneous outside factors are going to go, on their own.  We understand the concept of renewed “risk appetites,” but we really wish those who expect a weaker dollar would trade currency futures and leave oil out of it.  Same with equities.

An Illustrated Look at Energy Market Factors

A Look at the US Dollar Versus the Euro

Dollar-Euro (dollar in euro cents):  Three-Month Bar-Chart  The US dollar was lower for most of yesterday’s session, but it rallied later in the day.  Technically, we still feel that a break below last week’s lows near 68.50 euro cents would suggest that prices are headed lower  - which would be bullish for oil prices.  As long as prices stay above that level (the blue line above), there is still hope that the dollar can rally, which would be bearish for commodities in general and oil, in specific.

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

A Look at Ethanol Prices

Ethanol prices have had a number of setbacks recently, even as gasoline prices have moved higher.

A Look at Atlantic Tropical Weather

The chart above reflects the current tropical situation.

Only seven years have had a later start than 2009, going back to 1950, according to The Weather Channel” website.

This year’s first named storm will be “Ana.”

Source: http://www.weather.com/

A Look at Inventories

Thirteen-week demand is at 9.184 million bpd, down 1.77% against last year.  Thirteen-week supply is at 10.017 mln bpd, down 1.18%.  Thirteen-week implied demand is at 10.013 mln bpd, down 1.51%.

A Look at Imports

Thirteen-week crude oil imports remain at historically low levels.

This is a reflection of lower utilization rates and high inventory levels.

Recommendations for Specific Market Segments