Prices for August 18th, 2009

Market Review for Tuesday

HE inevitable sharp rally came yesterday, and we now have a number of questions facing us today. The first question is whether this week’s statistics will be bullish or bearish. More figures are likely to be bearish, but that brings us to our next and perhaps most pressing question; if the statistics are bearish, will the market react to them? And that depends, to a large extent, upon what we see from equities, which is our next pressing question. And after that, we have questions about the US dollar’s direction.

As one might have expected, yesterday’s rally had little or nothing to do with oil’s supply and demand. Equities posted a decent rally, with the DJIA up more than 82 points, and that was enough to bring in the outside buying that has been variously described as “recovery buying,” a “hard asset play,” fresh “risk appetite,” or ‘optimism that a recovery in equities will lead to a stronger economy and better oil demand.’ Of course, that never seems to apply to natural gas, which made a seven-year low.

There might have been some light short-covering ahead of this week’s supply and demand statistics, but it was hardly a major factor. Traders were also positioning themselves ahead of tomorrow’s September crude oil contract expiration. September crude oil options finish their run today, and that could give us a close near $70.00, which will be the biggest strike price nearby. We knew oil prices would rally, but we had honestly hoped to see supply and demand return to pre-eminence for a longer period of time.

As we have noted ad nauseam, fundamentals only seem to peek through when we have equities flat to lower and the dollar steady to higher. Last night’s API report did get some play, after reporting a crude oil draw of 6.134 million barrels and a gasoline stock draw of 0.847 mln bbls. Those figures bolstered prices in early evening trading.

Technically, there are still signs that prices may have built a longer-term double top in crude oil and gasoline. Heating oil prices may be working on a head and shoulders top. Of course, prices could turn back up, again, as well. That is yet one more among the many questions looking for answers today.

Technicals

           Oil prices rallied steeply yesterday, and we are now wondering which leg was the correction – the move seen yesterday or the decline immediately before that. If prices break Monday’s lows, they should go lower. If they break above resistance overhead, we almost certainly have another leg higher.

Dollars per barrel

Above:  Crude oil prices rallied after finding support in the retracement (50%-61.8%) zone. It could have been a correction.

September crude oil now has buy-stops over $70.30, $71.60, $72.21, $72.85, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99. Sell-stops are under $66.00-$66.11, $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 188.45, 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 179.25, 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 201.50, 204.75, 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 191.50, 188.65, 184.50, 182.60, 176.75, 175.00-175.15, 169.70, 168.00, 165.25, and 160.10. 

Football: The bears lost 24 yards on second and two, making it third and 26 to go, here.

Technical Support & Resistance

Sep crude oil Support: $66.00-$66.15, $64.95-$65.23, $62.70-$62.85, $62.00-$62.10, $61.00-$61.20.

Resistance: $70.10-$70.30, $71.50-$71.60, $72.10-$72.21, $72.70-$72.84, $73.25-$73.38.

Sep heating oil Support: 179.25-179.40, 178.40-178.55, 171.65-171.80, 165.80-166.00, 163.75-164.00.

Resistance: 188.35-188.45, 193.15-193.30, 194.50-194.65, 196.10-196.21, 197.30-197.40.

Sep Rbob Support: 191.50-191.70, 188.65-188.80, 184.50-184.70, 182.60-182.75, 176.75-177.00.

Resistance: 201.35-201.50, 204.60-204.75, 206.60-206.76, 207.00-207.20, 207.75-207.85.

Oil Inventory Reports

    Refinery utilization was up in four years and down in four years for this week, although it was 0.09% higher than the previous week, averaging 92.70%, up from 92.61% the previous week. Distillate stocks have been higher in seven of the last eight years, for an average increase of 1.010 million barrels. Gasoline stocks have been lower in six of the last eight years, for an average drawdown of 2.762 mln bbls. Crude oil stocks were mixed, with builds in four years and draws in four years, for an average build of 0.861 mln bbls. Crude oil imports have increased by an average of 517,000 bpd over the last five years.

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 fell by 25,627 contracts on Monday, when prices were lower. That looks like very heavy long liquidation, which would be theoretically supportive. Part of it came in front of Thursday’s expiration, but it is still positive.

      Heating oil open interest fell by 347 contracts on Monday, when prices were lower.  That looks like long liquidation and would be constructive.

      RBOB open interest fell by 1,394 contracts on Monday when prices dropped. That looks like long liquidation and is bullish.

      Natural gas open interest rose by 8,125 on Monday, when prices dropped. This looks like net new selling, which would be bearish. Open interest has increased during this decline.

Monday’s Open Interest Changes:  

Crude 1,163,730  dn 25,627        Heat 310,600   dn 347       RBOB 225,441  dn 1,394       Nat gas 746,092  up 8,125

CFTC Commitments of Traders  (for the period ended Tuesday, Aug 11th)   

As of Aug 11th:               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 5,882 contracts   The ratio stayed at 1.18-to-one long over the latest week.

   Large speculators liquidated 5,882 long contracts and added 1,786 shorts over the week under review.  Commercials liquidated 27,043 longs and covered 34,008 shorts.  Small specs and hedgers liquidated 3,770 new longs and covered 3,873 shorts.  Open interest fell by 30,213 contracts as prices dropped $1.97/barrel.  That looks like long liquidation, which should be supportive. All three categories were selling, liquidating longs. Small traders and commercials covered shorts.

   The average large speculator has 2,060 long contracts (104 accounts), or 92 less contracts on average on 2 more accounts, and 2,152 shorts (87 accounts), or an average of 92 contracts more on 3 fewer accounts.  Commercials held 6,913 longs (86) or 487 less longs on average on 2 more accounts, and 6,970 shorts (91), or 216 less shorts on 2 less accounts. Reportables held 3,929 longs (277, dn 2 accts) and 4,369 shorts (252 accts, dn 4). There were 2 fewer long and 4 fewer short accounts.

Heating oil                 52,089                 14,416                           - contracts held by speculators:  3.61 to 1 long

                                         175,906               226,401                              held by the trade.

                                           39,286                 26,464                               held by small specs and hedgers.

Spreads….up 727 contracts.    The ratio of large speculative longs to shorts went from 3.62-to-one to 3.61-to-one in 1 week.

       Large speculators added 4,126 longs and added 1,177 shorts.  Commercial accounts added 1,863 longs and added 8,416 shorts.  Small speculators and hedgers added 736 longs and covered 2,868 shorts.  Open interest grew by 7,452 contracts as prices rallied 1.03 cents. That looks like net new buying and is supportive. All three categories were buying, but the best buying came from large speculators. Small specs and hedgers were covering shorts while commercials sold short.

       The average large speculative long is holding 1,628 contracts (up 129 lots on 32 accounts, same accts), while the average short has 627 contracts (up 25 lots on 22 accts, up 1).  The average commercial long is holding 2,706 contracts (up 28 contracts on 65 accts, same) compared to the average short holding of 3,281 contracts (up 122 lots on 69 accts, same).  The average reportable position is 2,185 long (dn 73 lots on 122 accts, dn 1) while the average short holding is 2,348 (up 9 lots on 119 accts, up 4).  One long account was closed and four new ones were opened over the week being reviewed.

Rbob Gasoline           68,670               9,389                          -contracts held by speculators:  7.31 to 1 long

                                          112,552             178,432                             held by the trade.

                                             16,749                10,150                              held by small specs and hedgers.

Spreads…up 472 contracts   The ratio of large speculative longs to shorts went from 8.17-to-one to 7.31-to-one in 1 week.

     Large speculative holdings grew by 4,226 longs and grew by 1,504 shorts over the latest week. Commercial holdings fell by 572 longs and grew by 4,154 shorts.  Small speculators and hedgers’ positions grew by 351 longs and fell by 1,653 shorts.  Open interest grew by 4,477 contracts as prices dropped 1.35 cents, which looks like new selling and would be bearish. The ratio of longs to shorts dropped, on the new selling. There was new buying by large speculators, but commercials and large speculators sold more than was bought.

   The average holdings are 1,184 contracts for each large speculative long (58) and 427 for each large speculative short (22).  The average commercial long now has 1,563 contracts long (72) and 1,919 short (93). Average reportable holdings are 1,325 long (150) against 1,478 short (139).  There was one less reportable long account and the same number of short accounts, increasing average longs by 36 contracts and increasing average shorts by 44 contracts.

Naturalgas               94,803               248,823                           -contracts held by speculators:  2.62 to 1 short

                                         294,170               187,708                               held by the trade.

                                           87,390                 39,832                           held by small specs and hedgers.

Spreads…up 12,850 contracts    The ratio of large speculative shorts to longs went from 2.92-to-one to 2.62-to-one in 1 week.

  Large speculative holdings were up by 10,976 longs and were up by 3,776 shorts over the latest week. Commercial accounts liquidated 9,807 longs, and covered 1,329 shorts, while small speculators and hedgers added 6,538 new longs and added 5,260 shorts. Open interest rose by 20,557 contracts as prices fell 46.0 cents. That looks like net, new selling, which explains the sudden extreme weakness in this market. The biggest ump in open interest came from spreads, and we do not know if they are intra-market (both legs natural gas) or inter-market (one leg gas, one leg something else). Small traders were the best sellers.

  The average large speculator has 1,156 contracts (82) while each large speculative short is holding 2,704 shorts (92).  The average commercial long now has 3,421 contracts long (86) and 2,844 short (66). Average reportable holdings are 2,771 long (233) long and 3,285 short (211).  Large speculators kept the same number of long accounts, which increased by 134 contracts, and they added four new short accounts, which cut the average holding by 81 contracts. The reportable category liquidated 2 long accounts and added 6 short accounts, adding to average long holdings by 93, and cutting shorts by 22 contracts.

Natural Gas & Utility Generation

Natural gas futures fell for the ninth consecutive day yesterday, which left prices to finish at their lowest price since August 14th, 2002, a little more than seven years ago. The settlement that day was $2.91, so this date might hold for a while. Intraday, prices reached down to $3,088, and there was no sign yesterday that the selling has ended, yet. At some point, it will, but someone appears to be leaning awfully hard on this market right now.

We are still not sure what is happening or why it is happening now. The ratio of crude to gas reached 22.35-to-one yesterday, which was a target predicted by Goldman Sachs a month ago. The bottom line is that oil prices spent the period from its lows in December and the first quarter to June discounting the potentially beneficial effects of an economic recovery, effectively more than doubling in price – while natural gas prices were almost cut in half from January to the end of April. They did manage a 48% rally from $3.155 to $4.690, from late April to mid-May, but it never felt like the strength in equities had much to do with future gas demand. A subsequent low at $3.225 looked major, in mid-July, but that seems months ago.

What is so confusing is how any economic recovery would help oil before natural gas. Any recovery will see higher electrical and gas use long before rehiring brings commuters back. And it seems that the people who trade oil are not even in contact with people trading gas. They seem to have embraced entirely different valuation systems in 2009. Still, the recent nine-day collapse in natural gas prices should not be about high storage figures and weak demand any more. Those factors were played out by May, and something else seems to be behind the recent march to lower levels. No matter how many times we read that it is still storage and poor demand, our eyes return to the commitments of traders and the two-year short position held by large speculators. We continue to believe that they may want to buy out their shorts, just not at higher figures. Of course, we could be wrong. Maybe it is that simple. Storage is high and demand is weak. No one seems to care, though, in oil.

In cash trading yesterday, Henry Hub prices were at $3.07-$3.16, unchanged on the day (DJN).  SoCal prices were at $2.98-$3.11, down $0.05-$0.07 on the day.  El Paso Permian prices were down $0.01-$0.04 at $2.96-$3.04.  Katy prices were up $0.00-$0.03 at $3.06-$3.12.  Waha prices were down $0.02-$0.05 at $3.00-$3.12.  Transco 6 was down $0.04-$0.20 at $3.65-$3.80/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $30.75-$32.55/mwh.  Northeastern prices last traded at $32.00-$57.50.  Entergy was last at $27.50-$28.00.  Ercot was last at $35.00-$36.00/mwh.

Yesterday’s 22.35-to-one crude-to-natural gas ratio was the highest it has been since 1990, according to Bloomberg. We knew that it was the highest this new millennium, but it seems to be the highest it has been since both contracts have traded on the Nymex. Oil has a recovery premium that gas has never received.

Support is at $3.08-$3.10, $2.88-$2.91, $2.83-$2.84, $2.74-$2.75, $2.64-$2.66, $242-$2.45, and $2.35-$2.36.  Resistance is at $3.22-$3.23, $3.28-$3.30, $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 broke to their lowest levels since August, 2002 yesterday.

Dollars per million Btu

Sep Natural Gas:          Support:       $3.08-$3.10, $2.88-$2.91, $2.83-$2.84, $2.74-$2.75, $2.64-$2.66, $2.42-$2.43.

                                       Resistance:     $3.22-$3.23, $3.28-$3.30, $3.40-$3.41, $3.59-$3.61, $3.73-$3.77, $3.85-$3.86.

EIA Weekly Storage Figures

Last 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 55.60 bcf (Friday), the eight-year average was a build of 62.38 bcf. Last year, there was a build of 88 bcf (Friday). The range for this week has been builds of 23 to 88 bcf, with two 78’s and an 86.

EIA Report

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

News & Views

At this stage, equities were under selling pressure in Asia and the US dollar is steady, meaning that a bearish DOE report could generate a bearish response – at least as of this writing. The bears need to make headway on days like today, because it is difficult to get equities and currencies to cooperate with the fundamentals.

An Illustrated Look at Energy Market Factors

A Look at Atlantic Tropical Weather

This is now a Category Four mega-storm.

Hurricane Bill is heading towards the northern Caribbean and ultimately Bermuda, it seems.

Hurricane Bill seems likely to graze the US East Coast

Powerful wind currents are still steering Hurricane Bill – to curl north by northeast.

Nothing new seems to be forming … at this time.

Source: www.weather.com

A Look at the US Dollar Versus the Euro

Dollar-Euro (dollar in euro cents): Three-Month Bar-Chart The US dollar was almost unchanged yesterday, and we would not describe it as a major factor in yesterday’s oil trading. There is support @ 68.50 euro cents (blue line) and resistance @ 71.50-71.75, 72.25 and @ 72.75. Upside breakouts would help push quotes higher, which would be bearish for oil prices.

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

Dollar-Euro: One-Year Chart

Recommendations for Specific Market Segments

We are going to take the next two Friday’s off as our summer vacation.

That means that tomorrow’s report will be the last until Monday.