Prices for August 19th, 2009

Market Review for Wednesday

ESTERDAY started as the perfect canvass upon which to paint a bearish result, but it ended quite differently. Early yesterday morning, the dollar was steady and traders were looking at a 4.3% decline in Chinese equities, which set the table for another disappointing day in international stock markets. With a DOE report scheduled for its normal Wednesday release, oil’s fundamental bears had every reason to be optimistic. What actually happened left them stunned and in disarray. From a diagnostic perspective, though, it leaves issues clearer.

This week’s DOE report showed all three major inventory categories lower. That was bullish. Higher utilization was bearish, but we normally do see a brief increase as we approach Labor Day, and then that is normally it. Utilization tends to decline from Labor Day to Thanksgiving, and then from the end of November through the end of the year, we see a final burst of activity before four solid months of maintenance. Higher utilization pulled barrels from crude inventories, and that gave us a much larger drawdown than anyone had even imagined. This large crude oil draw gave fundamental support to the oil complex.

But, it was the double turn in equities, which posted a 61 point advance, and the decline in the US dollar, which worked together to bring in the index fund buying that gave the market its huge gains yesterday. The buying we have seen from March in oil, because of equities or currencies, has never been conservative or thought-out buying. They don’t use limit (“or better”) orders looking for good fills. They buy “at the market,” lifting any offers available. Since the orders are pooled, no one ever sees the poor fills and complains about them. Individual shareholders are long from a composite average, and fills are not a part of the thought process used to get long.

And yesterday’s big decline in crude oil stocks brought in exactly the same type of buying, but it was because it came from shorts losing money. Their urgency to cover shorts losing money generated additional market orders and buy-stops (which end up as urgent market orders). Here, traders do care about the fills, but how goods are they going to be when they come after competing with the pooled money described above. The end result was a steep price rise.

There is resistance above the market, but it seems like it will be removed soon. If it is, we are likely to embark on a new leg higher. Yesterday was a perfect storm of bullish factors.

Technicals

           Oil prices rallied steeply again yesterday, and they are now poised to take another shot at the resistance overhead. Crude has to break $73.38, heating oil has major resistance at 197.38 and gasoline has resistance at 208.55 and then at 211.24. Breaks and settlements above those figures will give us fresh legs higher. If they fail, the double tops stick.

Ratio: crude over natural gas

Above:  Crude oil prices reached their highest ratio to natural gas yesterday at 23.12-to-one.

September crude oil now has buy-stops over $72.85, $73.38, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99. Sell-stops are under $68.00-$68.05, $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 193.09-193.30, 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 183.35, 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 205.35, 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 196.20, 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 32 yards on third and 26, and that makes it fourth and very long (58!).

Technical Support & Resistance

Sep crude oil Support: $68.00-$68.05, $66.00-$66.15, $64.95-$65.23, $62.70-$62.85, $62.00-$62.10.

Resistance: $72.70-$72.84, $73.25-$73.38, $76.10-$76.25, $79.00-$79.17, $84.70-$84.83.

Sep heating oil Support: 183.35-183.50, 179.25-179.40, 178.40-178.55, 171.65-171.80, 165.80-166.00.

Resistance: 193.09-193.30, 194.50-194.65, 196.10-196.21, 197.30-197.40, 199.00-199.20.

Sep Rbob Support: 196.20-196.35, 191.50-191.70, 188.65-188.80, 184.50-184.70, 182.60-182.75.

Resistance: 205.20-205.35, 206.60-206.76, 207.00-207.20, 207.75-207.85, 208.40-208.55.

Oil Inventory Reports

    All three major inventory categories showed drawdowns in this week’s report, and crude oil inventories fell by a remarkable 8.4 million barrels. Utilization was up half a percentage point, and crude oil imports dropped by 1.417 million bpd, which gave us a combination of higher demand and dramatically lower supply. As a result, refiners went to the well to find the extra crude they ran. The API did give us advance notice that crude oil imports were going to decline. This came as a surprise, with a five-year average increase of 517,000 bpd and last year’s jump of 1.336 mln bbls, leaving us 2.878 mln bpd lower than a year ago.

Distillate stocks are now 29.8 million bbls, or 22.61%, higher than a year ago. Heating oil inventories are 12.4 mln bbls, or 35.43%, higher than they were a year ago. Gasoline stocks are 7.7 mln bbls (up 3.81%) higher against a year ago. Crude oil stocks are now 45.3 million bbls, or 15.19%, higher than a year ago. Residual stocks are 2.0 mln bbls (5.32%) lower than a year ago, jet fuel stocks are 5.3 mln bbls, (12.86%) higher than a year ago. Utilization is 1.70% lower than a year ago and 8.70% 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 9,442 contracts on Tuesday, when prices advanced sharply. That looks like good new buying and is supportive, especially two days before the September contract expiration.

      Heating oil open interest rose by 1,066 contracts on Tuesday, when prices advanced. That looks like new buying and is supportive.

      RBOB open interest fell by 2,227 contracts on Tuesday when prices were well higher. That looks like short-covering, which would be more of a bearish development.

      Natural gas open interest rose by 9,991 on Tuesday, when prices dropped. This looks like net new selling, which would be bearish. Open interest has increased by 44,382 contracts (6.24%) as prices have fallen 92.3 cents (22.83%). That’s good bang.

Tuesday’s Open Interest Changes:  

Crude 1,173,172  up 9,442        Heat 311,666   up 1,066       RBOB 223,214  dn 2,227       Nat gas 756,083  up 9,991

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 made a new low since August 14th, 2002, yesterday, but prices finished the day in positive territory on bargain-hunting and short-covering, it seems. The combination of stronger equities, with their vague promise of better economic times ahead, and stronger oil prices seem to have had an effect on the thinking of bears holding profitable short positions. Prices were lower for nine consecutive days.

Traders were also looking at cooler-than-normal temperature forecasts (by the National Weather Service, or NWS) for the period starting next Monday, in the upper Midwest and in the Mid-Atlantic and Northeast regions, Dow Jones noted yesterday. These contain some of the largest population figures and temperatures there often affect demand for electricity and natural gas to generate it. When temperatures are the same in the Midwest, the Northeast and Texas, they affect prices.

It has been the hottest it has been this year over the last week or 10 days here in the Northeast. Our temperatures typically have just been experienced in the Great Lakes and upper Midwest. But, despite readings exceeding 90 degrees recently, demand for natural gas has been on the weaker side. The underlying reason for this is a lack of solid industrial use, and that makes the incremental demand that comes from space cooling less important. In many to most years, sudden heat waves (or cold spells) can add the incremental demand that can tip the balance to the bullish side of the ledger. But, without the underlying baseload of industrial demand to make a tall enough cake, the space-heating demand is frosting a cupcake, rather than a birthday cake. It just is not enough to make a difference.

In cash trading yesterday, Henry Hub prices were at $2.98-$3.09, down $0.07-$0.09 on the day (DJN).  SoCal prices were at $2.90-$3.00, down $0.08-$0.11 on the day.  El Paso Permian prices were down $0.09-$0.12 at $2.87-$2.92.  Katy prices were down $0.10-$0.11 at $2.95-$3.02.  Waha prices were down $0.07-$0.13 at $2.87-$3.00.  Transco 6 was down $0.25-$0.26 at $3.40-$3.54/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $29.00-$33.00/mwh.  Northeastern prices last traded at $30.75-$50.50.  Entergy was last at $27.50-$31.00.  Ercot was last at $37.75-$38.50/mwh.

Yesterday’s crude-to-natural gas ratio expanded to a new record of 23.22 to one, proving that nothing seems to have any real value – but everything has a price. No doubt, there is plenty of natural gas in storage, but there is plenty of oil, too. And any economic recovery will start with companies using more electricity long before they increase their use of gasoline or diesel. Still, the two-dollar handle is taunting the bears to come get it, and they will.

Support is at $3.04-$3.06, $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 printed yet another new low since August 14th, 2002. y.

Dollars per million Btu

Sep Natural Gas:          Support:       $3.04-$3.06, $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). Expectations are for a build of 52-67 bcf, with 56-57 bcf being the averages.

EIA Report

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

News & Views

For oil prices to go lower, and for the potential double top to hold, the bears need equities flat to lower, the dollar steady to higher and oil fundamentals unchanged to worse. The bulls have the bears on the back foot, here.

An Illustrated Look at Energy Market Factors

A Look at Atlantic Tropical Weather

This is now a Category Four hurricane.

Hurricane Bill is passing well to the north of Caribbean islands.

Hurricane Bill is forecast to run northwest through Friday evening, and should then turn north on Saturday,

and then curl north-by-northeast as the weekend ends and next week starts.

If one is going to have a category four hurricane, this course is almost the most benign one could hope for (now).

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 lower yesterday, as selling pressure returned to this market. 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. A break and finish beneath the blue line would be bearish for the greenback and bullish for oil prices.

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

A Look at the Dow Jones Industrial Average (djia)

Dow Jones Industrial Average: Six Month Chart

The DJIA looks like oil (hardly surprising) and could break out to new highs.

A Look at Gasoline Supply & Demand

Thirteen-week demand is at 9.185 million bpd, down 1.89% against last year. Thirteen-week supply is at 10.059 mln bpd, down 0.39%. Thirteen-week implied demand is at 9.996 mln bpd, down 2.38%.

A Look at Distillate Supply & Demand

Thirteen-week demand is at 3.383 million bpd, down 18.46% against last year. Thirteen-week supply is at 4.177 mln bpd, down 11.14%. Thirteen-week implied demand is at 4.029 mln bpd, down 9.13%.

A Look at Refinery Utilization

Utilization is 1.70% lower than a year ago and 8.70% below the eight-year average. It is 10.30% lower than the five-year, pre-Katrina average.

A Look at Inventories

A Look at Imports

Recommendations for Specific Market Segments

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

Our next report will be out on Monday.

If anyone has any pressing needs, you may still call us; our office phone rings at home.