Prices for August 21st, 2009

Market Review for Friday & the Weekend       

HE crack spread has fallen dramatically over the last two days as traders bought crude oil as an “asset, but left refined products alone.  This highlights the difference between markets where supply and demand cannot be ignored and crude, which has risen completely on extraneous, non-oil factors, like equities and currencies.  On Friday, equities gained almost 156 points in response to fresh data that suggests that housing may be clawing its way back.  The National Association of Realtors reported a 7.2% increase in home resales in July, which was better than expectations, according to Dow Jones.

As one might expect, this helped push stock prices higher, and they, in turn, pushed oil prices higher.  Refined products prices advanced, but not nearly as much as crude oil prices did.  It seems that the asset buying was focused primarily in crude oil.  The US dollar was also lower on Friday, and that helped to push quotes higher. 

Last week’s crude oil inventory figures were the most bullish of the statistics, and we did see a fairly normal increase in refinery utilization, but the recent moves in crack spreads will discourage refiners from bringing new units online.  Ultimately, that should lead to lower refinery output, and that, in turn, should help bring inventories down.  Still, it is going to take time.  The connection between higher equities prices and a recovering economy is a good deal more tenuous and will require quite a bit more time.  Investors have been drawing this line between higher equities prices and stronger energy demand since March, and this new demand has been very slow in arriving. 

With gasoline accounting for half the normal crude barrel, it is going to require gains in employment before driving will increase dramatically.  What has been amazing is the amount of driving that has been done by those still going to work each day. 

In any event, the story of last week was one of crude breaking to new highs, which have given it a swing objective to $79.75/bbl, while refined products have yet to make that breakout.  Heating oil prices need to break over 197.38 and gasoline needs to break above 208.55-211.24 before it will be on the same path as crude oil is.  One of the two has to get back in line with the other, and that could be the story for this week.

Technicals

           Crude oil prices had a decisive breakout at the end of last week, printing new highs for 2009.  They now have a swing objective to $79.75.  Heating oil still has critical resistance at 197.38, while gasoline has resistance at 208.55 and then again above that at 211.24.  Those levels need to be broken for prices to move higher longer-term.

Ratio: crude over natural gas

Above:  Crude oil prices reached their highest ratio to natural gas on Friday at 26.35-to-one.

October crude oil now has buy-stops over $74.75, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $72.00, $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 187.30, 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 201.20, 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 bulls gained 10 yards on Friday, on second and eight, and that gives them a new set of downs to start this week.

Technical Support & Resistance

Oct crude oil                        Support:             $72.00-$72.20, $68.00-$68.05, $66.00-$66.15, $64.95-$65.23, $62.70-$62.85.

                                           Resistance:        $74.60-$74.75, $76.10-$76.25, $79.00-$79.17, $84.70-$84.83, $85.05-$85.15.

Sep heating oil       Support:             187.30-187.45, 183.35-183.50, 179.25-179.40, 178.40-178.55, 171.65-171.80.

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

Sep Rbob                       Support:             196.20-196.40, 191.50-191.70, 188.65-188.80, 184.50-184.70, 182.60-182.75.

                                           Resistance:        201.00-201.20, 205.20-205.35, 206.60-206.76, 207.00-207.20, 207.75-207.85.

Oil Inventory Reports

    Crude oil imports are extremely low right and, although we expect a minor recovery, we do not expect to imports near where they have been in previous years.  Refinery utilization may increase slightly this week, on its way towards a Labor Day peak, but after that, we should expect to see refineries cut back, especially in light of recent declines in crack spread values.  Because of relatively low refining figures, we would be surprised to see any large builds in refined products stocks, right now.  Low crude oil imports are likely to give us a decline in crude oil stocks. 

     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 fell by 29,267 contracts on Thursday, when prices were up slightly.  That was the result of the September contract expiration.  It still looks like short-covering, which should be bearish. 

      Heating oil open interest rose by 1,178 contracts on Thursday, when prices dropped.  That looks like new selling and is bearish.

      RBOB open interest fell by 436 contracts on Thursday when prices were lower. That looks like long liquidation and is supportive.    

      Natural gas open interest rose by 2,044 on Thursday, when prices dropped.  This looks like net new selling, which would be bearish.  Open interest has increased by 46,829 contracts since August 6th.  That’s good selling.

Thursday’s Open Interest Changes:  

Crude 1,142,010  dn 29,267        Heat 319,175   up 1,178       RBOB 222,453  dn 436       Nat gas 758,530  up 2,044      

CFTC Commitments of Traders  (for the period ended Tuesday, Aug 18th)   

 As of Aug 18th:                 Long                   Short:

Crude oil                   208,367               185,669                           -contracts held by speculators:  1.12 long

                                         614,569               636,515                               held by the trade

                                            75,342                76,094                               held by small specs and hedgers.

Spreads….dn 4,572 contracts   The ratio went from 1.18-to-one long to 1.12-to-one over the latest week.

   Large speculators liquidated 5,907 long contracts and covered 1,528 shorts over the week under review.  Commercials added 20,039 new longs and added 2,207 shorts.  Small specs and hedgers liquidated 8,773 longs and added 4,680 shorts.  Open interest rose by 787 contracts as prices dropped $0.26/barrel.  That looks like net, new selling, but there was heavy long liquidation, new buying and short-selling all mixed into this week’s statistics.  Small traders were the best new sellers. 

   The average large speculator has 2,126 long contracts (98 accounts), or 66 more contracts on average on 6 less accounts, and 2,040 shorts (91 accounts), or an average of 112 contracts less on 4 more accounts.  Commercials held 7,146 longs (86) or 233 more longs on average on the same accounts, and 6,630 shorts (96), or 340 less shorts on 5 more accounts. Reportables held 4,021 longs (273, dn 4 accts) and 4,285 shorts (256 accts, up 4). There were 4 less long and 4 more short accounts.

Heating oil                 52,074                 16,338                           - contracts held by speculators:  3.19 to 1 long

                                         183,826               231,463                              held by the trade.

                                           38,855                 26,954                               held by small specs and hedgers.

Spreads….dn 1,631 contracts.    The ratio of large speculative longs to shorts went from 3.61-to-one to 3.19-to-one in 1 week.

       Large speculators liquidated 15 longs and added 1,922 shorts.  Commercial accounts added 7,920 longs and added 5,062 shorts.  Small speculators and hedgers liquidated 431 longs and added 490 shorts.  Open interest grew by 5,843 contracts as prices dropped 4.67 cents.  That looks like net new selling and is supportive.  All three categories were selling, but the best selling came from commercials.  Commercials were also the only new buyers. 

       The average large speculative long is holding 1,270 contracts (dn 358 lots on 41 accounts, up 9 accts), while the average short has 778 contracts (up 151 lots on 21 accts, dn 1).  The average commercial long is holding 2,744 contracts (up 38 contracts on 67 accts, up 2) compared to the average short holding of 3,215 contracts (dn 66 lots on 72 accts, up 3).  The average reportable position is 2,165 long (dn 20 lots on 126 accts, up 4) while the average short holding is 2,315 (dn 33 lots on 123 accts, up 4).  Four new long and four new short accounts were opened over the week under review.

Rbob Gasoline            65,496               14,141                          -contracts held by speculators:  4.63 to 1 long

                                           124,799              181,115                             held by the trade.

                                             15,520                10,559                              held by small specs and hedgers.

Spreads…dn 187 contracts   The ratio of large speculative longs to shorts went from 8.17-to-one to 4.63-to-one in 2 weeks.

     Large speculative holdings fell by 3,174 longs and grew by 4,752 shorts over the latest week. Commercial holdings grew by 12,247 longs and grew by 2,683 shorts.  Small speculators and hedgers’ positions fell by 1,229 longs and grew by 409 shorts.  Open interest grew by 7,657 contracts as prices dropped 4.20 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 commercials, but speculators kicked out longs and added new shorts.  The best selling came from large speculators.

   The average holdings are 1,149 contracts for each large speculative long (57) and 643 for each large speculative short (22).  The average commercial long now has 1,733 contracts long (72) and 2,058 short (88). Average reportable holdings are 1,375 long (151) against 1,564 short (136).  There was one more reportable long account and three more short accounts, increasing average longs by 50 contracts and increasing average shorts by 86 contracts.

Naturalgas                93,346               268,673                           -contracts held by speculators:  2.88 to 1 short

                                         322,981               196,084                               held by the trade.

                                           93,464                 45,034                           held by small specs and hedgers.

Spreads…dn 10,331 contracts    The ratio of large speculative shorts to longs went from 2.62-to-one to 2.88-to-one in 1 week.

  Large speculative holdings dropped by 1,457 longs and were up by 19,850 shorts over the latest week. Commercial accounts added 28,811 longs, and added 8,376 shorts, while small speculators and hedgers added 6,074 new longs and added 5,202 shorts.  Open interest rose by 23,097 contracts as prices fell 44.5 cents.  That looks like net, new selling, and is bearish.  All three categories were selling, but large speculators sold the most.  This was even more substantial than it at first appears, because 10,331 spreads were removed.  Commercials were big buyers. 

  The average large speculator has 1,061 contracts (88) while each large speculative short is holding 2,952 shorts (91).  The average commercial long now has 3,712 contracts long (87) and 2,971 short (66). Average reportable holdings are 2,715 long (244) long and 3,307 short (215).  Large speculators added six new accounts, which diluted the average long holding by 95 contracts.  They closed one short account, which increased the average short holding by 248 contracts.  There were 11 new reportable long positions, which cut the average holding by 56, and four new short accounts, which added 22 to the average.

Natural Gas & Utility Generation

Natural gas futures continued lower on Friday, as the hopes for economic recovery that were powering oil prices to their highest levels of the year somehow did not apply to natural gas.  Traders might even have pushed gas prices lower if crude had not been strong, but we are still confused how economic growth can apply to oil but not to gas.  Still, that is what the markets seem to be saying. 

A return to milder weather worked in combination with plentiful supplies to push prices lower, and momentum certainly had an effect on trading, as well.  The most recent CFTC commitments of traders report shows that this move lower has been powered by fresh speculative selling, and commercials have been buying as prices have fallen.  Still, it seems that we will need extensive short-covering before this market can generate any substantial buying.  Potential buyers seem to be waiting for signs that prices have touched any kind of low point before they will be willing to enter the market on the long side.  Most of the commercial buying has been done on a scaled-down basis, with limit orders placed below existing prices. 

The National Weather Service is now predicting cooler-than-normal temperatures for the Northeast, Mid-Atlantic and Southeast, with milder readings extending across the South into Texas.  That is unusual for late August, but, as we have noted here before, we have been in a cooler-than-normal pattern since last November.  Until something changes in that regard, cooler readings seem to be the default mode in this country.  Of course, the thinking is that these cooler temperatures could usher us into an early shoulder period, especially if they continue beyond mid-September.  Normally, the second half of September and most of October are mild periods during which little cooling or heating is needed. 

In cash trading on Friday, Henry Hub prices were at $2.75-$2.87, down $0.18-$0.23 on the day (DJN).  SoCal prices were at $2.68-$2.79, down $0.11-$0.24 on the day.  El Paso Permian prices were down $0.23-$0.24 at $2.55-$2.67.  Katy prices were down $0.22-$0.29 at $2.68-$2.79.  Waha prices were down $0.20-$0.30 at $2.60-$2.75.  Transco 6 was down $0.38-$0.40 at $3.05-$3.16/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $27.50-$29.00/mwh.  Northeastern prices last traded at $28.00-$39.00.  Entergy was last at $27.00-$27.25.  Ercot was last at $33.25-$35.50/mwh.

Friday’s crude-to-natural gas ratio expanded to a new record of 26.35 to one, which is a ridiculous relationship.  This seems to be off on a spike that will ultimately return with a vengeance.  Despite the recent high figures, the average ratio since January, 2002, is 8.83-to-one.  The average since January, 2008 is 12.36-to-one.  Somewhere between those two averages is something approaching value.  The existing ratio is out of control.

Support is at $2.74-$2.77, $2.64-$2.66, $242-$2.45, $2.35-$2.36, $2.21-$2.24, $2.14-$2.16 and $2.05-$2.07.  Resistance is at $2.99-$3.01, $3.16-$3.17, $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:         $2.74-$2.77, $2.64-$2.66, $2.42-$2.43, $2.35-$2.36, $2.21-$2.24, $2.14-$2.16.

                                                    Resistance:     $2.99-$3.01, $3.16-$3.17, $3.22-$3.23, $3.28-$3.30, $3.40-$3.41, $3.59-$3.61.

EIA Weekly Storage Figures

Last week’s EIA report showed a build of 52 bcf on expectations for a build of 56-57 bcf.  Stocks are now 562 bcf higher than a year ago, against a surplus of 592 bcf a week ago, a surplus of 580 bcf two weeks ago and a surplus of 571 bcf three weeks ago.  Stocks are now 21.27% higher than a year ago.  They are 513 bcf and 19.06% above the five-year average.

The five-year average for this week was a build of 67.40 bcf (Friday), the eight-year average was a build of 65.62 bcf.  Last year, there was a build of 102 bcf (Friday).   The range over the last eight years has been builds of 43-102 bcf.

EIA Report

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

News & Views

On Frioday, crude was higher, but refined products rose grudgingly.  Crude broke to new highs last week, but products did not.  And while crude printed new highs for 2009, natural gas printed new seven-year lows.  Something is wrong with this overall picture and this week may be about righting these factors and getting prices back in line with each other.

An Illustrated Look at Energy Market Factors

A Look at Atlantic Tropical Weather

It is looking pretty clear now

It is looking clear, here, as well.

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 on Friday, 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 broke out to new highs late last week.

Source:  http://www.google.com/finance?q=INDEXDJX:.DJI

Recommendations for Specific Market Segments

We are going to take this next Friday off as the second part of our summer vacation.