Prices for August 24th, 2009

Market Review for Monday                   

T was a light volume trading day yesterday as traders and brokers scrambled to get the most out of the dying embers of summer.  Labor Day is still a full two weeks away, but schools start next week, so families have a limited amount of time to enjoy everything that is summer.  Some will still get a few last licks in next week, but this is effectively the last week of the season.  As a result, it is a little on the quiet side.  The oil complex was higher yesterday, but it lacked the upward thrust we saw last week.  The DJIA closed lightly higher and gave oil some support, but it seemed that momentum was at work more than anything else, yesterday.  Traders have been bullish about last week’s crude oil drawdown, and expectations suggest that we could see another draw in crude inventories in this week’s figures.  The ‘funniest’ thing about this market is that prices have risen in sympathy with higher equities, in the certainty that a recovering economy will increase oil demand.  Those of us watching the actual numbers are starting to realize that there is much greater hope on the long side of the ledger from cuts in supplies.  Equities markets have predicted a better supply-demand balance; they just predicted the wrong element to improve.

After lagging behind crude oil late last week, gasoline prices led the oil complex higher yesterday, and there was support from reports of maintenance at Canada’s largest refinery (Irving Oil in New Brunswick) and from early estimates predicting a drawdown, again, in this week’s figures for gasoline inventories.  Once again, though, it is a cut in supplies rather than any sudden increase in demand that helped the market.  We are thoroughly convinced that supply will drop long before we see any appreciable gains in demand.

Meteorologists are eying a disturbance just outside the Caribbean (see page 7).  At this stage it may or may not develop into something cyclonic.  It clearly bears watching, though. 

Traders will be looking ahead to tonight’s API report and tomorrow’s DOE report today.  Expectations are for draws in crude and gasoline stocks, as we noted.  We continue to believe that refinery utilization is the key to future refined products stock increases or drawdowns.  We often see a final burst of activity through the end of August into Labor Day.  Since it comes so late this year, the final increase could be seen in the week before that.  Either way, we are unlikely to see any increases in refinery utilization after Labor Day, so if we are going to see anything, it will be over the next two weeks, we believe.

Technicals

           Crude oil prices continued above their key breakout level ($73.38), sand refined products prices were higher, but they could not break over their key resistance levels, at 197.38 in heating oil and at 208.55 and then again above that at 211.24 for gasoline.  The rest of this week may be all about refined products prices trying to break out. 

Dollars per barrel

Above:  The crack spread rebounded yesterday, but is still nothing special.  It ended at $10.18/bbl, which is a decent level.

October crude oil now has buy-stops over $74.81, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $73.55, $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, and $56.15.  September heating oil has buy-stops over 193.85, 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 189.80, 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 205.45, 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 199.80, 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 five yards yesterday, on first down, and that makes it second and five to go, here, today. 

Technical Support & Resistance

Oct crude oil                        Support:             $73.55-$73.65, $72.00-$72.20, $68.00-$68.05, $66.00-$66.15, $64.95-$65.23.

                                           Resistance:        $74.60-$74.81, $76.10-$76.25, $79.00-$79.17, $84.70-$84.83, $85.05-$85.15.

Sep heating oil       Support:             189.80-190.00, 187.30-187.45, 183.35-183.50, 179.25-179.40, 178.40-178.55.

                             Resistance:        193.70-193.85, 194.50-194.65, 196.10-196.21, 197.30-197.40, 199.00-199.20.

Sep Rbob                       Support:             199.80-200.00, 196.20-196.40, 191.50-191.70, 188.65-188.80, 184.50-184.70.

                                           Resistance:        205.20-205.43, 206.60-206.76, 207.00-207.20, 207.75-207.85, 208.40-208.55.

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 rose by 12,866 contracts on Friday, when prices were up slightly.  That looks like fresh buying and is bullish. 

      Heating oil open interest fell by 1,914 contracts on Friday, when prices were up slightly.  That looks like short-covering.

      RBOB open interest fell by 1,688 contracts on Friday when prices were higher. That looks like short-covering, which would be bearish. 

      Natural gas open interest fell by 5,556 on Friday, when prices dropped.  This looks like long liquidation, which would be supportive. 

Friday’s Open Interest Changes:  

Crude 1,151,527  up 12,866        Heat 317,261   dn 1,914       RBOB 220,765  dn 1,688       Nat gas 752,974  dn 5,556   

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 rallied yesterday, and some observers felt that mildly higher equities played a part.  We did not see that, and it has been one of the enduring mysteries of this market that oil prices can be lifted by higher stock market prices while natural gas prices have not, really.  It seems to have been bargain-hunting and short-covering, which was evident yesterday.  It was always just a matter of time until we were going to see some of that. 

Gas prices fell as low as $2.726 before shorts started covering.  There has been pent-up buying by end-users for a while now, and they have been waiting for a sign that this market was getting ready to stabilize.  In most cases, these same companies had been buying when prices reached previous lows at 3.155 and at $3.225, and no one is looking to make additional margin calls in the current economic environment.  Still, prices under $3.00/mmBtu have not been seen since 2002 and it was always just going to be a matter of time before end-users would return to lock in some of these existing low prices to bring down the average on material bought previously.  Once short-covering was out there in any kind of size, it was logical to expect to see end-user buying come in.  It makes perfect sense to buy and store gas at these prices, for those who can.

The bottom line in this market continues to be abundant gas in storage and current production levels above what can be handled by demand.  Still, one has to imagine that these factors will be fully discounted at some point.  The market has been discounting these same factors, with alternating leadership between ample stocks and poor demand, for a solid 14 months almost.  At some point, one has to imagine that they will have been completely discounted.  We understand that the primarily domestic nature of this natural gas market works against any sudden recovery, but that is certainly a major factor behind its heavy use in the Pickens Plan and other programs that look more attractive by the moment.  We need to move on these, now.

In cash trading yesterday, Henry Hub prices were at $2.65-$2.80, down $0.07-$0.10 on the day (DJN).  SoCal prices were at $2.62-$2.74, down $0.05-$0.06 on the day.  El Paso Permian prices were up $0.03-$0.05 at $2.58-$2.72.  Katy prices were down $0.00-$0.07 at $2.61-$2.79.  Waha prices were up $0.00-$0.03 at $2.60-$2.78.  Transco 6 was down $0.06 and up $0.17 at $2.99-$3.33/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $26.25-$31.00/mwh.  Northeastern prices last traded at $31.25-$42.85.  Entergy was last at $25.50-$26.50.  Ercot was last at $24.50-$35.75/mwh.

With the price of natural gas now well below the cost of production, we are setting ourselves up for a major turn in this market at some point in the not too distant future.  The problem is that we will lose producers and maybe even wells at these low numbers.  When oil was under $15, we felt that we needed to run pipes straight into the SPR, and with gas prices where they are, we need to diversify into gas, starting with transportation (per Pickens Plan).

Support is at $2.72-$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 $2.97-$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 rallied after making new lows yesterday.

Dollars per million Btu

Sep Natural Gas:          Support:         $2.72-$2.77, $2.64-$2.66, $2.42-$2.43, $2.35-$2.36, $2.21-$2.24, $2.14-$2.16.

                                                    Resistance:     $2.97-$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

Traders will take their cues today from consumer confidence and expectations for this afternoon’s API report and tomorrow morning’s DOE report.  We continue to have crude oil prices telling us one thing on the charts, while refined products are telling us something completely different.

An Illustrated Look at Energy Market Factors

A Look at Atlantic Tropical Weather

This is the latest disturbance to catch meteorologists’ attention.

This is the latest picture of the Atlantic tropical basin.  The arrow points to the disturbance above.

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 rallied lightly yesterday.  There is still 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 dollar 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.  It was steady, yesterday.

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

Recommendations for Specific Market Segments

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