Prices for August 25th, 2009

Market Review for Tuesday                  

IL prices were chugging along, advancing on stronger consumer confidence and a rallying Dow Jones Industrial Average (DJIA) and other stock market measures.  October crude oil prices printed what had been an elusive figure at $75.00/bbl, and everything looked bullish.  Traders were talking about expectations for drawdowns in crude oil and gasoline inventories in the upcoming API and DOE reports and there was no warning that there was anything amiss on the bullish side of the ledger. 

And, then, prices suddenly caved in after lunch.  The US dollar was slightly firmer, but it was not a major move (see page 8), finishing very near unchanged on the day.  The DJIA finished up 30 points.  The Conference Board placed consumer confidence at 54.1 in August, well above the average estimate of 47 seen in a survey by Dow Jones.  After the close of the Nymex, the API reported a build in crude oil stocks, which flied in the face of expectations, but the API hardly releases the definitive set of figures for oil traders.  It was as if traders had suddenly been whacked with a stick that restored common sense.

A number of people we spoke with were cheered by the return of oil prices to levels that seem more in line with long-standing fundamentals in this market, but no one really had any particularly strong reason for the market’s sudden epiphany.  Clearly, these things do happen, but we do more typically have some reason, even if it is odd or incongruous.  Dow Jones attributed it to the dollar rebounding from a lower position against the euro earlier in the day, and that reason sounds as good as anything else.  The market could just have run out of buyers, at least at these higher levels, in the wake of decisions by exchange-traded funds to hold additional offerings in abeyance until they get a better idea of the new CFTC regulations regarding position limits.

It could have been a number of factors all coming together.  It could have been a combined technical and fundamental realization that prices don’t belong at $75 a barrel.  It could have been profit-taking after prices touched $75 and could not, apparently, move any higher.

Today, the real reason will matter less than this morning’s DOE report and the market’s reaction to it.  If prices continue to decline today, we may look back and see it as a return by crude oil prices to levels more in keeping with refined products – and their inability to break to new highs.

Technicals

           Crude oil prices are not really in a trading range the way that both heating oil and gasoline are right now.  Heating oil is in a range between 178.40 and 197.38, and gasoline prices are in a range between 188.65 and 208.55, with additional resistance at 211.24.  Crude oil’s next moves may give us the best idea of where this complex is headed next.

Dollars per barrel

Above:  The longer-term crude oil chart looks like it has another leg higher – but it may not.  Eventually, prices should test the lows.

October crude oil now has buy-stops over $75.00, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $71.00, $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 192.83, 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 183.70, 183.35, 179.25, 178.40, 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 206.25, 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 197.90, 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 lost 23 yards on second and five, yesterday, making it third and 28 to go, today. 

Technical Support & Resistance

Oct crude oil                        Support:             $71.00-$71.15, $68.00-$68.05, $66.00-$66.15, $64.95-$65.23, $62.70-$62.85.

                                           Resistance:        $74.60-$75.00, $76.10-$76.25, $79.00-$79.17, $84.70-$84.83, $85.05-$85.15.

Sep heating oil       Support:             183.70-183.85, 183.35-183.50, 179.25-179.40, 178.40-178.55, 171.65-171.80.

                             Resistance:        192.70-192.85, 193.70-193.85, 194.50-194.65, 196.10-196.21, 197.30-197.40.

Sep Rbob                       Support:             197.90-198.10, 196.20-196.40, 191.50-191.70, 188.65-188.80, 184.50-184.70.

                                           Resistance:        206.10-206.25, 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 5,133 contracts on Monday, when prices were higher.  That looks like fresh buying and is bullish. 

      Heating oil open interest fell by 283 contracts on Monday, when prices were higher.  That looks like bearish short-covering.

      RBOB open interest grew by 1,492 contracts on Monday when prices were higher. That looks like new buying and is supportive. 

      Natural gas open interest fell by 22,523 on Monday, when prices rallied.  This looks like heavy short-covering and is bearish. 

Monday’s Open Interest Changes:  

Crude 1,156,660  up 5,133        Heat 316,978   dn 283       RBOB 222,257  up 1,492       Nat gas 730,451  dn 22,523      

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 dropped four cents yesterday and the main reason cited by Dow Jones was the weather forecast.  The National Weather Service (NWS) is calling for cooler than normal readings next week in the Midwest, the Northeast, the Mid-Atlantic and Southeast.  That, of course, is expected to cut into demand for space-cooling, which should translate into lower use of natural gas by utilities.

We must say, though, that we find it odd to see this market reacting to weather forecasts after falling as much as it has over the last 13-14 months.  It seems like a strange momentary visit to normal market conditions in the middle of a tempest.  It would be an encouraging sign, though, to see this market return to normal, after such a big decline.  At some stage, we have to get to the point where prices have discounted abundant storage levels and poor demand.  We honestly thought we had reached that point a while ago, but the recent decline suggests that that might not have been the case.  Still, the increase in open interest in short positions held by large speculators suggests that there is more to the most recent decline that the same old story.  We are not exactly sure what the reasoning for the sudden selling pressure might be, but it does not look like they wanted to buy.

We did see heavy short-covering on Monday, but it still leaves a huge large speculative short interest in the market.  It has been there for two and a half years, now, through winters and hurricanes, so it was clearly being held against something else on the long side.  It could be oil positions, which would account for the huge move in the ratio between crude and natural gas, but the length of time that this short interest has been outstanding leaves us groping to understand what possible end-game is on the cards.  At some point and at some lower number, one would have to expect to see the shorts cover their positions. 

In cash trading yesterday, Henry Hub prices were at $2.83-$2.91, up $0.11-$0.18 on the day (DJN).  SoCal prices were at $2.73-$2.89, up $0.11-$0.15 on the day.  El Paso Permian prices were up $0.07-$0.08 at $2.65-$2.80.  Katy prices were up $0.06-$0.15 at $2.76-$2.85.  Waha prices were up $0.05-$0.12 at $2.72-$2.83.  Transco 6 was up $0.04-$0.22 at $3.21-$3.37/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $29.00-$31.00/mwh.  Northeastern prices last traded at $30.25-$47.25.  Entergy was last at $25.50-$26.50.  Ercot was last at $31.75-$33.75/mwh.

We honestly feel that natural gas prices are under-priced, have discounted the same bearish fundamentals two times more than necessary and have failed to discount any improvement in the economy at all.  They have also tried, but have not really discounted lower rig counts, either.  They are absurdly lowly priced in comparison with oil prices and have been purposely crushed by short speculators who don’t seem to have plans to buy.

Support is at $2.81-$2.82, $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 were fractionally lower yesterday.

Dollars per million Btu

Sep Natural Gas:          Support:         $2.81-$2.82, $2.72-$2.77, $2.64-$2.66, $2.42-$2.43, $2.35-$2.36, $2.21-$2.24.

                                                    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

After last night’s decent-sized build in crude oil stocks in the API report, this morning’s DOE statistics will shed the more definitive light on prices.  Refined products are in trading ranges, leaving crude as our “free-range diagnostic” this morning.

An Illustrated Look at Energy Market Factors

A Look at Atlantic Tropical Weather

This latest disturbance will bring some kind of weather to the East Coast.

This is the latest picture of the Caribbean 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 was steady 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 to slightly higher, 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.