Prices for August 28th, 2009

Market Review for Friday & over the weekend

IL prices were higher on Friday in what seems to have been a relatively quiet session dominated by short-covering.  Today (Monday) is a bank holiday in the United Kingdom (UK) and many European traders were looking primarily to balance their books and reduce risks.  This approach seems to have taken root in US trading, as well. 

For the week, as a whole, refined products prices had trouble moving higher in the face of heavy resistance overhead, and that inability pulled crude oil prices back down, after they had broken to the upside at the end of the previous week.  The composite picture, as we start this week, is one of an oil complex that tried to break higher in the week ended August 21st, but ultimately could not – which we discovered last week - after crude oil prices hit $75.00 but could not hold that level against the reality of lower refined products prices.  Last week’s DOE statistics showed some definitive improvement in demand aggregates, but also showed inventories at levels that continue to come in at figures well above those seen a year ago.  For reasons that escape us, traders focused more on inventories than on relative demand, last week.

Book-squaring (short-covering and long liquidation) has been a bigger factor over the last few sessions than new buying or selling, and that is likely to remain the case today, as September heating oil and gasoline contracts expire this afternoon. 

The EIA reported on Friday that distillate stocks at the end of June were the highest they had been for that month since 1981.  They were also the highest they had been at the end of any month, since December, 1984.  June-ending stocks were 31.4% higher than they had been a year earlier and were also 31% above the five-year average for June. 

Oil demand in June was the highest for any month since January, but was still the 23rd consecutive month in which oil demand was lower than it has been the previous year.  Still, the year-on-year decline in oil demand in June was the smallest decline since October, 2008.  For the first six months of 2009, oil consumption averaged 18.652 million bpd, down 6.3%, or 1.248 million bpd against the first half-year in 2008.  It was the largest decline in oil demand for the first six months of any year since 1980.  Gasoline demand in June showed its first monthly gain, year-on-year, since September, 2007. 

Technicals

           The oil complex was higher on Friday, but there is still good resistance overhead.  We have been waiting for a major technical failure for the last few weeks, but it has not yet occurred.  Crude is in a range between $69.83 and $75.00, heating oil is between 178.40 and 197.38 and gasoline is between 188.65 and 208.55/211.24.  The gasoline expiration today will put prices closer to the lower end of the range – but will move heating oil nearer its upper end.

Dollars per barrel

Above:  Crude oil prices rallied on Friday, but still have last weeks highs as resistance overhead.

October crude oil now has buy-stops over $73.52, $75.00, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $71.78, $70.65, $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.  October heating oil has buy-stops over 1921.45 192.83, 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 186.65. 184.40, 183.55, 181.65, 179.25, 178.40, 171.65, 165.80, 163.75, 157.45, 155.85, 151.65, 148.70, 147.70, 141.30, 140.90, and 137.50.  October RBOB has buy-stops over 191.55, 208.15, 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 188.65, 187.35, 184.50, 182.60, 176.75, 175.00-175.15, 169.70, 168.00, 165.25, and 160.10. 

Football: The bulls gained 11 yards on Thursday on fourth and 34, giving the bears a first down Friday.  It’s second and 12.

Technical Support & Resistance

Oct crude oil                          Support:             $71.75-$71.90, $70.65-$70.80, $68.00-$68.05, $66.00-$66.15, $64.95-$65.23.

                                           Resistance:        $73.45-$73.55, $74.60-$75.00, $76.10-$76.25, $79.00-$79.17, $84.70-$84.83.

Oct heating oil        Support:             186.65-186.75, 184.40-184.50, 183.55-183.65, 181.65-181.80, 179.25-179.40.

                             Resistance:        191.35-191.45, 192.70-192.85, 193.70-193.85, 194.50-194.65, 196.10-196.21.

Oct Rbob                       Support:             188.65-188.80, 187.35-187.50, 184.50-184.70, 182.60-182.75, 176.75-176.85.

                                           Resistance:        191.45-191.55, 208.00-208.15, 208.45-208.55, 211.10-211.24, 213.80-214.00.

Oil Inventory Reports

    We usually see the last increase in refinery utilization for a while just about now, either in this report or in the one out next week.  That does not mean that we cannot have increases in utilization during any given week, but it does mean that the trend is likely to be lower until December.  Crude oil imports have been lower this week in four of the last five years and crude oil inventories have dropped in seven of the last eight years.  Utilization has increased in six of the last eight years, for an average increase of 1.866%.  Over the last eight years, the average increase has been 1.22%. 

     Distillate stocks are now 30.2 million bbls, or 22.84%, higher than a year ago.  Heating oil inventories are 12.9 mln bbls, or 36.24%, higher than they were a year ago.  Gasoline stocks are 8.5 mln bbls (up 4.26%) higher against a year ago.  Crude oil stocks are now 43.9 million bbls, or 14.64%, higher than a year ago.  Residual stocks are 3.6 mln bbls (9.47%) lower than a year ago, jet fuel stocks are 4.4 mln bbls, (10.71%) higher than a year ago.  Utilization is 3.20% lower than a year ago and 8.34% below the eight-year average.  It is 9.70% 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 2,436 contracts on Thursday, when prices were higher.  That looks like short-covering, which would be negative.

      Heating oil open interest fell by 1,053 contracts on Thursday, when prices were higher.  That looks like short-covering, which would be bearish. 

      RBOB open interest fell by 759 contracts on Thursday when prices were higher. That looks like short-covering, which would be bearish. 

      Natural gas open interest grew by 9,864 on Thursday, when prices dropped.  This looks like long liquidation, and is supportive.

Thursday’s Open Interest Changes:  

Crude 1,152,088  dn 4,942        Heat 305,094   dn 1,053       RBOB 208,967  dn 759       Nat gas 716,272  up 9,864         

CFTC Commitments of Traders  (for the period ended Tuesday, Aug 25th)   

 As of Aug 25th:                 Long                   Short:

Crude oil                   199,654               195,078                           -contracts held by speculators:  1.02 long

                                         640,468               654,676                               held by the trade

                                            78,095                68,463                               held by small specs and hedgers.

Spreads….up 2,725 contracts   The ratio went from 1.18-to-one long to 1.02-to-one over the last 2 weeks.

   Large speculators added 7,825 long contracts and added 5,467 shorts over the week under review.  Commercials added 6,579 new longs and added 9,278 shorts.  Small specs and hedgers added 6,652 longs and added 6,311 shorts.  Open interest rose by 23,781 contracts as prices rallied $0.96/barrel.  That looks like net, new buying, which would be supportive.  All three categories were buying almost equally during the week under review.    

   The average large speculator has 2,194 long contracts (91 accounts), or 68 more contracts on average on 7 less accounts, and 1,876 shorts (104 accounts), or an average of 164 contracts less on 13 more accounts.  Commercials held 7,811 longs (82) or 665 more longs on average on four less accounts, and 6,891 shorts (95), or 261 more shorts on 1 less account. Reportables held 4,028 longs (272, dn 1 acct) and 4,155 shorts (266 accts, up 10).There were 7 more longs and 130 fewer shorts held on average.

Heating oil                 45,903                 16,074                           - contracts held by speculators:  2.86 to 1 long

                                         178,848               216,213                              held by the trade.

                                           36,423                 28,887                               held by small specs and hedgers.

Spreads….up 4,464 contracts.    The ratio of large speculative longs to shorts went from 3.61-to-one to 2.86-to-one in 2 weeks.

       Large speculators added 2,130 longs and covered 4,965 shorts.  Commercial accounts liquidated 7,385 longs and added 3,412 shorts.  Small speculators and hedgers added 460 longs and covered 3,242 shorts.  Open interest fell by 331 contracts as prices dropped 0.91 cents.  That looks like net long liquidation, which should be supportive.  The heaviest long liquidation came from commercial accounts.  Speculators were covering shorts. 

       The average large speculative long is holding 1,350 contracts (up 80 lots on 34 accounts, dn 7 accts), while the average short has 643 contracts (dn 135 lots on 25 accts, up 4).  The average commercial long is holding 2,630 contracts (dn 144 contracts on 68 accts, up 1) compared to the average short holding of 3,045 contracts (dn 170 lots on 71 accts, dn 1).  The average reportable position is 2,026 long (dn 139 lots on 130 accts, up 4) while the average short holding is 2,167 (dn 148 lots on 125 accts, up 2).  Four new long and two new short accounts were opened over the week under review.

Rbob Gasoline            60,131                  5,962                          -contracts held by speculators:  10.09 to 1 long

                                           114,510              168,896                             held by the trade.

                                             15,039                14,822                              held by small specs and hedgers.

Spreads…up 420 contracts   The ratio of large speculative longs to shorts went from 4.63-to-one to 10.09-to-one in 2 weeks.

     Large speculative holdings grew by 7,860 longs and fell by 4,387 shorts over the latest week. Commercial holdings fell by 7,305 longs and grew by 5,300 shorts.  Small speculators and hedgers’ positions rose by 170 longs and fell by 188 shorts.  Open interest grew by 1,145 contracts as prices rallied 0.68 cents, which looks like new buying and would be bullish.  The ratio of longs to shorts exploded out to more than 10 to one.  The best new buying came from large speculators, presumably party by funds.  The best selling and long liquidation came from commercial accounts. 

   The average holdings are 986 contracts for each large speculative long (61 accts) and 298 for each large speculative short (20).  The average commercial long now has 1,431 contracts long (80) and 1,919 short (88). Average reportable holdings are 1,187 long (160) against 1,409 short (135).  There were 9 more reportable long accounts and one less short account, decreasing average longs by 188 contracts and decreasing average shorts by 155 contracts.

Naturalgas                89,058               250,008                           -contracts held by speculators:  2.81 to 1 short

                                         303,068               187,245                               held by the trade.

                                           88,357                 43,230                           held by small specs and hedgers.

Spreads…dn 26,731 contracts    The ratio of large speculative shorts to longs went from 2.88-to-one to 2.81-to-one in 1 week.

  Large speculative holdings were up by 851 longs and dropped by 3,365 shorts over the latest week. Commercial accounts liquidated 18,886 longs, and covered 17,259 shorts, while small speculators and hedgers added 3,349 new longs and covered 792 shorts.  Open interest fell by 41,417 contracts as prices fell 21.4 cents.  That looks like net, long liquidation, which would be supportive.  Commercial accounts were the only ones actually liquidating long positions.  Large speculators were selling short.  Small specs and hedgers were buying, with large specs buying less.

  The average large speculator has 1,127 contracts (79) while each large speculative short is holding 2,778 shorts (90).  The average commercial long now has 3,651 contracts long (83) and 2,881 short (65). Average reportable holdings are 2,767 long (225) long and 3,339 short (200).  Large speculators closed 9 accounts, which increased the average long holding by 66 contracts.  They closed one short account, which decreased the average short holding by 174 contracts.  There were 19 less reportable long positions, which upped the average held by 52, and 15 less short accounts, which added 32 to the average.  

Natural Gas & Utility Generation

The September natural gas futures contract expired on Thursday, which made October the new expiring contract on Friday.  That gave us a gap opening higher as we switched contracts, on the spot continuation chart, which uses each expiring contract in succession.  Prices for October delivery sold off as the session wore on, but the gap was still there at the end of Friday’s trading, despite a settlement nearer the day’s lows.

Technically, gaps (higher) have traditionally been signs of pent-up buying in a market, and they are bullish features (when they come on the upside of a market).  It looks like this particular gap could be filled in over the next day or two, but that still does not negate its initially bullish message.  And we feel that it tells a story that makes special sense in this market.  End-users have been waiting to buy as prices have fallen, and we continue to see traders buy deferred contract months, in the belief that existing prices are just too low to make any real sense.  What is interesting is that the big sellers in this market did not seem either keen or ready to sell prices lower until any specific contract becomes the expiring contract.  That adds another element of curiosity to the large short open interest held by large speculators in this market. 

After the initial gap higher, sellers returned to pound quotes back down, citing the usual mantra of heavy storage figures, poor demand, mild temperatures and a lack of immediately threatening tropical weather on the horizon.  Our continuing problem with these factors is that they have been discounted repeatedly, time and again, since last July (2008).  The quality and aggressiveness of the selling seems to get stronger and heavier and more goal-oriented as soon as a contract becomes the front month.  Because the category holding the most shorts is the large speculative group, it wants prices to move lower.

In cash trading on Friday, Henry Hub prices were at $2.39-$2.65, down $0.14-$0.36 on the day (DJN).  SoCal prices were at $2.53-$2.71, down $0.11-$0.17 on the day.  El Paso Permian prices were down $0.17-$0.20 to $2.40-$2.71.  Katy prices were down $0.17-$0.24 at $2.36-$2.59.  Waha prices were down $0.15-$0.23 at $2.45-$2.58.  Transco 6 was down $0.26-$0.32 at $2.54-$2.72/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $31.50-$35.50/mwh.  Northeastern prices last traded at $26.50-$37.30.  Entergy was last at $26.00-$29.00.  Ercot was last at $33.00-$33.50/mwh.

Dow Jones noted in Friday’s roundup that 34 new rigs have returned to service over the past six weeks, as natural gas drillers look ahead to a period of potential dearth after seeing the number of rigs cut by more than half since reaching highs last September.  These new rigs are hardly enough to change the intermediate picture – which traders have yet to discount at all.  The gap higher on Friday paid silent lip service to the notion that future supplies will be tighter, but once the future becomes the present, there are still plenty of eager sellers, judging from Friday’s finish.

Support is at $3.01-$3.02, $2.81-$2.82, $2.69-$2.72, $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 $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 gapped higher on Friday, but sold off during the session.

Dollars per million Btu

Oct Natural Gas:          Support:         $3.01-$3.02, $2.81-$2.82, $2.69-$2.72, $2.64-$2.66, $2.42-$2.43, $2.35-$2.36.

                                                    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 54 bcf on expectations for a build of 52-53 bcf.  Stocks are now 516 bcf higher than a year ago, against a surplus of 562 bcf a week ago, a surplus of 592 bcf two weeks ago and a surplus of 580 bcf three weeks ago.  Stocks are now 18.82% higher than a year ago.  They are 500 bcf and 18.13% 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).   Expectations are for a build of 52-53 bcf, according to Dow Jones and Bloomberg.

EIA Report

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

News & Views

China’s Shanghai Composite was off 5.4% at about 1:30 AM this morning.  Oil traders will be weighing ec0nomic factors against the expiration of September refined products futures this afternoon.  Although Labor Day is still a week away, schools resume today, meaning that summer is effectively over for most families. 

An Illustrated Look at Energy Market Factors

A Look at Atlantic Tropical Weather

This is the latest picture of the Atlantic Ocean.

This is the latest picture of the US Gulf.  There are no major, developed threats.

A Look at the US Dollar Versus the Euro

Dollar-Euro (dollar in euro cents):  Three-Month Bar-Chart  The US dollar sold off steeply on Thursday, and has rallied ever since.  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 two weeks ago, but has eased since that time.

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

Recommendations for Specific Market Segments

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