Prices for August 31st, 2009

Market Review for Monday         

HE oil complex dropped steeply yesterday as traders liquidated long positions in the expiring September refined products contracts.  That selling seeped over into deferred months and there was a sense that oil prices failed to break higher yesterday.  This was especially true in gasoline futures, which are now beneath the lower limit of their recent trading range with the switch from September to October as the expiring contract. 

Traders were also monitoring a steep decline in China’s Shanghai Composite Index, which fell 7% yesterday.  It was the initial trigger that generated selling in trading overnight on Sunday night and into Monday morning.  The weakness came as the result of growing fears that stimulus packages may have done their best, and on the fear that credit markets could be tightening again, at least in China, according to Dow Jones.  The DJIA was off 0.8%, or off 48 points in trading yesterday.  The US dollar was lower, but not by enough to tip the balance in the bulls’ favor.  Probably the biggest factor was simply the lack of patience by bulls, who saw prices turned back once again from major resistance levels.  They saw it as a technical failure.

There was a good amount of long liquidation, and while there was also short-covering, it was never up to the size of long liquidation.  It seems that a number of traders had been waiting for prices to break above the major resistance before getting out of their long holdings in September contracts.  It turns out to have been a case of poor timing, though, and their selling only exacerbated the weakness. 

It remains to be seen if this weakness, in either oil prices or Chinese equities, will carry over to today’s trading.  Traders will start looking ahead - to this afternoon’s API report and then to the weekly DOE statistics out tomorrow morning – as early as this late morning.   

With a bank holiday in the UK, volume was on the light side yesterday, in a number of different markets, and some feel that the rest of this week could be quieter than normal in the US, with Labor Day coming up next Monday.  Still, schools are back in session, so few families can take vacations at this late stage, and the ones taking time off this week are more likely to be single people and couples with grown children, or no children.  As a result, we expect volume to pick up again somewhat today. 

Technicals

           Oil prices were steeply lower yesterday, and crude oil prices broke their major support, but rallied to finish 13 cents above the $69.83 key level.  Heating oil prices broke decisively beneath 178.40, but October takes over today, some 2.45 cents above that figure.  And gasoline prices did not break the support yesterday, but will open today with October nearly eight cents beneath the range support at 188.65.  Each breakdown has a flaw that could negate it.

Ratio: Crude divided by natural gas prices.

Above:  The ratio of crude oil prices to natural gas prices fell to 23.50-to-one yesterday.  It reached 26.35-to-one on 8-21-09.

October crude oil now has buy-stops over $73.35-$73.52, $75.00, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $69.10, $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 187.15, 192.45 192.83, 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 176.10, 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 207.00, 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 195.50, 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 bears gained 28 yards yesterday on second and 12, giving the bears another set of downs.

Technical Support & Resistance

Oct crude oil                        Support:             $69.10-$69.25, $68.00-$68.05, $66.00-$66.15, $64.95-$65.23, $62.70-$62.85.

                                           Resistance:        $73.35-$73.55, $74.60-$75.00, $76.10-$76.25, $79.00-$79.17, $84.70-$84.83.

Oct heating oil      Support:             176.10-176.25, 171.65-171.80, 165.80-166.00, 163.75-164.00, 157.45-157.60.

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

Oct Rbob                     Support:             195.50-195.65, 188.65-188.80, 187.35-187.50, 184.50-184.70, 182.60-182.75.

                                           Resistance:        206.85-207.00, 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 grew by 6,387 contracts on Friday, when prices were higher.  That looks like new buying, which would be supportive.

      Heating oil open interest fell by 4,388 contracts on Friday, when prices were higher.  That looks like short-covering, which would be bearish. 

      RBOB open interest grew by 3,222 contracts on Friday when prices were higher. That looks like new buying and would be supportive. 

      Natural gas open interest grew by 3,039 on Friday, when prices dropped.  This looks like fresh selling and is bearish. 

Friday’s Open Interest Changes:  

Crude 1,158,475  up 6,3487       Heat 300,706   dn 4,388       RBOB 212,089  up 3,222       Nat gas 719,904  up 3,039

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 October natural gas futures dropped 5.6 cents yesterday, closing the gap higher seen on Friday.  Traders were reacting to weaker oil prices and to mild temperature outlooks across many of the most populous regions in the United States.  Keeping with the pattern of cooler-than-usual temperature readings since last November, readings in the upper Midwest, the Northeast and Mid-Atlantic states have been positively autumnal over the last two days, and they are expected to remain on the cooler side, which would negate any incremental needs for gas-generated electricity.

Last week’s EIA underground storage report showed a build roughly in line with expectations.  It left stocks 18.13% above the five-year average for this time of year and 18.82% higher than a year ago.  These figures have been slowly creeping lower over the past few weeks.  They remain well above where we have been at this time of year before, but they are not as large as the surpluses seen in distillates or heating oil right now, where we have more than 30% more than a year ago.  Heating oil stocks are more than 36% higher than a year ago.  For some reason, traders do not seem to feel that the surplus in distillates and heating oil stocks is as onerous as the surplus in natural gas inventories. 

Traders are monitoring a tropical development about 60% across the Atlantic.  While it is approaching the Caribbean, meteorologists do not expect this system to threaten the US Gulf.  It seems likely to develop into a tropical cyclone, trackers are saying, but it does not look like it will track a trajectory that would push it into a threatening path, at least at this time.  Futures traders are not all that concerned with the development, and there was little or no short-covering yesterday, in anticipation of the system being upgraded.

In cash trading yesterday, Henry Hub prices were at $2.30-$2.60, down $0.05-$0.09 on the day (DJN).  SoCal prices were at $2.61-$2.68, down $0.03 and up $0.08 on the day.  El Paso Permian prices were down $0.03 and up $0.05 to $2.45-$2.50.  Katy prices were down $0.02-$0.11 at $2.34-$2.48.  Waha prices were down $0.01-$0.05 at $2.44-$2.53.  Transco 6 was up $0.01-$0.04 at $2.55-$2.76/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $30.50-$33.00/mwh.  Northeastern prices last traded at $28.25-$29.00.  Entergy was last at $26.75-$27.00.  Ercot was last at $27.00-$28.00/mwh.

We continue to wonder why natural gas prices are not subject to at least some of the factors or  influences driving distillate or heating oil prices.  And we continue to wonder why oil prices seem so sensitive to the slightest changes in economic outlook, while gas prices seem to be influenced barely at all.  Since they share a number of fundamental factors, we feel that factors influencing one should have some – even if it is minor – influence on the other.  The fact that one is traded internationally and the other domestically should not make them entirely different species.

Support is at $2.91-$2.92, $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 $3.07-$3.08, $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, and $5.01-$5.03. 

Natural gas prices closed the gap made on Friday, with yesterday’s trading..

Dollars per million Btu

Oct Natural Gas:          Support:         $2.91-$2.92, $2.81-$2.82, $2.69-$2.72, $2.64-$2.66, $2.42-$2.43, $2.35-$2.36.

                                                    Resistance:     $3.07-$3.08, $3.22-$3.23, $3.28-$3.30, $3.40-$3.41, $3.59-$3.61, $3.73-$3.77.

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 67.20 bcf (Friday), the eight-year average was a build of 68.50 bcf.  Last year, there was a build of 90 bcf (Friday).

EIA Report

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

News & Views

Recent economic reports are showing continuing improvement in the economy.

Oil traders need to figure out whether an improving economy will bring demand back quickly enough to justify existing high prices.  Technically, prices are still in danger of failing to break to new highs. 

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 a number of localized disturbances, but nothing organized.

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 slightly lower yesterday, but it remains in essentially the same range that it has been in for weeks.  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 dropped by 48 points yesterday.  It has had trouble building on last week’s upside breakout.

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

Recommendations for Specific Market Segments

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