Prices for September 17th, 2009

Market Review for Thursday    

ESTERDAY was a quiet day, and crude oil prices were mixed.  Heating oil prices were higher, and gasoline prices finished just into positive territory.  Equities were lower and the dollar was very near unchanged.  And traders were revisiting this week’s DOE report, which had both bullish and bearish factors.  On the bullish side, crude oil stocks were down by more than had been expected.  And total products supplied, using a four-week average, are now up by a comparatively blistering 3.69%.  On the bearish side, refined products stocks were both up by more than had generally been expected and the year-to-year surpluses grew in both. 

That leaves utilization as the tie-breaker, but what is bearish for crude is bullish for products (and vice versa).  Utilization dropped in this week’s report, and is now 3.5% below the eight-year average for this time of year.  Because of Hurricane Gustav, utilization is actually 9.5% higher than it was at this time a year ago.  It typically declines in autumn, as refiners take units down for maintenance.  We expect utilization will decline by 2.5% to 5.0% between now and Thanksgiving.

That would be bearish for crude (because refineries would use less) but bullish for products (because refineries would produce less).  Traders already seem to be looking ahead to this eventuality, and we are starting to see products gain again on crude, despite the fact that this week’s inventory statistics were bullish for crude and bearish for products.  The crack spread is still very low, and reflects poor refining margins right now. 

 The trends in the US dollar (lower) and equities (higher) both seem to suggest additional buying sprees in oil markets moving forward.  At its heart, yesterday’s activity was more or less flat, especially in crude oil, as these two “trump” suits failed to deliver anything bullish for prices.  And, even though oil market fundamentals seem to be improving, there is still plenty of oil available and in storage.  It is going to require time, and this market will need higher consumption and lower production to return to equilibrium.  Despite the ongoing improvement, anyone looking strictly at fundamentals would have to conclude that oil prices are too high for the existing supply-demand balance.  More than anything else, yesterday’s activity seems to represent a rest or consolidation on the way to anticipated higher prices – mostly because of equities and currencies.

Technicals

           Crude oil prices broke above $72.90 yesterday, but they failed to build on the gains.  There is still resistance at $75.00.  Heating oil broke over resistance at 182.53 and now has resistance at 193.82 and then major resistance at 197.38.  Gasoline prices broke over resistance at 185.67, and has more at 188.65, 194.00 and then at 195.51.    

Dollars per barrel.

Above:  The crack spread finished at $5.16 yesterday, and is near the lowest levels seen yet in 2009.  It is bad for refiners.

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 $71.65, $70.00, $68.00, $67.54, $67.00, $65.80-$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 185.70, 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 181.50, 175.34, 173.00, 170.70, 170.00, 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 187.31, 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 183.25, 176.64, 173.00, 172.60, 169.70, 168.00, 165.25, and 160.10. 

Football: The bulls were stopped at scrimmage, leaving it at second and 10 to go.

Technical Support & Resistance

Oct crude oil                        Support:             $71.65-$71.80, $70.00-$70.20, $68.00-$68.10, $67.00-$67.05, $66.00-$66.15

                                           Resistance:        $73.35-$73.55, $74.60-$75.00, $76.10-$76.25, $79.00-$79.17, $84.70-$84.85.

Oct heating oil      Support:             181.50-181.70, 175.30-175.45, 173.00-173.15, 171.65-171.80, 170.70-170.85.

                             Resistance:        185.60-185.70, 191.35-191.45, 192.30-192.45, 192.75-192.83, 193.75-193.85.

Oct Rbob                     Support:             176.60-176.75, 173.00-173.15, 172.60-172.75, 169.70-169.85, 168.00-168.15.

                                           Resistance:        185.45-185.67, 187.20-187.31, 206.85-207.00, 208.00-208.15, 211.00-211.24.

Oil Inventory Reports

      This week’s DOE report showed more of what we saw last week.  Crude stocks were lower, while refined products stocks increased.  Over the last two weeks, the year-on-year crude oil stock surplus has declined while the refined products year-on-year surpluses have increased.  It has been a simple conversion of crude into products, more or less.  Refinery utilization, as it typically does at this time of year, has started to decline.  This will continue over the next six or seven weeks, we should expect.  Ultimately, the decline in utilization will lead to smaller builds in products and smaller draws in crude oil inventories.  We may be looking at the fullest extent of the relationship for now. 

     Distillate stocks are now 36.6 million bbls, or 27.90%, higher than a year ago.  Heating oil inventories are 12.1 mln bbls, or 32.53%, higher than they were a year ago.  Gasoline stocks are 13.9 mln bbls (up 7.17%) higher against a year ago.  Crude oil stocks are now 29.8 million bbls, or 9.83%, higher than a year ago.  Residual stocks are 4.8 mln bbls (12.40%) lower than a year ago, jet fuel stocks are 5.3 mln bbls, (13.28%) higher than a year ago.  Utilization is 9.54% higher than a year ago and 3.51% below the eight-year average.  It is 5.26% lower than the four-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 12,907 contracts on Wednesday, when prices were higher.  That looks like short-covering, which would be bearish. 

      Heating oil open interest fell by 654 contracts on Wednesday, when prices were higher.  That looks like short-covering and is bearish.

      RBOB open interest grew by 10,639 contracts on Wednesday when prices were higher. That looks like new buying and is supportive.   

      Natural gas open interest fell by 9,506 on Wednesday when prices were higher.  That looks like more short-covering and would be bearish.    

Wednesday’s Open Interest Changes:  

Crude 1,184,722  dn 12,907       Heat 316,418   dn 654       RBOB 214,423  up 10,639       Nat gas 734,640  dn 9,506     

CFTC Commitments of Traders  (for the period ended Tuesday, Sep. 8th)   

 As of Sep. 8th:                 Long                   Short:

Crude oil                    211,936               178,824                           -contracts held by speculators:  1.18 long

                                          629,710               667,430                               held by the trade

                                            76,226                 71,618                               held by small specs and hedgers.

Spreads….dn 7,332 contracts   The ratio went from 1.15-to-one long to 1.18-to-one over the last week.

   Large speculators liquidated 3,793 long contracts and covered 8,311 shorts over the week under review.  Commercials added 22,119 new longs and added 22,224 shorts.  Small specs and hedgers added 2,758 longs and added 7,171 shorts.  Open interest rose by 13,752 contracts as prices rallied $3.05/barrel.  That looks like net, new buying, which would be bullish.  Commercials were doing the best buying, and large speculators were covering shorts.  Small specs and hedgers were selling short.

   The average large speculator has 2,119 long contracts (100 accounts), or 60 less contracts on average on 1 more account, and 1,753 shorts (102 accounts), or an average of 64 contracts less on 1 less account.  Commercials held 7,238 longs (87) or 172 fewer longs on average on five more accounts, and 6,881 shorts (97), or 17 more shorts on 3 more accounts. Reportables held 3,880 longs (284, up 13 accts) and 4,099 shorts (270 accts, up 5).There were 146 less longs and 52 fewer shorts on average.

Heating oil                   44,223                 18,819                           - contracts held by speculators:  2.35 to 1 long

                                          187,802               218,733                              held by the trade.

                                            33,669                 28,142                               held by small specs and hedgers.

Spreads….up 3,329 contracts.    The ratio of large speculative longs to shorts went from 2.89-to-one to 2.35-to-one in 1 week.

       Large speculators liquidated 587 longs and added 3,329 shorts.  Commercial accounts added 9,273 longs and added 1,323 shorts.  Small speculators and hedgers liquidated 664 longs and added 3,370 shorts.  Open interest grew by 10,947 contracts as prices rallied 2.36 cents.  That looks like net, new buying and is supportive.  The only new buying came from commercial accounts.  Speculators were selling into higher prices.

       The average large speculative long is holding 1,340 contracts (up 161 lots on 33 accounts, dn 5 accts), while the average short has 627 contracts (up 7 lots on 30 accts, up 5).  The average commercial long is holding 2,722 contracts (up 135 contracts on 69 accts, unch) compared to the average short holding of 3,038 contracts (up 100 lots on 72 accts, dn 2).  The average reportable position is 2,132 long (up 90 lots on 128 accts, unch) while the average short holding is 2,142 (up 26 lots on 130 accts, up 2). There were the same number of reportable longs and two more short accounts, adding 90 longs and 26 shorts.

Rbob Gasoline            53,343                10,568                          -contracts held by speculators:  5.05 to 1 long

                                           123,627              170,280                             held by the trade.

                                             13,725                  9,847                              held by small specs and hedgers.

Spreads…up 520 contracts   The ratio of large speculative longs to shorts went from 10.09-to-one to 5.05-to-one in 3 weeks.

     Large speculative holdings rose by 71 longs and fell by 255 shorts over the latest week. Commercial holdings fell by 1,049 longs and fell by 325 shorts.  Small speculators and hedgers’ positions grew by 286 longs and fell by 112 shorts.  Open interest fell by 172 contracts as prices rallied 4.67 cents, which looks like short-covering and would be negative.  The ratio of longs to shorts is at 5.05-to-one from more than 10-to-one three weeks ago.  All three categories were covering shorts during the period under review.  Speculators were buying very lightly.

   The average holdings are 920 contracts for each large speculative long (71 accts, up 16 accts) and 480 for each large speculative short (22, unch).  The average commercial long now has 1,792 contracts long (69) and 1,892 short (90). Average reportable holdings are 1,253 long (154) against 1,426 short (138).  There were 10 less reportable long accounts and 13 more short accounts, decreasing average longs by 90 contracts and average shorts by 149 contracts.

Naturalgas                95,911               264,540                           -contracts held by speculators:  2.76 to 1 short

                                         319,734               191,333                               held by the trade.

                                           83,378                 43,150                           held by small specs and hedgers.

Spreads…dn 5,250 contracts    The ratio of large speculative shorts to longs went from 2.85-to-one to 2.76-to-one in 1 week.

  Large speculative holdings were up by 4,298 longs and were up by 3,081 shorts over the latest week. Commercial accounts were up 4,615 longs, and added 5,566 shorts, while small speculators and hedgers liquidated 3,443 longs and covered 3,177 shorts.  Open interest grew by 220 contracts as prices fell 1.4 cents.  That looks like net, new selling, but it was not heavy enough to make a major statement.  Large speculators and commercials were buying and selling heavily, while small specs and hedgers were liquidating and covering existing holdings.

  The average large speculator has 989 contracts (97) while each large speculative short is holding 2,496 shorts (106).  The average commercial long now has 3,675 contracts long (87) and 2,814 short (68). Average reportable holdings are 2,537 long (251) long and 2,931 short (231).  There is one less long account and four fewer short accounts the reportable category, and that increased the average long holding by 24 contracts and raised the average short position by 64 contracts.  This report caught the market at a major turning point.  This week’s report is bound to be more interesting.

Natural Gas & Utility Generation

Natural gas prices sold off 30 cents yesterday, after the first bout of short-covering.  It seems that the fresh buying may have run its course, and the last few gains came from shorts getting out.  That could never sustain itself.  The market was due for long liquidation or profit-taking, and that is what we saw yesterday.  We do not believe that the bullish move in this market is over, yet, though. 

The latest unemployment figures fit into the recent mold of statistics suggesting that the economy is getting stronger.  Now, the argument has shifted from whether we are at a bottom to what kind of a bottom we are at.  There has been a good deal of discussion over whether this is a “V” bottom, or one that will roar back to prosperity, a “W” bottom that will experience another wave of poor economic data before getting much stronger, a “U” bottom, with the base of the letter either wider or narrower, or an “L” bottom, in which the worst may have been seen, but in which better days are really quite distant.  But, as we say, this discussion emphasizes the fact that the debate has switched to what kind of a bottom it is rather than if it is a bottom at all.  As far as most people on Main Street are concerned, this is a somewhat academic exercise with limited practical application.

In cash trading yesterday, Henry Hub prices were at $3.40-$3.58, up $0.22-$0.22 on the day (DJN).  SoCal prices were at $3.65-$3.89, up $0.12-$0.15 on the day.  El Paso Permian prices were up $0.16-$0.18 at $3.48-$3.58.  Katy prices were up $0.16-$0.21 at $3.38-$3.56.  Waha prices were up $0.15-$0.20 at $3.44-$3.57.  Transco 6 was up $0.10-$0.15 at $3.63-$3.77/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $35.50-$36.50/mwh.  Northeastern prices last traded at $29.75-$36.25.  Entergy was last at $28.50-$29.50.  Ercot was last at $33.75-$36.00/mwh.

Expectations for yesterday’s EIA underground storage report came in between 76 and 79 bcf.  The actual figure was a build of 66 bcf, and it cut the surplus against the five-year average from 503 bcf and 17.41% to 487 bcf and 16.39%.  That is just about as supportive a report as one could want.  But, as so often happens, traders faded the initial response on a report day.  It was a categorically bullish report, so traders took profits.  It works like that more often than not. 

Also this week, we had traders covering gas futures after many of them tried to outwit the index funds.  It is common knowledge that these index funds roll out of the front month (October right now) and then purchase the next month (November) around the 14th of each month.  So some enterprising speculators bought November and sold October last week, in the hope that they might be able to profit from the “roll” into November.  In the event, the roll went off without a hitch and traders were stuck holding a spread that no longer made much sense.  They lost money on the deal. 

Support is at $3.44-$3.46, $3.28-$3.32, $2.91-$2.93, $2.80-$2.82, $2.74-$2.75, $2.69-$2.70, $2.62-$2.64, $240-$2.43, $2.35-$2.36, $2.21-$2.24, $2.14-$2.16 and $2.05-$2.07.  Resistance is at $3.78-$3.80, $3.88-$3.90, $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 advanced to new recent highs yesterday.

Dollars per million Btu

Oct Natural Gas:          Support:        $3.28-$3.32, $2.91-$2.93, $2.80-$2.82, $2.74-$2.75, $2.69-$2.70, $2.62-$2.64.

                                                    Resistance:     $3.78-$3.80, $3.85-$3.86, $4.09-$4.11, $4.15-$4.16, $4.24-$4.28, $4.31-$4.33.

EIA Weekly Storage Figures

Last week’s EIA report showed a build of 66 bcf on expectations for a build of 76-79 bcf.  Stocks are now 496 bcf higher than a year ago, against a surplus of 495 bcf a week ago, a surplus of 489 bcf two weeks ago and a surplus of 516 bcf three weeks ago.  Stocks are now 16.74% higher than a year ago.  They are 487 bcf and 16.39% above the five-year average.

The five-year average for this week was a build of 82.2 bcf, while the eight-year average was a build of 84.0 bcf.  Last year, there was a build of 67 bcf.  This week’s estimates were for builds of 76-79 bcf.

EIA Report

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

News & Views

Traders already seem to be discounting the normal, seasonal decline in refinery utilization, and that could ultimately be good news for US refiners, which are currently experiencing their worst margins for 2009.

An Illustrated Look at Energy Market Factors

A Look at the US Dollar Versus the Euro

Dollar-Euro (dollar in euro cents):  Three-Month Bar-Chart  The US dollar moved mostly sideways yesterday, but the trend still remains pointed lower.  We still believe that prices have embarked upon a new major leg lower, which could take prices down to the 67.50 euro cents level.  Any continuing weakness will be bullish for oil and commodities. 

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 lost nearly 8 points yesterday, in a quiet and subdued session.  The trends remain higher, which is bullish for oil.

The assumption is that a stronger DJIA signals continuing economic recovery and stronger oil demand.

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

A Look at Inventories

Distillate inventories are at their highest levels for this time of year.

A Look at Imports

Thirteen week crude oil imports are at historically low levels.

Recommendations for Specific Market Segments