Prices for September 21st, 2009

Market Review for Monday         

ITTERY traders were looking ahead to a two-day meeting of the Federal Reserve starting today, to be followed in quick succession by a G-20 economic summit on Thursday.  The fear is that policy-makers will start to take their feet off the financial accelerators that have propelled global recovery for the last year.  Everyone knows that the party has to end at some point, that fiscal stimulus without restraint will lead only to inflation, but few expected the markets to be this nervous this soon. 

The oil markets dropped sharply yesterday as investors started to move back into safe havens, and that boosted the US dollar and helped pull equities prices back down.  Previous Fed meetings have largely been non-events over the last few months, but yesterday’s activity is a sign that traders feel the economy has recovered enough to warrant a change in the Fed’s stance on policy.  It might not happen at this meeting, but the markets seem to have been telling us that they think it is coming sooner than later.  It is good news if the economy is strong enough to take it, but it could be premature to change anything, yet.

The likelihood is that nothing much will happen.  But, Fed-watchers are notorious for building entire fiscal structures on as little as one word change.  And the thinking gripping traders yesterday was that the Fed could decide to change its tone, and then possibly its actions, culminating with an increase in historically low interest rates.

 Every time that equities pause and the dollar strengthens, traders come home to the supply and demand fundamentals in oil.  They are improving, but they do not, on their own, justify existing prices.  Without weaker dollar and stronger equities pushing prices higher, the oil complex has little reason to advance.  Recent fundamental improvements do not justify prices at existing levels without the support from equities and currencies.

 This week’s supply-demand statistics are likely to show a large decline in refinery utilization, according to estimates gathered by wire-services.  These estimates agree with our own research, which has shown a number of large declines, even without hurricanes, for this same week, over the years.  While that should help to eat into refined products stockpiles, it would also reduce demand for crude, which would lead to even lower imports (already historically low) or builds in inventories.

Technicals

           Oil prices sold off smartly yesterday as it returned to being a commodity (opposed to an asset class).  Crude oil is in a range between $65.23 and $75.00 with a tighter range of $67.05 and $73.16.  Heating oil prices are in a range of 170.00-170.18 and 185.70.  Gasoline is between 172.16 and 187.31.

Dollars per barrel.

Above:  The gasoline-to-heating oil spread finished yesterday with heating oil over gasoline for the first time since February 25th.

October crude oil now has buy-stops over $72.20, $73.16, $73.35-$73.52, $75.00, $76.25, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $68.95, $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 182.80, 185.70, 187.15, 192.45 192.83, 193.85, 194.65, 196.21, 197.40, 199.20, 209.40, 215.00, 221.13, and 225.80. Sell stops are under 174.20, 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 183.65, 185.35, 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 173.85, 173.00, 172.60, 169.70, 168.00, 165.25, and 160.10. 

Football: The bulls lost 23 yards on third and 14, and that makes it a difficult fourth and 37 to go today.

Technical Support & Resistance

Oct crude oil                        Support:             $68.95-$69.10, $68.00-$68.10, $67.00-$67.05, $66.00-$66.15, $64.95-$65.10.

                                           Resistance:        $72.55-$72.66, $73.35-$73.55, $74.60-$75.00, $76.10-$76.25, $79.00-$79.17.

Oct heating oil      Support:             174.20-174.35, 173.00-173.15, 171.65-171.80, 170.70-170.85, 170.00-170.20.

                             Resistance:        182.60-182.80, 185.60-185.70, 191.35-191.45, 192.30-192.45, 192.75-192.83.

Oct Rbob                     Support:             173.85-174.00, 173.00-173.15, 172.60-172.75, 169.70-169.85, 168.00-168.20.

                                           Resistance:        183.50-183.65, 185.45-185.67, 187.20-187.31, 206.85-207.00, 208.00-208.15.

Oil Inventory Reports

      Of all the weeks in the year, this week has seen the largest changes in utilization.  Over the last eight years, only one had a change of less than a full percentage point, and last year, after Hurricane Ike, utilization fell by 10.7%.  In 2004, after Hurricane Ivan, utilization fell 7.6%.  The average decline, in the six years declines were seen, was 4.28%.  This week has been peculiar in other ways, having more years showing drawdowns than builds in distillate stocks and with six of the last eight years seeing builds in gasoline.  Crude oil imports have also seen huge moves this week, with declines of 1.367 million bpd in 2008 and of 1.488 mln bpd in 2004, with builds of 0.704, 0.491 and 0.637 mln bpd in the intervening years. 

     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 27,354 contracts on Friday, when prices were lower.  That looks like heavy long liquidation, which would be supportive.  It is probably at least partially expiration-related.

      Heating oil open interest fell by 262 contracts on Friday, when prices were lower.  That looks like light long liquidation and is mildly supportive. 

      RBOB open interest fell by 1,153 contracts on Friday when prices were lower. That looks like long liquidation and is constructive, at least in theory.

      Natural gas open interest fell by 6,214 on Friday when prices were higher.  That looks like short-covering, which would be bearish.

Friday’s Open Interest Changes:  

Crude 1,170,945  dn 27,354       Heat 316,680   dn 262       RBOB 215,392  dn 1,153       Nat gas 723,332  dn 6,214       

CFTC Commitments of Traders  (for the period ended Tuesday, Sep 15th)   

 As of Sep 125h:                 Long                   Short:

Crude oil                    219,352               173,795                           -contracts held by speculators:  1.26 long

                                          629,344               676,051                               held by the trade

                                            75,287                 74,137                               held by small specs and hedgers.

Spreads….up 13,255 contracts   The ratio went from 1.15-to-one long to 1.26-to-one over the last 2 weeks.

   Large speculators added 7,416 long contracts and covered 5,029 shorts over the week under review.  Commercials liquidated 366 new longs and added 8,621 shorts.  Small specs and hedgers liquidated 939 longs and added 2,519 shorts.  Open interest rose by 19,366 contracts as prices dropped $0.17/barrel.  That looks like new selling and is bearish.  The best new selling came from commercials and from small speculators and hedgers.

   The average large speculator has 2,150 long contracts (102 accounts), or 31 more contracts on average on 2 more accounts and 1,773 shorts (98 accounts), or an average of 20 contracts more on 4 less accounts  Commercials held 7,152 longs (88) or 86 fewer longs on average on one more account, and 7,116 shorts (95), or 235 more shorts on 2 less accounts. Reportables held 4,066 longs (276, dn 8 accts) and 4,305 shorts (261 accts, dn 9). There were 186 more longs and 206 more shorts on average.

Heating oil                   46,114                 17,456                           - contracts held by speculators:  2.64 to 1 long

                                          196,946               229,918                              held by the trade.

                                            34,917                 30,603                               held by small specs and hedgers.

Spreads….dn 1,824 contracts.    The ratio of large speculative longs to shorts went from 2.35-to-one to 2.64-to-one in 1 week.

       Large speculators added 1,891 longs and covered 1,363 shorts.  Commercial accounts added 9,144 longs and added 11,185 shorts.  Small speculators and hedgers added 1,248 longs and added 2,461 shorts.  Open interest grew by 10,459 contracts as prices dropped 0.24 cents.  That looks like net, new selling and is bearish.  Commercials and small specs and hedgers were sellers.  Commercials were far and away the biggest new sellers. 

       The average large speculative long is holding 1,397 contracts (up 57 lots on 33 accounts, unch), while the average short has 623 contracts (dn 4 lots on 30 accts, up 2).  The average commercial long is holding 2,854 contracts (up 132 contracts on 69 accts, unch) compared to the average short holding of 3,107 contracts (up 69 lots on 74 accts, up 2).  The average reportable position is 2,187 long (up 55 lots on 129 accts, up 1) while the average short holding is 2,187 (up 45 lots on 131 accts, up 1). There were the same number of reportable longs and two more short accounts, adding 90 longs and 26 shorts.

Rbob Gasoline            47,577                13,266                          -contracts held by speculators:  3.59 to 1 long

                                           127,859              164,170                             held by the trade.

                                             14,003                12,003                              held by small specs and hedgers.

Spreads…dn 1,645 contracts   The ratio of large speculative longs to shorts went from 10.09-to-one to 3.59-to-one in 4 weeks.

     Large speculative holdings fell by 5,766 longs and grew by 2,698 shorts over the latest week. Commercial holdings rose by 4,232 longs and fell by 6,110 shorts.  Small speculators and hedgers’ positions grew by 278 longs and grew by 2,156 shorts.  Open interest fell by 2,901 contracts as prices dropped 3.97 cents, which looks like long liquidation and is supportive.  The ratio of longs to shorts is at 3.59-to-one from more than 10-to-one four weeks ago.  Large speculators were liquidating longs while commercials were covering shorts.

   The average holdings are 933 contracts for each large speculative long (51 accts, dn 20 accts) and 553 for each large speculative short (24, up 2).  The average commercial long now has 1,776 contracts long (72) and 2,002 short (82). Average reportable holdings are 1,282 long (148) against 1,442 short (133).  There were 6 less reportable long accounts and 5 fewer short accounts, increasing average longs by 29 contracts and average shorts by 16 contracts.

Naturalgas                84,448               258,314                           -contracts held by speculators:  3.06 to 1 short

                                         334,359               200,287                               held by the trade.

                                           81,489                 41,695                           held by small specs and hedgers.

Spreads…up 22,591 contracts    The ratio of large speculative shorts to longs went from 2.76-to-one to 3.06-to-one in 1 week.

  Large speculative holdings dropped by 11,463 longs and dropped by 6,226 shorts over the latest week. Commercial accounts were up 14,625 longs, and added 8,954 shorts, while small speculators and hedgers liquidated 1,889 longs and covered 1,455 shorts.  Open interest grew by 2,864 contracts as prices rose 51.3 cents.  That looks like net, new buying, which would be supportive.  Commercials were heavy buyers, but were also selling, although not as much.  Speculators liquidated longs and covered shorts.  There is still a huge disproportion of large speculative shorts in this market. 

  The average large speculator has 1,083 contracts (78) while each large speculative short is holding 2,532 shorts (102).  The average commercial long now has 3,800 contracts long (88) and 2,821 short (71). Average reportable holdings are 2,694 long (246) long and 3,150 short (223).  There are five less long accounts and eight less short accounts in the reportable category, which increased the average long holding by 157 contracts and the average short holding by 219 contracts.  There were 19 fewer large speculative long accounts and four fewer large speculative shorts (increased average longs by 94 and shorts by 36).

Natural Gas & Utility Generation

Natural gas prices were lower yesterday, as natural gas traders took their cue from oil prices, equities and the dollar.  Gas prices have been following oil and equities higher, but they have also been working higher on their own merit.  At its heart, this is a renewed market.  But, it is still susceptible to trust issues by those holding longs.  Prices have been weak for so long that those holding long positions are still easily scared out.  What makes this advance different, though, is the market’s ability to bounce back after sharp declines.  At least, that has been the pattern so far in September.  Every steep decline has been answered by an equally strong advance very quickly.  So far this month, prices have been remarkably resilient.

Traders were also reportedly reacting to the latest weather reports, which show warmer temperatures moving back into the US east of the Rockies.  Temperatures have been cooler in the Mid-Atlantic and Northeast recently, with nights and early mornings quite brisk.  Had the trend continued, we might have seen heating demand appear a month early.  As it is, with autumn starting today, the heating season is getting closer each day.  Any warming trend will delay it and that takes some of the spine out of the market.  Heating demand started immediately in November a year ago, and that may have helped prices rally lately.

In cash trading yesterday, Henry Hub prices were at $3.30-$3.45, up $0.18-$0.25 on the day (DJN).  SoCal prices were at $3.38-$3.83, down $0.01 and up $0.21 on the day.  El Paso Permian prices were up $0.14-$0.15 at $3.25-$3.41.  Katy prices were up $0.05-$0.07 at $3.25-$3.38.  Waha prices were up $0.12-$0.14 at $3.25-$3.41.  Transco 6 was up $0.21-$0.26 at $3.54-$3.65/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $31.00-$39.50/mwh.  Northeastern prices last traded at $32.25-$41.00.  Entergy was last at $32.00-$33.00.  Ercot was last at $31.25-$32.50/mwh.

The crude-to-natural gas ratio finished yesterday at 19.49-to-one.  On September 8th, it reached a high of 25.33-to-one.  We think that the ratio may have turned, but it has a long way to go to get back to the average since 2002, which is less than 9-to-one.  With the winter looming - the six colder months of the year start today – we see reasons to believe that this ratio could return to somewhere between 12 and 16 to one before spring.  Of course, a great deal will depend upon temperatures during the coldest months, but gas stands to lose more of its surplus than distillate if it is a colder or longer winter than normal.  That is because so much of the distillate “barrel” is diesel.  In any event, the recent turn back up in this market seems to have the momentum to push the ratio back to a more traditional relationship with crude oil. 

Having said all this, it is important that prices rally almost immediately after yesterday’s selloff.  It may take time for prices to rebuild a base for another advance, though. 

Support is at $3.53-$3.55, $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 were lower, with the rest of the complex yesterday.

Dollars per million Btu

Oct Natural Gas:          Support:        $3.53-$3.55, $3.45-$3.46, $3.28-$3.32, $2.91-$2.93, $2.80-$2.82, $2.74-$2.75.

                                                    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 68.8 bcf, while the eight-year average was a build of 75.25 bcf.  Last year, there was a build of 51 bcf. 

EIA Report

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

News & Views

Yesterday’s jitters over a possible fiscal tightening by the Fed seems premature to us,

but they are a shot across the bow, a harbinger of things to come.

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 rallied slightly again yesterday, although it sold off later.  When prices broke beneath the blue line, above, they started a new leg lower that should push quotes to the 67.50 euro cents level.  And any continuing weakness will be bullish for oil and commodities.  Meetings this week could address the dollar’s weakness, though.

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 41 points yesterday, as traders started to worry that the Federal Reserve could start to pull in on the reins of accommodation.

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

Recommendations for Specific Market Segments