Prices for September 22nd, 2009

Market Review for Tuesday        

T is just too early for the Fed to make dramatic changes, but when the FOMC minutes are released, pundits will agonize over every single word used, with particular emphasis on any additions or deletions from previous reports.  Change is in the air, but it is a wind in the distance, not here yet.  At some point, we all know that interest rates will need to rise, but we fully expect Ben Bernanke’s Federal Reserve to give us plenty of advance notice.  Although it would be nice to crush the currency speculators and fortify the dollar, which would allow commodities to go home to their own fundamentals, this economy just is not robust enough to handle that.  Higher interest rates could kill equities and housing.

As a result of yesterday’s reassessment, the dollar broke down to yet new lows, reaching the 67.50 euro cents objective we forecast a couple weeks ago.  Equities rallied, with the DJIA gaining 51 points.  And so, influenced by those two factors, investors came back into oil markets and pushed prices up and away from critical support below.  The question today, is whether the DOE report will have enough of a change to outpoint equities and currencies.

Today could be a pivotal day.  We get the DOE statistics out in the morning, then we get more from the Fed and then we will be looking ahead to the G-20 meeting.  November crude oil also starts its run as the expiring contract today.  There is typically more drama at the end than at the beginning of a contract’s final run, but differentials sometimes change at the start of a run.

Last night’s American Petroleum Institute (API) report showed some unexpected numbers.  Crude oil stocks actually increased in their figures, although not by much.  Distillate stocks dropped, primarily as the result of implied demand of 4.577 million bpd.  Gasoline stocks built, on the back of an extraordinarily weak demand number of 8.453 million bpd.  That low a figure is rarely seen in September.

 Refinery utilization dropped by 0.9%, which is the sort of large decline we would expect to see this week.  It seems to have started to back up crude into inventories and started to eat into historically high distillate inventories.  If the DOE numbers back these numbers up this morning, we should start to see refinery margins improve again.  They have been near or at their lowest levels for 2009 recently.  The very weak gasoline implied demand figure may mean that it would only be the heat crack improving, but we will have to see today.

Technicals

           Oil prices rallied yesterday, and prices are stuck inside trading ranges.  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 crack spread reached its second lowest figure yesterday, at $3.64, one cent below the low reached two weeks ago.

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 179.95, 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 175.15, 173.85, 173.00, 172.60, 169.70, 168.00, 165.25, and 160.10. 

Football: The bulls gained 18 yards on fourth and 37, which did not get the bulls the first down.  The bears take over now.

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:        $71.85-$72.20, $72.55-$72.66, $73.35-$73.55, $74.60-$75.00, $76.10-$76.25.

Oct heating oil      Support:             175.45-175.60, 174.20-174.35, 173.00-173.15, 171.65-171.80, 170.70-170.85.

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

Oct Rbob                     Support:             175.15-175.30, 173.85-174.00, 173.00-173.15, 172.60-172.75, 169.70-169.85.

                                           Resistance:        179.85-179.95, 183.50-183.65, 185.45-185.67, 187.20-187.31, 206.85-207.00.

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 19,971 contracts on Monday, when prices were lower.  That looks like heavy long liquidation, which would be supportive.  It was probably at least partially expiration-related.

      Heating oil open interest fell by 1,135 contracts on Monday, when prices were lower.  That looks like long liquidation and is mildly supportive. 

      RBOB open interest fell by 8,456 contracts on Monday when prices were lower. That looks like long liquidation and is constructive, at least in theory.  It is very liquidation with expiration so far away.

      Natural gas open interest fell by 8,025 on Monday when prices were lower.  That looks like long liquidation and profit-taking by longs.  It is theoretically supportive.

Monday’s Open Interest Changes:  

Crude 1,150,974  dn 19,971       Heat 315,545   dn 1,135       RBOB 206,913  dn 8,436       Nat gas 715,307  dn 8,025    

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 rallied yesterday to keep alive their track record recently of rallying quickly after any selloff.  Prices seem to have found a new home in the mid three-dollar range.  Longer-term, gas prices probably are in a range between something like $3.00 or $3.25 on the downside and $3.75 on the upside.  Prices have not really discounted any economic recovery yet, but it is going to be difficult to do that during the shoulder months of September and October with underground storage still at high levels compared to year-ago and five-year average levels.  If we see storage levels reduced to single-digit surpluses, and then get a colder-than-normal winter, traders will start talking about economic recovery.

They will also start talking about low rig counts.  In the meantime, prices just need to stay above support at $2.409.  That does not look terribly difficult right this minute, but it might turn out to be more difficult than it looks right now.  Temperature forecasts are for normal seasonal readings through the end of September, and that could coincide, at some point, with either weakness in equities, weakness in oil or both.  That combination could press quotes to test support in the $2.40 to $3.00 zone.  If prices can stay above $3.00, until we get to the heating season, we think it will be a sign of strength in this market.

In cash trading yesterday, Henry Hub prices were at $3.32-$3.42, up $0.02 and down $0.03 on the day (DJN).  SoCal prices were at $3.55-$3.71, down $0.12 and up $0.17 on the day.  El Paso Permian prices were up $0.00-$0.05 at $3.30-$3.41.  Katy prices were up $0.00-$0.06 at $3.31-$3.38.  Waha prices were up $0.01-$0.06 at $3.31-$3.42.  Transco 6 was up $0.08-$0.10 at $3.62-$3.75/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $30.50-$36.50/mwh.  Northeastern prices last traded at $31.75-$44.00.  Entergy was last at $29.00-$32.00.  Ercot was last at $28.00-$29.75/mwh.

Natural gas prices seem to have turned the corner on the charts, but the fundamentals are still shaky.  Of course, with a ratio of more than 19-to-one, there is a lot of room for natural gas to discount a stronger future economy.  At the heart of the disparity in the relationship between crude and gas is the simple fact that crude has discounted economic recovery and gas has not. If the recovery were stripped from crude oil, one could argue that it should be between $35 and $45, based on where the ratio was before oil started discounting a recovery.  Alternatively, if natural gas were to price in the recovery to the same degree that crude oil has, prices would be between $5.75 and $8.00 per million Btu.  Either way, we do not expect to see economic recovery priced in until the surplus against last year and the five-year average has returned to single-digits.  But, as long as crude oil prices remain at higher levels, one can easily make the argument that natural gas prices are ridiculously underpriced.  At some point, we expect prices to realize this.

Support is at $3.50-$3.53, $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 rebounded lightly yesterday.

Dollars per million Btu

Oct Natural Gas:          Support:        $3.50-$3.53, $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

The Fed meeting concludes today, we have the DOE report, and then we will start looking ahead to the G-20 meeting.

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 dropped yesterday, hitting the 67.50 euro cents objectives we outlined here a month ago.  And it does not look like the weakness wants to stop any time soon.  There is a secondary objective to 65.75, and we fully expect to add fresh objectives to lower levels later on.  Unless the Fed does change course, the dollar seems destined for lower levels.

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 gained 51 points yesterday, as traders reassessed the likelihood that the Fed will change course this week.

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

Recommendations for Specific Market Segments