Prices for September 24th, 2009

Market Review for Thursday        

RUDE oil prices broke beneath $67.00 and challenged $65.23.  Heating oil broke under 170.00 and settled at its lowest point since July 30th.  Gasoline prices finished at their lowest levels since July 13th.  After following a pattern of up, then down and back up again, the last two days seem to have finally given the oil complex a sense of direction.  There are now objectives to $58.00 in crude, 158.50 in heating oil and 151.37-151.77 in gasoline.

High inventories and low demand are the story behind lower prices.  But, they could not have found a window of opportunity to decline this sharply if equities had been stronger or the dollar had been weaker.  The DJIA dropped 41 points yesterday, and the dollar rallied, as both followed the momentum that had been established on Wednesday.  Equities had been making new recent highs and they then sold off, and the dollar had been making new recent lows and it rallied.  Yesterday, both of them followed the pattern begun later on Wednesday.  By doing so, they gave oil a window of opportunity to follow its own fundamentals on Wednesday afternoon and again yesterday.

Wednesday was – officially now – a pivotal day.  It started the ball rolling, and that ball kept rolling yesterday.  The really “pivotal” part was technical; prices broke below major support levels.  But there was a great deal of back story to getting there.  Financial traders started to discount the end of rock-bottom interest rates and the Fed’s stimulus in the economy.  We are a way away from that day of reckoning, but the markets started thinking it out this week.  That gave any bearish statistics the DOE might have had an opportunity to shine through to influence prices, and that is something we have not had for a while.  Then, we actually got some bearish statistics from the DOE.

Federal Reserve Governor Kevin Warsh writes in an editorial in the Wall Street Journal today that the Fed ‘may have to withdraw its extraordinary levels of support for the economy before the need becomes obvious,’ Dow Jones wrote in a preview of the editorial last night.  He writes, “…policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary.”   This was what the markets were thinking about earlier this week; at some point, the Fed will need to raise rates and stop buying mortgage-backed securities.  Warsh did reiterate the Fed’s position that interest rates will remain “at exceptionally low levels” for an extended period.

Technicals

           Oil prices dropped again yesterday, and all three have now broken resistance.  Crude oil broke below $67.00 and now has $65.23 as support.  Heating oil has broken 170.00 and gasoline has broken 172.61.  Crude has an objective to $58.00, heating oil has an objective to 158.50 and gasoline has an objective to 151.37 to 151.77.  The trends are lower.

Dollars per barrel.

Above:  The crack spread reached a new low at $3.29 for 2009.  This spread was lower on December 31st, 2008.

November crude oil now has buy-stops over $68.77, $71.80-$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 $65.23, $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 175.74, 182.20, 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 167.30, 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 170.00, 177.50, 179.95, 183.65, 185.35, 187.31, 207.00, 208.15, 208.55, 211.24, 214.00, 222.70, 228.86, 240.10, and 250.40.  Sell-stops are under 162.00, 160.00, 150.00, 135.20 and 134.00.

Football: The bears gained another 31 yards yesterday, on first down, and that gets the bears another set of downs today.

Technical Support & Resistance

Nov crude oil                          Support:             $65.23-$65.30, $64.95-$65.00, $62.70-$62.85, $62.00-$62.10, $61.00-$61.15.

                                           Resistance:        $68.65-$68.77, $71.80-$72.20, $72.55-$72.66, $73.35-$73.55, $74.60-$75.00.

Oct heating oil        Support:             167.30-167.40, 165.80-165.95, 163.75-163.90, 157.45-157.60, 155.85-156.00.

                             Resistance:        175.60-175.74, 182.00-182.20, 182.60-182.80, 185.60-185.70, 191.35-191.45.

Oct Rbob                       Support:             162.00-162.20, 160.00-160.20, 157.30-157.45, 153.10-153.25, 150.00-150.20.

                                           Resistance:        169.80-170.00, 177.30-177.50, 179.85-179.95, 183.50-183.65, 185.45-185.67.

Oil Inventory Reports

      As expected, this week showed the largest decline in refinery utilization in a very long time, with rates falling by 1.36%.  That is normal, though, for mid-September, especially with a late Labor Day this year.  What was much less expected was to see builds across the board in the three main categories (crude, distillate and gasoline).  More years had seen draws in distillate, although six of the last eight years had seen builds in gasoline.  Crude oil imports were also surprising, increasing rather dramatically even as utilization dropped.  Because of hurricanes in 2004 and 2008 for the comparable week previous to the reports those years, there had been large declines in imports.  This report will cast long shadows for more than just a week.

     Distillate stocks are now 40.8 million bbls, or 31.38%, higher than a year ago.  Heating oil inventories are 13.1 mln bbls, or 34.75%, higher than they were a year ago.  Gasoline stocks are 20.6 mln bbls (up 10.70%) higher against a year ago.  Crude oil stocks are now 32.2 million bbls, or 10.61%, higher than a year ago.  Residual stocks are 6.2 mln bbls (15.98%) lower than a year ago, jet fuel stocks are 7.0 mln bbls, (17.86%) higher than a year ago.  Utilization is 18.88% higher than a year ago and 2.13% below the eight-year average.  It is 5.64% 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 grew by 19,692 contracts on Wednesday, when prices were lower.  That looks like very strong, new selling and is bearish.  New selling is pushing the market lower, and there is long liquidation to follow.

      Heating oil open interest fell by 1,845 contracts on Wednesday, when prices were lower.  That looks like long liquidation, which is supportive. 

      RBOB open interest fell by 3,853 contracts on Wednesday when prices were lower. That looks like net long liquidation and is supportive.  We expect there was also fresh selling, but the liquidation was heavier.

      Natural gas open interest fell by 11,404 on Wednesday when prices were higher.  That looks like more heavy short-covering, and would be considered bearish.

Wednesday’s Open Interest Changes:  

Crude 1,144,557  up 19,692       Heat 314,636   dn 1,845       RBOB 202,519  dn 3,853       Nat gas 698,897  dn 11,404  

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

 As of Sep 15th:                 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 up again yesterday, even as crude oil prices lost more than $3.00 a barrel.  That is an extraordinary display of strength in this market.  Equities were also lower and financial traders now seem to be looking at the economic recovery after the Fed’s historical assistance.  The Fed has made it clear that the era of extremely low interest rates is far from over, that it will be with us for an “extended period.”  Nevertheless, Fed Governor Warsh yesterday warned that the return to normalization could come before there are any visible signs suggesting that the time has arrived.  That is what seems to be spooking equities and currencies traders.  But, it all bounced off the new Teflon™ suit being worn by gas.

October natural gas got up to $3.999/mmBtu, but it could not print the magical $4.000 figure.  Selling was heavy enough below the even number to turn prices back a few cents, but it was clear from the surprising strength seen in natural gas over the course of this month so far – with special emphasis on the last two sessions – that the assault on $4.000 has just begun.  Given existing demand and inventory pictures, it may seem premature to some observers, but natural gas has extensive pent-up buying from the past year, and prices are still underpriced in relation to oil.

In cash trading yesterday, Henry Hub prices were at $3.52-$3.66, up $0.07-$0.18 on the day (DJN).  SoCal prices were at $3.64-$3.75, up $0.02-$0.04 on the day.  El Paso Permian prices were up $0.03-$0.05 at $3.38-$3.48.  Katy prices were up $0.12-$0.13 at $3.45-$3.58.  Waha prices were up $0.03-$0.07 at $3.38-$3.52.  Transco 6 was up $0.01-$0.03 at $3.77-$3.83/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $31.50-$35.00/mwh.  Northeastern prices last traded at $30.25-$39.50.  Entergy was last at $31.50-$32.50.  Ercot was last at $29.00-$29.50/mwh.

This week’s EIA underground storage report showed a build of 67 bcf, which was two bcf short of expectations.  That was enough to help generate buying interest.  But, it is important to note that the new trend also makes the market a more fertile ground for bullish reactions.  We had plenty of reports that showed builds of two, three or even five bcf less than expected as prices were falling, and the weekly numbers did nothing to arrest the downward spiral.  That is because prices were trending lower.  During bearish trends, any news has a bearish tint.  The reverse is true during bull markets, and this market’s ability to turn relatively insignificant developments into full-blown reasons for higher prices is one of the best signals one could have that we have actually seen a reversal in fortune.  The next best signal is the simple act of stringing together a series of progressively higher highs (and lows) on the charts.  Over the last month, prices have risen more than a dollar and a half from the lows and prices have been able to move higher, even when oil prices have declined.  The ratio of crude to natural gas has fallen from 27.10-to-one to 16.66-to-one. 

Support is at $3.73-$3.75, $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 $3.98-$4.00, $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 up sharply yesterday, as many others were weak.

Dollars per million Btu

Oct Natural Gas:          Support:        $3.73-$3.75, $3.50-$3.53, $3.45-$3.46, $3.28-$3.32, $2.91-$2.93, $2.80-$2.82.

                                                    Resistance:     $3.98-$4.00, $4.09-$4.11, $4.15-$4.16, $4.24-$4.28, $4.31-$4.33, $4.37-$4.42.

EIA Weekly Storage Figures

This week’s EIA report showed a build of 67 bcf on expectations for a build of 69 bcf.  Stocks are now 509 bcf higher than a year ago, against a surplus of 496 bcf a week ago, a surplus of 495 bcf two weeks ago and a surplus of 489 bcf three weeks ago.  Stocks are now 16.87% higher than a year ago.  They are 485 bcf and 15.95% 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.  Expectations today are for a build of 69 bcf.

EIA Report

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

News & Views

Investors, who have been convinced that their portfolios are not complete without up to 10% in commodities, may be starting to grasp the volatile nature of commodities futures – a volatility that has precluded them from being investments.

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 continued its rally, following the momentum higher from Wednesday’s reversal session.  It remains to be seen how far this rally will carry or for how long, but it gave oil prices a window to decline these last two days. 

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, following the weakness from Wednesday’s reversal lower.

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

A Look at Inventories

Distillate stocks made fresh, new 26-year highs.

A Look at Imports

Crude imports have started to recover recently, but are still at historically low levels.

Recommendations for Specific Market Segments