Prices for September 25th, 2009

Market Review for Friday & over the Weekend

HE G-20 meeting concluded with the 20th Century’s three great Allies, the US, Britain and France, agreeing that “Iran’s nuclear activity was unacceptable,” as news of a second, secret uranium enrichment plant in Iran was revealed, and they jointly insisted “that the international community expected answers on 1 October and was also united in calling upon Iran to live up to its international responsibilities” {as a signatory of the nuclear non-proliferation treaty}

This was a highly unusual way of ending an economic summit in the midst of the world’s deepest and most synchronized recession in three-quarters of a century.  And it highlights the growing urgency with the Allies feel they must deal with Iran’s nuclear program.  No one is saying it, yet (from 1600 Pennsylvania Avenue, 10 Downing Street or Élysée Palace) but the possibility of an Israeli attack on Iran’s nuclear facilities, with the threatened closure of the Straits of Hormuz and consequent loss of 20% of the world’s daily oil flow, would be the greatest threat to economic growth, potentially, in 2010.  That is at the heart of this ongoing story, and it is why we keep bringing it up here repeatedly.  Israel will not wait indefinitely.

The whole Iranian nuclear situation cast a note of uncertainty into a market that was ending a week of fundamental weakness, made more significant by financial traders’ decision to use last week’s Fed meeting as a lightning rod to think about a “post-stimulus era.”  Financial markets started the week worrying about the (still distant) day when the Fed raises rates, seemed to get past it all on Tuesday and the first part of Wednesday, but then decided to discount it anyway by Wednesday afternoon.  This led to severe losses (from the highs) in equities and an equivalent rally in the dollar.  Those moves, in turn, allowed oil market fundamentals to shine through, and last week’s DOE headlines were bearish.

Friday’s activity reflected normal pre-weekend profit-taking (by bears) in oil markets.  Despite that short-covering, there was still some follow-through selling.  It might have been more substantial, though, without the surprising G-20 closing remarks focusing on Iran.  Durable goods orders fell in a report released on Friday, and home sales prices were reportedly lower as homebuilders found themselves struggling to sell in a market filled with discounted foreclosures.  While few economists saw these figures threatening the nascent recovery, they certainly did nothing to instill confidence in investors already looking well beyond the initial phases of that recovery. 

Technicals

           Oil prices had a bearish week, and all three major contracts broke below at least one level of support.  Crude broke $67.00, and also broke $65.23, but could not finish under the latter.  Heating oil prices broke and settled under 170.00, but broke (without settling) under 166.00.  Gasoline broke 172.61 but not 160.10.  Trends are mixed to lower.

Dollars per barrel.

Above:  The crack spread reached a new low at $2.72 for 2009.  This spread was at $2.51 on December 31st, 2008.

November crude oil now has buy-stops over $67.10, $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 $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 170.77, 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 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 164.77, 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 160.00, 150.00, 135.20 and 134.00.

Football: The bears lost a yard on first down, making it second and 11 as we start this new week. 

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:        $66.95-$67.10, $68.65-$68.77, $71.80-$72.20, $72.55-$72.66, $73.35-$73.55.

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:        170.65-170.77, 175.60-175.74, 182.00-182.20, 182.60-182.80, 185.60-185.70.

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

                                           Resistance:        164.65-164.77, 169.80-170.00, 177.30-177.50, 179.85-179.95, 183.50-183.65.

Oil Inventory Reports

      Utilization rates have typically continued falling during the week represented in this week’s figures.  The decline is not generally as steep as the drop seen in last week’s numbers but, over the last eight years, utilization has fallen by an average of 0.84%.  Utilization has fallen in five of the last eight years, and we had a large rebound in utilization last year, in the recovery from Hurricane Ike.  Distillate stocks have had a very mixed history for this equivalent week, with four weeks showing builds and four weeks showing draws.  The builds were bigger, averaging 1.325 million barrels over four years, compared the draws, which averaged 0.400 million bbls.  The overall average came out to a build of 0.4625 million bbls. 

     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 15,986 contracts on Thursday, when prices were lower.  That looks like heavy, new selling and is bearish.  We have seen good, new selling recently.

      Heating oil open interest were up by 5,639 contracts on Thursday, when prices were lower.  That looks like new selling, which would be bearish. 

      RBOB open interest grew by 4,164 contracts on Thursday when prices were lower. That looks like net, new selling and is bearish.  We have had a mixture of fresh selling and long liquidation, recently.

      Natural gas open interest rose by 334 on Thursday when prices were higher.  That looks like net, new buying and is supportive.

Thursday’s Open Interest Changes:  

Crude 1,160,543  up 15,986       Heat 320,275   up 5,639       RBOB 206,683  up 4,164       Nat gas 699,231  up 334       

CFTC Commitments of Traders for Nymex  (for the period ended Tuesday, Sep 22nd)   

 As of Sep 22nd:                 Long                   Short:

Crude oil                    231,093               168,877                           -contracts held by speculators:  1.37 long

                                          579,274               649,080                               held by the trade

                                            74,423                 66,833                               held by small specs and hedgers.

Spreads….dn 33,571 contracts   The ratio went from 1.15-to-one long to 1.37-to-one over the last 3 weeks.

   Large speculators added 11,741 long contracts and covered 4,918 shorts over the week under review.  Commercials liquidated 50,070 longs and covered 26,971 shorts.  Small specs and hedgers liquidated 864 longs and covered 7,304 shorts.  Open interest fell by 72,764 contracts as prices gained $0.62/barrel.  That looks like short covering and is bearish.  All three categories were covering shorts and the only fresh positions came from large speculative buying.  Most of that was from funds.

   The average large speculator has 2,288 long contracts (101 accounts, dn 1 acct), 1,919 shorts (88 accounts, dn 10).  Commercials held 6,736 longs (86, dn 2) and 6,761 shorts (96, up 1).  Reportables held 3,876 longs (271, dn 5 accts) and 4,301 shorts (246 accts, dn 15). There were 10 fewer large speculative short accounts, and 15 fewer reportable short accounts, which underlined the short-covering seen during the week under review. Traders were partially or entirely getting out of their shorts.

Heating oil                   49,122                 16,133                           - contracts held by speculators:  3.04 to 1 long

                                          213,467               254,289                              held by the trade.

                                            39,820                 31,987                               held by small specs and hedgers.

Spreads….up 606 contracts.    The ratio of large speculative longs to shorts went from 2.35-to-one to 3.04-to-one in 2 weeks.

       Large speculators added 3,434 longs and covered 2,657 shorts.  Commercial accounts liquidated 4,182 longs and added 3,150 shorts.  Small speculators and hedgers added 197 longs and covered 1,044 shorts.  Open interest grew by 56 contracts as prices were up 3.20 cents.  That looks like almost equal buying and selling.  Large speculators were buying new positions and covering shorts, and managed money or funds seem to have been the biggest buyers of both new futures and of existing shorts.

       The average large speculative long is holding 1,293 contracts (dn 104 lots on 38 accounts, up 5), while the average short has 672 contracts (up 49 lots on 24 accts, dn 6).  The average commercial long is holding 2,809 contracts (dn 45 contracts on 76 accts, up 7) compared to the average short holding of 3,391 contracts (up 284 lots on 75 accts, up 1).  The average reportable position is 2,391 long (up 204 lots on 138 accts, up 9) while the average short holding is 2,540 (up 353 lots on 133 accts, up 2). There were nine more reportable long accounts and two more short accounts in this report.

Rbob Gasoline            51,097                13,089                          -contracts held by speculators:  3.90 to 1 long

                                           126,625              165,725                             held by the trade.

                                             14,104                13,012                              held by small specs and hedgers.

Spreads…up 201 contracts   The ratio of large speculative longs to shorts went from 3.59-to-one to 3.90-to-one in 4 weeks.

     Large speculative holdings grew by 3,520 longs and fell by 177 shorts over the latest week. Commercial holdings fell by 1,234 longs and grew by 1,555 shorts.  Small speculators and hedgers’ positions grew by 101 longs and grew by 1,009 shorts.  Open interest rose by 2,588 contracts as prices dropped 0.76 cents, which looks like net, new selling.  Commercials and non-reportable traders were selling.  Large speculators were buying and covering shorts, through Tuesday afternoon, as prices weakened towards the end of the period.

   The average holdings are 946 contracts for each large speculative long (54 accts, up 3 accts) and 569 for each large speculative short (23, dn 1).  The average commercial long now has 1,735 contracts long (73, up 1) and 1,997 short (83, up 1). Average reportable holdings are 1,299 long (148, unch) against 1,476 short (131, dn 2).  There were the same reportable long accounts and 2 fewer short accounts.  We expect there to have been heavy long liquidation after Tuesday (next week’s report).

Naturalgas                79,537               243,345                           -contracts held by speculators:  3.06 to 1 short

                                         321,950               198,531                               held by the trade.

                                           85,211                 44,822                           held by small specs and hedgers.

Spreads…dn 20,247 contracts    The ratio of large speculative shorts to longs stayed at 3.06-to-one over the latest week.

  Large speculative holdings dropped by 4,911 longs and dropped by 14,969 shorts over the latest week. Commercial accounts dropped 12,409 longs, and covered 1,756 shorts, while small speculators and hedgers added 3,722 longs and added 3,127 shorts.  Open interest fell by 33,845 contracts as prices rose 28.9 cents.  That looks like heavy short-covering, and there was heavy covering by large speculators, who had been selling quotes lower as the market hit $2.409.  The bigger surprise is why they were not covering more or earlier.  The trade was liquidating longs into the market strength.  Traders got out of spreads.

  The average large speculator has 1,033 contracts (77) while each large speculative short is holding 2,283 shorts (98).  The average commercial long now has 3,659 contracts long (88) and 2,877 short (69). Average reportable holdings are 2,615 long (239) long and 3,095 short (215).  There are seven less long accounts and eight less short accounts in the reportable category, which decreased the average long holding by 79 contracts and the average short holding by 55 contracts.  There was 1 fewer large speculative long account and four fewer large speculative short accounts in this report. 

Natural Gas & Utility Generation

Natural gas prices were up slightly, again, on Friday, which is impressive, considering that the oil complex was almost uniformly lower on Friday.  While prices were able to briefly break above $4.000/mmBtu, they were not able to finish above that level.  Still, natural gas prices made steady progress last week, with progressively higher highs over the last three days of last week, and progressively higher settlement prices from Tuesday through Friday.  This was all the more impressive given that the oil complex did the opposite, with crude making progressively lower lows over the last three days of the week.  While crude rallied on Friday, gasoline and heating oil made progressively lower lows and finished lower on each of the last three days of last week.  This divergence in the two energies has been borne out by the ratio of crude to natural gas, which finished at 23.41-to-one two weeks ago, 19.07-to-one a week ago and at 16.57-to-one on Friday.  The average since the start of 2008 is 12.91-to-one while the average since January, 2002 is now a perfect 9.00-to-one.  Now that the traders who wanted it higher have had it get to 27.10-toi-one and have taken profits, we expect it to return to between 9 and 14 to one.

In cash trading yesterday, Henry Hub prices were at $3.50-$3.70, up $0.04 and down $0.02 on the day (DJN).  SoCal prices were at $3.60-$3.73, down $0.02-$0.04 on the day.  El Paso Permian prices were up $0.03-$0.04 at $3.42-$3.51.  Katy prices were up $0.07-$0.07 at $3.52-$3.65.  Waha prices were up $0.07-$0.10 at $3.48-$3.59.  Transco 6 was up $0.02 and down $0.10 at $3.67-$3.85/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $33.50-$40.00/mwh.  Northeastern prices last traded at $35.50-$37.00.  Entergy was last at $28.50-$29.50.  Ercot was last at $36.25-$37.25/mwh.

Traders are going to be watching this week’s EIA report (in addition to future reports as they come out) to see if storage levels can eat into the year-on-year surplus and the surplus against the five-year average.  The five-year average increase for this week was just under 68 bcf, which means that a build similar to the ones seen over the last two weeks would leave us at roughly the same surplus seen last week.  Last year, though, there was a build of 87 bcf, so a build like last week’s (or less) could eat into the year-on-year surplus.  We have reached the point where any decline in either the year-on-year surplus or the surplus against the five-year average will help prices rally further. 

Natural gas is clearly in a bullish market, now, and $2.409 is looking like it was a significant low.  Of course, there is a good deal more to it.  Natural gas traders are finally starting to discount a recovering economy into prices, and that is bringing the ratio between crude oil and natural gas back into line with its historical value.  Our biggest question is why it ever went to 27.10-to-one, and aside from the fact that a large investment bank said it should go there, we can’t find a good reason.

Support is at $3.79-$3.81, $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 higher again on Friday, for a fourth day higher.

Dollars per million Btu

Oct Natural Gas:          Support:        $3.79-$3.81, $3.73-$3.75, $3.50-$3.53, $3.45-$3.46, $3.28-$3.32, $2.91-$2.93.

                                                    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

Last 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 67.8 bcf, while the eight-year average was a build of 57.75 bcf.  Last year, there was a build of 87 bcf.  Expectations last week called for a build of 69 bcf.

EIA Report

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

News & Views

Consumer confidence was up to 73.5 in September from 65.7 in August, according to a Reuters/University of Michigan survey.  The economy seems to be improving, but investors seem to be raising the bar in terms of expectations.

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 was back down on Friday, but it did not fall far enough to pull oil prices down with it.  There is light support around the 67.30-67.50 zone, and prices may need to fall below that level to impress oil traders. 

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: Three-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 Comments on Iran

US President Barack Obama:  “Iran is breaking rules that all nations must follow, endangering the global nonproliferation regime, denying its own people access to the opportunity they deserve, and threatening the stability and security of the region and the world.”  Bloomberg

Russian President Dmitry Medvedev:  Said that the discovery of a second uranium enrichment plant came as a “surprise for everyone.”  He added, “Iran’s construction of a uranium enrichment plant violates decisions of the United Nations Security Council.  The IAEA must investigate this site immediately, and Iran must cooperate with this investigation.  Russia stands ready to help the investigation “by any means available.”  Dow Jones

French President Nicolas Sarkozy:  “What has been revealed today is exceptional.  We were already in a very severe confidence crisis, we are now faced with a challenge, a challenge made to the entire international community.”  He added: “Everything, everything, must be on the table [at this week’s negotiations].”  Agence France Presse

Iranian President Mahmoud Ahmadinejad:  The suddenly revealed second plant is “perfectly legal.”  And now that Iran has come clean about the plant’s existence to the IAEA, Iran “should be encouraged for that [bit of honesty].”  He is “very hopeful” that P5+1 talks (permanent five members of UN Security Council plus Germany) will yield results. 

“We decided to refrain from reacting strongly to what happened this morning [when a number of countries lashed out at Iran for building a second, secret facility].  We showed restraint.  Our position with respect to the nuclear weapons is quite clear.  We believe that nuclear weapons are against humanity.”  He went on to scold the American President: “Mr Obama is not a nuclear expert.  We have to leave it to the IAEA to carry out its duties.  Those who misinform are actually hurting the image of the US in the world.”  Iran insists that it is only obligated to inform the world of any new facility six months before placing radioactive materials on site.   Agence France Presse

US Secretary of Defense Robert Gates:  “The reality is there is no military option that does anything more than buy time.  The estimates are one to three years or so.  And the only way you end up not having a nuclear capable Iran is for the Iranian government to decide that their security is diminished by having those weapons, as opposed to strengthened.”  Dow Jones

Chinese Foreign Ministry Spokesperson Ma Zhaoxu:  “We hope that the IAEA will deal with the matter according to its terms of reference and its mandate.  It is also our hope that Iran will cooperate with he IAEA on this matter.”

Chinese Vice Minister for Foreign Affairs He Yafei:  “China welcomes the dialogue and will take part in the dialogue.  You talk about punishment and, personally, I don’t like the word ‘punishment,’ and I think all issues can only be solved through dialogue and negotiation.”  Dow Jones

Venezuelan Mining Minister Rodolfo Sanz:  “We [Venezuela] have important reserves [of uranium].  Iran is helping us with geophysical aerial probes and geochemical analyses.”  Dow Jones

Our Take:  The revelation of a second, secret enrichment facility does nothing to relieve the very real sense of vulnerability in Jerusalem.  It does everything to reinforce the sense of urgency which could ultimately compel Israel to remove the possibility of a state-extinguishing threat just six minutes away.  The clock is ticking … like a time bomb for Israel.  Israel is not included in negotiations, but stands to lose the most from their failure. Sanctions mean nothing to Israel, unless they convince Iran to halt nuclear enrichment activities.  That is the real bottom line, from an oil perspective.

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