Prices for September 28th, 2009

Market Review for Monday         

HE Dow Jones Industrial Average (DJIA) advanced 124 points yesterday, as stock market traders were buying on a couple of high profile mergers, featuring Xerox in one and Abbott Laboratories in another.  So-called M & A activity has been subdued over the past year, and this sudden mini-burst of activity cheered stock traders.  They took it as a sign that the economy may have moved on to yet another vista of potential growth, according to Dow Jones.

Oil traders were impressed by the stock market move higher yesterday, and they were buying oil futures yesterday largely on the back of the gains in equities.  They were also reacting to a missile-test by Iran at an especially sensitive time.  Prices were oversold and found support yesterday, and those factors were buttressed by Iran and the move higher in equities. 

It is too early and not enough of an advance, yet, for us to say with certainty that this is anything more than a rally in a market still planning to move lower.  The dollar rallied yesterday, and if we do not see equities continue to move higher, the dollar could help the fundamentals shine through, again.  That was last week’s story and it helped push quotes lower.

Iran test-fired long-range missiles capable of reaching Israel yesterday in a move that was as arrogant as it was poorly timed.  World leaders were already doubting Iran’s sincerity towards nuclear negotiations after discovering a second, secret enrichment facility late last week (it was reported on Friday).  So, just as the world is shining fresh light on the country, it decides to go ahead with a missile test – capable of hitting Israel – on no less a day than Yom Kippur, the holiest day in the Hebrew calendar.  The timing could not possibly have been worse nor could Iran have displayed any greater hubris.  It is as if Mr Ahmadinejad is inviting Israel to attack Iran’s nuclear facilities. 

History is filled with plenty of instances of bad timing, but yesterday’s missile test strikes us as being as insulting to Israel and its friends as the West would be by holding a noon pig roast in Karbala on the first day of Ramadan.  It’s just extraordinary, really.  And, if that was not bad enough – and it really was – Iran’s Chief of Staff (of its armed services) said yesterday, “Israel is a paper tiger and when they say that Israel is going to attack Iran, it is a bluff.” 

Iran is a much bigger threat to this market’s ability to track its fundamentals than equities or currencies.  Tomorrow’s DOE report will still be a major factor in this week’s trading, but Iran is capable of capturing the headlines from here.

Technicals

           Oil prices rallied after finding support at 160.10 in gasoline, which was its low on July 13th, above 165.85 at 166.90 (the 165.85-167.00 area is now a support region), and $65.41 in crude, in which there is support from $65.05-$65.40 now.  There are still objectives to $58.00 in crude, 158.50 in heat and 151.37-151.77 in gasoline.

Dollars per barrel.

Above:  The crack spread reached a new low at $2.59 for 2009.  This spread was at $2.51 on December 31st, 2008.

November crude oil now has buy-stops over $67.54, $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 171.37, 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 166.90, 165.85, 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 160.00160.10, 150.00, 135.20 and 134.00.

Football: The bears lost 8 yards on second and 11, which makes it third and 19 to go, today.

Technical Support & Resistance

Nov crude oil                        Support:             $65.23-$65.40, $64.95-$65.00, $62.70-$62.85, $62.00-$62.10, $61.00-$61.15.

                                           Resistance:        $67.45-$67.55, $68.65-$68.77, $71.80-$72.20, $72.55-$72.66, $73.35-$73.55.

Oct heating oil      Support:             166.90-167.30, 165.80-165.95, 163.75-163.90, 157.45-157.60, 155.85-156.00.

                             Resistance:        171.65-171.75, 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:        164.77-165.05, 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 0.463 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 2,512 contracts on Friday, when prices were lightly higher.  That looks like light, new buying and is supportive.

      Heating oil open interest dropped by 2,146 contracts on Friday, when prices were lower.  That looks like long liquidation, which would be supportive. 

      RBOB open interest fell by 3,682 contracts on Friday when prices were lower. That looks like net long liquidation and is constructive. 

      Natural gas open interest fell by 24,796 on Friday when prices were higher.  That looks like heavy short-covering, which would be bearish.  The heavy liquidation was expiration-related.

Friday’s Open Interest Changes:  

Crude 1,163,055  up 2,512       Heat 318,129   dn 2,146       RBOB 203,001  dn 3,682       Nat gas 674,435  dn 24,796

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 dropped 25.5 cents yesterday, as gas traders liquidated October holdings going into yesterday’s expiration.  After prices had risen fairly consistently since touching $2.409 on September 4th, it was only natural to see long liquidation on the final day of trading.  Today, we start with the November contract, which represents the heating season, proper.  It starts off a full dollar and ten cents above the now-expired October contract.  The big question is whether traders will warm to the idea of a spot contract that much higher.  At a stroke, it means that the continuation chart has gained 29.5% in a day, without trading through it.  And, even if prices sell off and traders cannot immediately stomach the jump in values, we will get a gap on the charts, which is almost always significant.  This is not something that happens with the switch in contract months every month.  In fact, it is quite rare to see any gap at all.  To get one of $1.10/mmBtu may be unprecedented.  We have not seen a gap this large in recent memory.  It tells a story and, in this case, the story it is telling is one of a market that is coming to grips with a recovering economy, declining production and much lower rig counts.

In cash trading yesterday, Henry Hub prices were at $3.42-$3.65, down $0.05-$0.08 on the day (DJN).  SoCal prices were at $3.66-$3.85, up $0.06-$0.12 on the day.  El Paso Permian prices were up $0.05-$0.09 at $3.47-$3.60.  Katy prices were down $0.00-$0.06 at $3.46-$3.65.  Waha prices were down $0.08 and up $0.03 at $3.40-$3.62.  Transco 6 was up $0.03 and down $0.06 at $3.70-$3.79/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $30.00-$34.50/mwh.  Northeastern prices last traded at $30.75-$38.00.  Entergy was last at $25.75-$26.25.  Ercot was last at $32.50-$33.50/mwh.

Gaps are often used as measuring devices on charts, so prices went from $2.409 to $4.035, from low point to high point, which is a gain of $1.626/mmBtu.  Whatever the low point is for November over the next few days, we will measure $1.626 up from that to get a gap measured objective.  If it turns out to be yesterday’s low at $4.761, then we would have an upside objective up to $6.387.  Our guess-timate is that we will end up with a low point between $4.25 and $4.50 over the next few days, and that would give us a gap measured objective to the $5.87 to $6.12.  In any event, we expect to have an objective from the gap that seems likely to be left by the switch from October to November as the expiring contract.  Of course, there is a chance that prices could sell off all the way back to $4.035 over the next few days.

We said yesterday that natural gas is clearly in a bullish market, and that $2.409 is looking like a significant low.  If prices retain most of the switch gap, reporters will need to find reasons why prices are more or less suddenly so much higher.  The recovering economy, higher equities, the gains since March in oil prices and the decline in rig counts are all likely to get good play in the press.

Support is at $3.73-$3.75, $3.66-$3.68, $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, and $2.21-$2.24.  Resistance is at $3.98-$4.00, $4.03-$4.04, $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 dropped yesterday after four consecutive days higher..

Dollars per million Btu

Oct Natural Gas:          Support:         $3.73-$3.75, $3.66-$3.68, $3.50-$3.53, $3.45-$3.46, $3.28-$3.32, $2.91-$2.93.

                                                    Resistance:     $3.98-$4.00, $4.03-$4.04, $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 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

A number of ships seem to have set sail as far as Iran is concerned … not literally … yet.  We were thinking of this as the big story of the first half of next year, but it certainly looked like Iran was calling out Israel yesterday.  Fundamentals are still important and this is a ‘better time’ for this kind of problem – if one has to have it – because of plentiful supplies.  Still … .

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 yesterday, but it was not the dominant factor in oil traders’ thinking.  Instead, they seem to have been focusing more on the upwards movement in equities, and that combined with support and oversold pressures to push oil quotes higher.  If the dollar continues to rally, though, it is likely to boost prices.

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 gained 124 points yesterday, and that helped propel oil prices higher.

Source:  http://money.cnn.com/quote/chart/chart.html?symb=djia&sid=1643&time=6mo&Submit1=Refresh

A Look at Selected Spreads

The premium of the second over the first month of crude yesterday finished at 33 cents December over November.

The third month minus the front month contango in heating oil finished yesterday at 5.94 cents, well above the actual cost of carry.  Carrying costs or better are on the board into spring, summer and all the way to next winter. Anyone who can find storage should fill it now and sell December, 2010 futures against the product.  At nearly $1.99, one can lock in 30 cents a gallon over 14 months, locking in substantially more than it costs to carry product.  If there is any tightness between now and then, one could sell prompt at a potential premium over the following month and make money coming and going.  It is a printing press at the mint deal.

More on Iran

The Obama Administration reacted to yesterday’s Iranian missile tests, calling them “provocative” and “not helpful at all.”  It seems an odd time to try to master the British capacity for understatement, but this administration is keen to explore all diplomatic avenues first … .

White House Spokesperson Robert Gibbs said, “This is … an important week for the Iranians, they have decisions to make.”  Washington has demanded immediate access to the second uranium enrichment facility, with Mr Gibbs saying, “They can … agree to immediate, unfettered access.  I think that would be the least that they can do.”  He added, “I don’t believe that there’s ever been as broad and as deep a consensus about addressing the concerns that we have right now.”  He continued, saying, “I would lump any of these [acts of the last few days] into the provocative nature with which Iran has acted on the world stage for a number of years.”

PJ Crowley, at the US State Department added, “To the extent that Iran wants to continue to act more like a police state or a military state than a constructive player in the region, it just will further isolate Iran.”  He said that the tests are unlikely to help Iran influence countries at the so-called “P5 + 1” {permanent five UN Security Council members plus one, Germany} at the meeting scheduled later this week.  “It will just further isolate Iran and you’ll continue to see greater international consensus for additional steps, including sanctions against Iran.  This provocative behavior did not work for North Korea; it’s unlikely to work for Iran.”

Russian Foreign Minister Sergei Lavrov added, “It is not prohibited by any international agreement, but, of course when missile launches occur on top of the unresolved situation surrounding Iran’s nuclear program, it’s worrying.”  Diplomats seem to have embraced British understatement.

China has kept its cards close to the vest.

SSSSS

We expect that the US and Russia do not want to scare Iran away from the negotiating table before talks have even begun.  But, these talks are starting to diverge dramatically from the real heart of it all.  There is a real bottom line, here: If the P5+1 talks do not end with IAEA inspectors totally overseeing Iran’s nuclear enrichment program, Israel is going to try to destroy those facilities. 

Discussing what new sanctions to impose, after years of increasingly harsher sanctions have done nothing, is becoming more and more clearly pointless.  We get the impression, especially tonight, after everything that has happened in the last few days, that Iran may want to drag out negotiations long enough to present the world with a fait accompli – an Iran with a nuclear weapon.  Then, if Iran doesn’t get its way, it will have something very real with which to threaten its perceived enemies. 

Any quick glance at a laundry list of its purported wishes makes the thought of it having a nuclear weapon unpalatable.  It wants the US out of the region and Israel gone forever.  Those are two of Ahmadinejad’s stated wishes. 

Iran still insists it wants nuclear power for energy.  Curiously enough, that actually might be the truth, today.  But, once it has that, there is little to stop it from taking the final step to a weapon.  And it went out of its way yesterday to show the world it can deliver one on target – against Israel and everyone in between.  And if that means it can pursue its dreams or even its whims with a vengeance, can anyone really feel safe?  If we can see this, smarter men and women can, too.  So, the question facing us all is simple: Who’s really still talking about sanctions?  

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