Prices for September 28th, 2009

Market Review for Tuesday        

IL prices were mixed yesterday, with crude oil quotes lower, heating oil quotes higher and gasoline prices lower.  None of the moves was especially large, and Dow Jones described prices as having been “frozen” ahead of this morning’s DOE report.  The dollar rallied, which brought out selling, and the DJIA was off 47 points, which was also bearish for oil prices, but neither one seems to have captured the market’s imagination.

Most curious, though, was the market’s inability to get fired up by events going on between Iran, on one side, and the UN, the Western Allies and Israel on the other.  The way things look to us right now, Iran is on a collision course with war.  This is nothing less than Israel’s equivalent of the Cuban Missile Crisis, and Israeli Prime Minister Benjamin Netanyahu is not known as a man likely to embrace more words and fewer actions.  Our sources, which are not especially reticent on this topic, have told us that Israel has made its position clear to both the Bush and Obama administrations.  It might be waiting for this next round of negotiations to see if they might bear fruit or suggest real progress.  Honestly, we would be stunned to see any.

Iran has made its position abundantly clear: It feels that nuclear energy development is its right, not a privilege to be granted by outside powers it sees as overbearing and hypocritical.  And, there are those who agree with that assessment within the UN Security Council.  The problem comes when one moves the discussion from nuclear energy to nuclear weaponry.  As a signatory to the nuclear non-proliferation treaty, Iran has officially relinquished the acknowledged privilege of developing a nuclear weapon.  The path to nuclear power forks at the end, where a turn right leads one to energy and a turn to the left takes one to weaponry.  Iran insists it will not be tempted into taking the fork to nuclear weaponry, but after seeing Iran test a missile which Iran, itself, noted could target Israel, leaders in Jerusalem are not keen to find out Iran might have been fibbing only after its radar has picked up a nuclear missile on its way to Tel Aviv.  And those same leaders are waiting impatiently (only so long) while the P5+1 group threatens Iran with sanctions if Iran does not cede control of its nuclear program to the IAEA.  This whole affair quickly becomes an oil market factor capable of eclipsing everything else, if negotiations fail.

Right now, though, the biggest factor is this morning’s DOE report.  We may be at the point where utilization has fallen far enough to lead to crude oil builds, but not far enough to eat into refined products inventories. 

Technicals

           Oil prices were mixed yesterday, and there is major support at 160.10 in gasoline, 165.85 in heating oil and at $65.05-$65.40 in crude oil.  There are still objectives to $58.00 in crude, 158.50 in heat and 151.37-151.77 in gasoline, but the major support zones need to be broken (and settled beneath first).

Dollars per barrel.

Above:  The crack spread reached a new low at $2.54 for 2009.  This spread was at $2.51 on December 31st, 2008.

November crude oil now has buy-stops over $67.70, $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 $65.80, $64.95, $62.70, $62.00-$62.09, $61.00, $60.00-$60.25, $59.65, $58.30, $56.55, and $56.15.  November heating oil has buy-stops over 173.42, 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 170.35, 167.65, 166.90, 165.85, 163.75, 157.45, 155.85, 151.65, 148.70, 147.70, 141.30, 140.90, and 137.50.  November RBOB has buy-stops over 166.12, 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 161.25, 160.00160.10, 150.00, 135.20 and 134.00.

Football: The bears gained a yard on third and 19 to go, making it fourth and 18 to go here, today.

Technical Support & Resistance

Nov crude oil                        Support:             $66.20-$66.35, $65.23-$65.40, $64.95-$65.00, $62.70-$62.85, $62.00-$62.10.

                                           Resistance:        $67.55-$67.70, $68.65-$68.77, $71.80-$72.20, $72.55-$72.66, $73.35-$73.55.

Nov heating oil     Support:             170.35-170.50, 167.65-167.75, 166.90-167.30, 165.80-165.95, 163.75-163.90.

                             Resistance:        173.30-172.42, 175.60-175.74, 182.00-182.20, 182.60-182.80, 185.60-185.70.

Nov Rbob                     Support:             162.50-162.65, 161.25-161.40, 160.00-160.20, 157.30-157.45, 153.10-153.25.

                                           Resistance:        164.77-165.05, 166.00-166.15, 169.80-170.00, 177.30-177.50, 179.85-179.95.

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 7,632 contracts on Monday, when prices were higher.  That looks like fairly good, new buying, which would be supportive for higher quotes. 

      Heating oil open interest dropped by 2,893 contracts on Monday, when prices were higher.  That looks like short covering, which would be a bearish development.

      RBOB open interest fell by 2,420 contracts on Monday when prices were higher. That looks like net short-covering, which would be bearish. 

      Natural gas open interest fell by 11,664 on Monday when prices were lower.  That looks like heavy long liquidation and would be supportive.

Monday’s Open Interest Changes:  

Crude 1,170,687  up 7,632       Heat 315,236   dn 2,893       RBOB 200,581  dn 2,420       Nat gas 662,771  dn 11,771    

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 rallied 4.5 cents yesterday as traders adapted to the November contract as the expiring month.  Yesterday’s small rally was more than just a 4.5 cent rally on a Tuesday.  It was an implicit acceptance of the higher November price.  Prices have a huge gap on the charts now, and the initial indication suggests an objective to more than $7.00/mmBtu.  That may change with subsequent activity, but the picture as it exists now has an objective to $7.16. 

Posting any gain at all was the most important aspect of yesterday’s trading, especially with cash lower.  Quite honestly, we expected traders to repudiate and reject the new and higher levels.  Just two weeks ago, prices were trading (intraday) at less than $3.50/mmBtu.  Now, they are knocking on the door of $5.00/mmBtu.  That is a remarkable change and there has been nothing compelling to point to as an underlying cause.  It is clear that prices were undervalued, and they may even still be.  They have certainly come a long way.  The ratio of crude to natural gas is now 16.26-to-one, compared to being 24.12-to-one at the start of September.  What’s different?  One large investment bank made its money on the spread and has gotten out. 

In cash trading yesterday, Henry Hub prices were at $3.22-$3.50, down $0.15-$0.20 on the day (DJN).  SoCal prices were at $3.52-$3.73, down $0.12-$0.14 on the day.  El Paso Permian prices were down $0.16-$0.20 at $3.31-$3.40.  Katy prices were down $0.20-$0.26 at $3.26-$3.39.  Waha prices were down $0.10-$0.16 at $3.30-$3.46.  Transco 6 was down $0.16-$0.24 at $3.46-$3.63/mmBtu, according to Dow Jones News (DJN).

Palo Verde prices were last quoted at $31.00-$33.00/mwh.  Northeastern prices last traded at $27.50-$35.00.  Entergy was last at $24.50-$25.00.  Ercot was last at $30.50-$31.00/mwh.

The Energy Information Administration (EIA) reported yesterday that US lower 48 production has fallen by 1.1% to 62.55 bcf/day, according to Dow Jones.  This report shows that relatively and absolutely low prices have cut into output.  We have seen rig counts fall for the past year, and this is a clear sign that the lower rig counts – the result of previously falling prices – have given us reduced production.   Right now, the rig count stands at 710, which is up from the lows, but which is still well below half the number seen at the highs in September, 2008, when more than 1600 rigs were in service. 

Prices are overbought here, and that may slow down the current advance.  Prices may decide that it is too much to go from $3.50 (as a low on September 22nd) to $5.00 in less than ten days.  Nevertheless, yesterday’s first day reaction to much higher prices was just about as bullish as it could have been. 

Support is at $4.59-$4.61, $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 $4.85-$4.88, $4.97-$5.01, $5.22-$5.24, $5.55-$5.57, $5.62-$5.63, $5.82-$5.86, $5.96-$6.01, $6.15-$6.17, $6.34-$6.37, $6.65-$6.69, $6.90-$6.94, $7.01-$7.04, $7.28-$7.31, $7.34-$7.36, $7.48-$7.50, $7.74-$7.76, $7.93-$7.94, and $8.04-$8.08

Natural gas prices gapped higher yesterday and settled with a gain.

Dollars per million Btu

Nov Natural Gas:          Support:         $4.59-$4.61, $3.73-$3.75, $3.66-$3.68, $3.50-$3.53, $3.45-$3.46, $3.28-$3.32.

                                                    Resistance:     $4.85-$4.88, $4.97-$5.01, $5.22-$5.24, $5.55-$5.57, $5.62-$5.63, $5.82-$5.86.

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. 

EIA Report

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

News & Views

Traders are still focusing on the dollar, on equities and on oil supply and demand factors much more than on events relating to Iran.  At some point, though, we see no way around Iran becoming the biggest factor in this market.

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 up yesterday, and prices may be returning to the blue line, which is the point from which this market broke down.  The dollar has rallied from its recent low point, which is now good support.  The dollar was oversold before it rallied.  Additional strength from here is likely to press oil quotes lower.

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 47 points yesterday, and that helped keep oil prices from rising.

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

A Look at the Straits of Hormuz

The Straits of Hormuz are ringed on three sides by Iran.  Up to 16 million bpd of crude, or roughly 19% of the world’s daily oil output passes through the straits each day.  That includes Iranian output.

This map is from 2005, and the US 5th Fleet may be elsewhere, but the US has a presence at the designated site.  The US is likely to have one or two carrier task groups in the Petroleum Gulf, with another in the Mediterranean.  “Known by the military designations GBU-27 or GBU-28, "bunker busters" are guided by lasers or satellites and can penetrate up to 30 feet of earth and concrete.”

Israel certainly has some of the bombs for its U.S.-supplied F-15 fighter jets.  Those would be the bombs used to attack Iran’s nuclear facilities, if such an event were to occur.

Recommendations for Specific Market Segments