Prices for October 16th, 2009

Market Review for Friday & the Weekend                  

HE dollar was steady to firmer and the DJIA sold off 67 points as traders took profits ion both markets on Friday.  They did not pursue that in oil trading, though, and prices continued higher.  Dow Jones wrote about “economic optimism” in its Friday market roundup, but we tend to feel that trend dynamics were working with the big cuts in output to bring in fundamental short-covering.  Fundamental traders have been focused on high inventory levels and poor demand, and last week’s DOE report altered the supply part of the supply-demand equation.  Bitterly cold temperatures (near freezing) in southern New England and in the New York metropolitan area also brought in what we believe was short-covering ahead of the weekend. 

The bottom line is simple: The DJIA made new highs for 2009, the dollar made new lows and crude oil and heating oil prices made new highs for the year.  Those factors are likely to be continuing bullish factors as we start this next week.  Friday’s activity was short-covering by fundamental traders, who have rethought their perspective. 

The biggest factor in last week’s fundamental picture was the decline in gasoline supplies.  Refinery production dropped 964,000 bpd and imports dropped 321,000 bpd, giving us a decline in supply of 1.285 million bpd, surely the biggest one-week decline, in the absence of a hurricane, in the history of this complex.  Distillate production fell 166,000 bpd and imports declined by 50,000 bpd, pulling 216,000 bpd from the supply side. 

Even though gasoline prices did not break out above critical resistance, it was a strong week, and prices gained 21.13 cents a gallon.  Heating oil prices increased by 17.69 cents a gallon, while crude added $6.76/bbl.  Open interest climbed across the board last week, by 32,430 in crude, 4,902 in heating oil, 22,393 in gasoline and by 28,798 in natural gas.  The gains in prices and open interest were particularly impressive in gasoline, underlining the drop in supply.

Despite the changes, supplies are still plentiful.  Opec Secretary-General Abdalla Salem El-Badri noted that the cartel is producing 1.7 million bpd more crude than the five-year average, and he enumerated Opec’s waterborne stocks by saying it has “floating storage of 125 million, 55 million of which is crude and 75 million of which is product.”  Traders discounted continuing low refinery output, cold weather and economic recovery.

Technicals

           Oil prices broke out above critical resistance levels last week in crude oil and heating oil.  Gasoline broke resistance, but is still inside a larger trading range.  Crude now has objectives to $81.73, $96.22, $99.00 and $107.35.  Heating oil has objectives to 214.50 and 224.25.  There is resistance in gasoline up to 211.24.

Dollars per barrel

Above:  The crack spread started the week at $3.43 and ended at $5.21/bbl, reflecting the huge decline in utilization rates.

November crude oil now has buy-stops over $78.75, $79.17, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $76.80, $74.75, $74.40, $72.80, $72.00, $70.60, $68.88, $68.00, $65.80-$66.20, $64.95, $62.70, $62.00-$62.09, $61.00, $60.00-$60.25, and $59.65.  November heating oil has buy-stops over 203.50, 209.40, 216.07, 225.80, 227.05, 229.08, 238.95, 249.62, 251.50, 256.48, 265.89, 273.20, 288.50, 295.00, 299.71, and 303.00. Sell stops are under 199.80, 193.90, 192.15, 188.75, 186.50, 182.63, 177.00, 176.68, 173.75, 171.10, 170.35, 168.60, 167.65, 166.90, 165.85, 163.75, and 157.45.  November RBOB has buy-stops over 198.36, 200.00, 207.00, 208.15, 208.55, 211.24, 214.00, 222.70, and 228.86.  Sell-stops are under 192.10, 186.25, 183.90, 179.20, 177.30, 175.14, 171.40, 170.25, 168.85, 163.00, 161.25, 160.00-160.10, 150.00, and 135.20.

Football: The bulls gained nine yards on Friday on first down, which makes it second and one to go here as we start this week.

Technical Support & Resistance

Nov crude oil                        Support:             $76.80-$77.00, $74.40-$74.55, $72.80-$73.00, $72.00-$72.15, $68.85-$69.17.

                                           Resistance:        $78.60-$78.75, $79.00-$79.17, $84.70-$84.83, $85.00-$85.15, $89.70-$89.82.

Nov heating oil     Support:             199.80-200.00, 193.90-194.10, 192.15-192.30, 188.75-188.85, 186.50-186.65.

                             Resistance:        203.35-203.50, 209.20-209.40, 215.95-216.07, 225.65-225.80, 226.90-227.05.

Nov Rbob                     Support:             192.00-192.20, 186.25-186.35, 183.90-184.05, 179.20-179.35, 177.30-177.45.

                                           Resistance:        198.20-198.36, 206.80-207.00, 208.00-208.15, 208.40-208.55, 211.10-211.24.

Oil Inventory Reports

      This week’s DOE report has had mixed results for refined products, with four years higher and four years lower over the last eight years.  The overall result was that stocks declined slightly over the eight-year period.  Crude oil stocks have been higher in five of the last eight years, and utilization actually bounced back up in six of the last eight years.  Crude oil imports have been lower on average over the last six years, but they have averaged 9.636 million bpd, which is significantly higher than last week’s reported figure.  If this week follows historical trends, we should see a bounce back up in both crude oil imports and in refinery utilization.    

     Distillate stocks are now 43.0 million bbls, or 33.67%, higher than a year ago.  Heating oil inventories are 12.3 mln bbls, or 31.45%, higher than they were a year ago.  Gasoline stocks are 17.9 mln bbls (up 9.35%) higher against a year ago.  Crude oil stocks are now 31.6 million bbls, or 10.32%, higher than a year ago.  Residual stocks are 3.9 mln bbls (10.00%) lower than a year ago, jet fuel stocks are 7.4 mln bbls, (19.53%) higher than a year ago.  Utilization is 1.30% lower than a year ago and 4.39% below the eight-year average.  It is 7.00% 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 10 contracts on Thursday, when prices were higher.  That looks like negligible buying or selling and is neutral.  It suggests that as many new buyers came in as shorts covered.

      Heating oil open interest was up by 1,361 contracts on Thursday, when prices were higher.  That looks like new buying and is supportive. 

      RBOB open interest grew by 10,602 contracts on Thursday when prices were higher.  That looks like heavy, new buying, which would be bullish.  The fundamental picture improved dramatically with last week’s steep drop in gasoline output.

      Natural gas open interest fell by 8,659 on Thursday when prices were higher.  That looks like heavy short-covering, which would be bearish. 

Thursday’s Open Interest Changes:  

Crude 1,282,336  dn 10       Heat 314,185   up 1,361       RBOB 218,108  up 10,602       Nat gas 734,688  dn 8,659          

CFTC Commitments of Traders for Nymex  (for the period ended Tuesday, Oct 13th)   

 As of Oct 13th:                 Long                   Short:

Crude oil                    252,327               183,491                           -contracts held by speculators:  1.38 long

                                          601,526               664,318                               held by the trade

                                          107,760               113,804                               held by small specs and hedgers.

Spreads….up 22,715 contracts   The ratio went from 1.22-to-one long to 1.38-to-one over the last two weeks.

   Large speculators added 16,758 new long contracts and covered 2,072 shorts over the week under review.  Commercials liquidated 30,137 longs and covered 11,632 shorts.  Small specs and hedgers added 5,340 longs and added 5,665 shorts.  Open interest grew by 14,676 contracts as prices were up $3.27/barrel.  That looks like good, new buying, and follows a week of heavy buying over the previous week.  A large number of new longs bought ahead of last week’s breakout to the upside. 

   The average large speculator has 2,175 long contracts (116 accounts, up 10 accts) which is down 6 contracts, and 1,929 shorts (111 accounts, up 3), down 276 contracts.  Commercials held 7,161 longs (84, up 1), down 449 contracts and 6,920 shorts (96, up 1), down 195 contracts.  Reportables held 3,877 longs (298, up 20 acct), down 246 contracts, and 4,105 shorts (280 accts, up 10), down 119 contracts.  Reportable positions were diluted by new accounts.

Heating oil                   52,000                 15,543                           - contracts held by speculators:  3.34 to 1 long

                                          181,844               230,081                              held by the trade.

                                            40,570                 28,790                               held by small specs and hedgers.

Spreads….dn 2,891 contracts.    The ratio of large speculative longs to shorts went from 2.22-to-one to 3.34-to-one in 2 weeks.

       Large speculators added 2,460 longs and covered 1,573 shorts.  Commercial accounts liquidated 3,072 longs and added 7,944 shorts.  Small speculators and hedgers added 5,292 longs and covered 1,691 shorts.  Open interest grew by 1,789 contracts as prices rallied 10.92 cents.  That looks like net, new buying, which would be bullish.  Small specs and hedgers were the biggest buyers, with large speculators also buying.  Commercials sold into the higher prices.

       The average large speculative long is holding 1,486 contracts (up 247 lots on 35 accounts, dn 5), while the average short has 536 contracts (dn 54 lots on 29 accts, unch).  The average commercial long is holding 2,798 contracts (dn 91 contracts on 65 accts, up 1) compared to the average short holding of 3,027 contracts (up 25 lots on 76 accts, up 2).  The average reportable position is 2,139 long (up 22 lots on 126 accts, dn 3) while the average short holding is 2,164 (up 43 lots on 130 accts, dn 1). The number of contracts held by reportable accounts increased as the number of accounts dropped.

Rbob Gasoline            53,162                13,457                          -contracts held by speculators:  3.95 to 1 long

                                           113,496              155,788                             held by the trade.

                                             19,119                16,532                              held by small specs and hedgers.

Spreads…up 6,141 contracts   The ratio of large speculative longs to shorts went from 2.80-to-one to 3.95-to-one in 2 weeks.

     Large speculative holdings grew by 2,985 longs and fell by 1,406 shorts over the latest week. Commercial holdings fell by 4,317 longs and rose by 3,397 shorts.  Small speculators and hedgers’ positions grew by 4,762 longs and grew by 1,439 shorts.  Open interest rose by 9,571 contracts as prices rallied 5.91 cents, which looks like net, new buying.  Small specs and hedgers were the best buyers, with large speculators buying and covering shorts.  Commercials sold into higher prices, selling fresh shorts and liquidating longs. 

   The average holdings are 1,266 contracts for each large speculative long (42 accts, unch accts) and 538 for each large speculative short (25, dn 4).  The average commercial long now has 1,669 contracts long (68, dn 1) and 1,791 short (87, up 4). Average reportable holdings are 1,444 long (129, dn 1) against 1,464 short (129, up 3).  There was 1 less reportable long  account and 3 more short accounts. The average reportable long holding was up 48 contracts while the average short gained 30.

Naturalgas                99,332               246,375                           -contracts held by speculators:  2.48 to 1 short

                                         310,133               202,908                               held by the trade.

                                           90,316                 50,498                           held by small specs and hedgers.

Spreads…up 35,868 contracts    The ratio of large speculative shorts to longs went from 3.06-to-one to 2.48-to-one in 3 weeks.

  Large speculative holdings were up by 5,469 longs and were up by 10,412 shorts over the latest week. Commercial accounts were up 7,517 longs, and were up 4,497 shorts, while small speculators and hedgers added 4,118 longs and added 2,195 shorts.  Open interest grew by 52,972 contracts as prices fell 29.2 cents.  That looks like heavy selling, and large speculators sold this market heavily.  Small specs and hedgers and commercials were also selling, although they both bought more than they sold.  Open interest has been increasing in general lately as part of the bigger bull move in natural gas prices.

  The average large speculator has 1,226 contracts (81) while each large speculative short is holding 2,768 shorts (89).  The average commercial long now has 3,782 contracts long (82) and 2,941 short (69). Average reportable holdings are 2,800 long (234) long and 3,248 short (214).  There are 9 more long accounts and 13 more short accounts in the reportable category, which increased the average long holding by 105 contracts and increased the average short holding by 43 contracts.  There were six more long accounts and five more short accounts in the large speculative category, which cut holdings by 26 and 41 contracts.

Natural Gas & Utility Generation

Natural gas prices rallied steeply on Friday, reasserting the upward trend in this market.  It seems that prices had gotten overbought, sold off and then reached a support level above $4.35.  Traders took profits on long positions established ahead of the bitterly cold weather seen towards the end of last week.  Temperatures in the greater metropolitan New York area were actually two months ahead of themselves, giving us a taste of mid-December in mid-October.  As we start this new week, temperatures are expected to return to more normal, seasonal figures.  That would give us substantially warmer readings than those we have recently experienced.  Of course, it all remains to be seen.  Forecasts do not always arrive as advertised or on schedule.  At this point, the trend towards colder weather is well established, and that suggests that everything is likely to wind up colder than forecast.  This is not of only passing interest, either; if this trend remains intact through the next three or four weeks – or if we do not get an intense warming trend during that period – then we must assume that the colder trend will remain intact as we start the heating season.  If that is the case, it should be colder through spring.

In cash trading on Friday, Henry Hub prices were at $3.60-$4.30, up $0.28 and down $0.10 on the day (DJN).  SoCal prices were at $4.07-$4.30, up $0.00-$0.12 on the day.  El Paso Permian prices were up $0.12 and down $0.04 at $3.90-$4.15.  Katy prices were up $0.12-$0.18 at $3.90-$4.15.  Waha prices were up $0.02-$0.24 at $3.94-$4.25.  Transco 6 was down $0.09-$0.10 at $4.60-$4.83/mmBtu, according to Dow Jones News (DJN). 

Palo Verde prices were last quoted at $38.50-$41.00/mwh.  Northeastern prices last traded at $36.00-$47.25.  Entergy was last at $35.00-$36.00.  Ercot was last at $33.00-$33.25/mwh. 

The latest temperature forecasts have been reduced, and a number of forecasts have gone from normal to below normal for this week.  That happens a lot when weather is trending.  Ten days out, it might look like readings will be warmer, but as one actually approaches the period forecast, the outlook progressively gets colder.  That seems to be what we should expect from here.  Unless we get a sudden and definite warming spell soon, we must expect every forecast to be revised colder as we get closer to the forecast period from now until spring.  As it now stands, with a colder trend clearly in place, we should be expecting one of the coldest and longest winters in years.

There seems to be an intrinsic acknowledgement of this, which is why this market has recently ignored larger-than-expected builds in underground storage.  We are seeing increasing interest, and open interest was up nearly 29,000 last week.

Support is at $4.43-$4.45, $4.35-$4.39, $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 $4.87-$4.89, $4.97-$4.99, $5.07-$5.09, $5.13-$5.15, $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, and $7.93-$7.94.

Natural gas prices turned back up after finding support above the gap.

Dollars per million Btu

Nov Natural Gas:          Support:         $4.43-$4.45, $4.35-$4.39, $3.73-$3.75, $3.66-$3.68, $3.50-$3.53, $3.44-$3.46.

                                                    Resistance:     $4.87-$4.89, $4.97-$4.99, $5.07-$5.09, $5.13-$5.15, $5.22-$5.24, $5.55-$5.57.

EIA Weekly Storage Figures

Last week’s EIA report showed a build of 58 bcf on expectations for a build of 52-53 bcf.  Stocks are now 450 bcf higher than a year ago, against a surplus of 473 bcf a week ago, a surplus of 491 bcf two weeks ago and a surplus of 509 bcf three weeks ago.  Stocks are now 13.78% higher than a year ago.  They are 474 bcf and 14.62% above the five-year average.

The five-year average for this week was a build of 59.2 bcf, while the eight-year average was a build of 54.75 bcf.  Last year’s build was 70 bcf.

EIA Report

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

News & Views

Everything is pointing higher.  Equities made new highs last week, the dollar made new lows, and crude broke to new highs.  Nonetheless, there are some signs of underlying weakness, notably from consumers and from oil demand.

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 steady to lightly firmer on Friday, but the trend remains pointed lower.  There are still objectives lower to 65.80 and 65.20 euro cents.  The dollar has embarked on yet another leg lower and this makes lower this market’s default mode.  That is bullish for oil 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: Six-Month Chart

The DJIA coughed up 67 points on Friday, but it broke 10,000 last week and finished at 9,995. It’s still a bullish market.

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

A Look at Gasoline Supply & Demand

Thirteen-week demand is at 9.161 million bpd, up 0.03% against last year.  Thirteen-week supply is at 9.952 mln bpd, down 0.10%.  Thirteen-week implied demand is at 10.013 mln bpd, down 1.53%.

A Look at Distillate Supply & Demand

Thirteen-week demand is at 3.412 million bpd, down 15.73% against last year.  Thirteen-week supply is at 4.176 mln bpd, down 3.65%.  Thirteen-week implied demand is at 4.051 mln bpd, down 9.76%.

A Look at Refinery Utilization

Utilization is 1.30% lower than a year ago and 4.39% below the eight-year average.  It is 7.00% lower than the four-year, pre-Katrina average.

Recommendations for Specific Market Segments