Prices for October 19th, 2009

Market Review for Monday         

IL prices were higher in early trading on Sunday night, sold off, but then rallied into yesterday’s close to finish at their highest levels in more than a year.  Crude oil prices came within a whisker of $80.00, which is a price level not seen in a dozen months.  Once again, it was the combination of a weak dollar and strong equities that powered oil prices higher.  Some observers feel that it was only a lack of stronger demand in oil that prevented prices from reaching $80.00 yesterday.  Oil traders have had a difficult time adjusting to the unexpected improvement in the supply-demand balance, because most had expected that it would be an increase in demand, rather than a sharp decline in supply, that would lead to improvement in the balance. 

There was new buying, but there was also active short-covering in the November crude oil contract a day before expiration.  The November contract expires this afternoon.  December futures have already broken over $80.00, and are likely to command the bulk of this market’s attention from here on out.    

The combination of third quarter reporting and the trend higher in equities has been a strong factor behind the huge outflow of capital from the relative safety of the dollar to the riskier investment in stocks.  A steady stream of better-than-expected third quarter corporate results has helped push stock market quotes higher and that has been a key link in the chain between higher equities, economic optimism and a growing sense that lagging oil demand is certain to improve.  This has been the linear assumption since March and, while we have seen some improvement in consumption, it has not been anything near the expectations that have boosted prices.  We find it ironic in the extreme that the real improvement has actually come from a decline in supplies instead of the bump higher in demand that has been assumed since March. 

Yesterday was the 22nd anniversary of Black Monday, October 19th, 1987.  We were on a plane for most of the day and a business partner picked us up at the airport.  He told us that the DJIA had fallen 500 points on record volume, and we remember that oil prices dropped from a significant high that day.  One of the first thoughts we had was that equities and oil had moved in tandem, which was unheard of then.  Now, the two move in lockstep.  Many things stay the same, but just as many do not.

Technicals

           The oil complex continued higher yesterday, with all three contracts making new recent highs.  Crude still 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.  Crude oil and heating oil prices have been higher for eight straight days, now.

Dollars per barrel

Above:  The crude oil contango spread has been flatlining for the last several weeks.  At some point, it will trigger the release of storage.

November crude oil now has buy-stops over $79.69, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $78.00, $76.80, $74.75, $74.40, $72.80, $72.00, $70.60, $68.88, $68.00, $65.80-$66.20, $64.95, and $62.70.  November heating oil has buy-stops over 205.40, 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 202.00, 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, and 163.75.  November RBOB has buy-stops over 199.40, 198.36, 200.00, 207.00, 208.15, 208.55, 211.24, 214.00, 222.70, and 228.86.  Sell-stops are under 196.30, 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 11 yards yesterday on second and one to go.

Technical Support & Resistance

Nov crude oil                        Support:             $78.00-$78.20, $76.80-$77.00, $74.40-$74.55, $72.80-$73.00, $72.00-$72.15.

                                           Resistance:        $79.55-$79.70, $84.70-$84.83, $85.00-$85.15, $89.70-$89.82, $90.85-$91.00.

Nov heating oil     Support:             202.00-202.20, 199.80-200.00, 193.90-194.10, 192.15-192.30, 188.75-188.85.

                             Resistance:        205.25-205.40, 209.20-209.40, 215.95-216.07, 225.65-225.80, 226.90-227.05.

Nov Rbob                     Support:             196.30-196.45, 192.00-192.20, 186.25-186.35, 183.90-184.05, 179.20-179.35.

                                           Resistance:        199.25-199.40, 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 21,032 contracts on Friday, when prices were higher.  That looks like very heavy, net short-covering, which would be bearish.  A large part of the short covering came ahead of today’s November contract expiration.

      Heating oil open interest was up by 1,900 contracts on Friday, when prices were higher.  That looks like new buying and is supportive. 

      RBOB open interest grew by 7,549 contracts on Friday when prices were higher.  That looks like heavy, new buying, which would be bullish.  Open interest has jumped 32,361 – or 16.74% - since October 7th.  That is unusual.

      Natural gas open interest fell by 4.967 on Friday when prices were higher.  That looks like good short-covering, which would be bearish.  The most recent buying has come from short-covering.

Friday’s Open Interest Changes:  

Crude 1,261,304  dn 21,032       Heat 316,085   up 1,900       RBOB 225,657  up 7.549       Nat gas 729,721  dn 4,967    

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 traded in both positive and negative territory yesterday, as traders tried to reconcile competing temperature forecasts.  On the one hand, temperatures have been colder than they have been in October in a solid 35 years.  On the other hand, they are expected to return to much more normal or even warmer-than-normal readings tomorrow.  Now, one day does not make a trend, but if one were to see warmer-than-usual readings for two or three weeks, they would come during the critical “seeding” period that could set a new trend for a year or more.  At this stage, there is nothing to suggest that tomorrow’s readings will be anything more than a one-time event, but if warmer weather lingers, it would be important.  Just as critically, though, if it turns out to be a one-day wonder, it would reinforce the colder-0than-normal trend that has been with us for nearly a year and would suggest that we have a colder heating season still in front of us.  The end of October into early November was the seeding period last year, and has established trends more frequently than any other period, with late April into May the next most likely period.  What happens over the next few weeks could set the year’s trend.

In cash trading yesterday, Henry Hub prices were at $4.08-$4.40, up $0.10-$0.48 on the day (DJN).  SoCal prices were at $4.39-$4.54, up $0.24-$0.32 on the day.  El Paso Permian prices were up $0.17-$0.33 at $4.23-$4.32.  Katy prices were up $0.17-$0.20 at $4.10-$4.32.  Waha prices were up $0.09-$0.30 at $4.24-$4.34.  Transco 6 was up $0.12-$0.17 at $4.77-$4.95/mmBtu, according to Dow Jones News (DJN). 

Palo Verde prices were last quoted at $38.00-$43.75/mwh.  Northeastern prices last traded at $36.75-$47.75.  Entergy was last at $35.25-$35.75.  Ercot was last at $34.25-$34.75/mwh. 

Usually, temperature forecasts are not as critical in October.  But, with readings recently printing figures two months ahead of schedule, giving us mid-December temperatures in mid-October, the importance of recent forecasts has increased dramatically.  The fact that this has been a seeding period in many previous years also makes forecasts – and what happens in the event that much more significant.  We have plenty of natural gas in storage, but a combination of economic revival and unseasonably cold temperatures right now could imply a faster rate of burning once we get into the heating season, proper.  These factors have turned what normally is a shoulder month into something more.

Some traders were also buying in this market yesterday in sympathy with new highs on the DJIA and the continuing expectation that the economy will improve.  But, as in oil, it may be lower supply that helps prices before demand picks up.

Support is at $4.67-$4.69, $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 $4.88-$4.92, $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, and $7.34-$7.36.

Natural gas prices were slightly higher yesterday.

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

It is difficult to make a bearish case that is capable of sticking in the current environment.  However, there will come a point when equities will react to higher oil prices, rather than oil prices reacting to higher equities.  At some point, the increase in the cost of oil for consumers will be seen as the bleed on the economy that it really is.

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 lightly lower yesterday, and it made slightly fresh lows for this campaign.  It also finished at its lows.  There are 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 rallied 96 points yesterday, and it is back above 10,000, and set a new, recent record yesterday.

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

A Look at Inventories

Distillate inventories did not make new highs last week, but they remain at very high levels.

A Look at Imports

Crude imports remain at extremely low levels.

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