Prices for October 23rd, 2009

Market Review for Friday & the Weekend       

HERE are always (at least) two ways of looking at things, and Friday’s decline in oil prices gives us a chance to start at the same and end at the same place, but to take two different ways of covering the distance between them.  Either way, our stories start with weaker equities and a stronger dollar, two unrelated instruments that have had a strong inverse relationship recently.  And, we end with weaker oil prices on Friday.

One camp would tell us that it is simply a matter of watching the two markets and then seeing whether they have given oil prices a push or a pull.  This group would insist that oil is no longer really a commodity, that it is instead an asset class.  When equities are lower and the dollar is stronger, oil prices will weaken.  When it is the other way around, the oil markets should rally.  The commodity camp would insist that a stronger equities market and a weaker dollar bring index funds in to buy oil futures, but when we see the DJIA weak and the dollar higher, oil’s fundamentals are allowed to shine through. The index funds don’t get short, so when the outside forces are not pulling oil higher, fundamental selling is allowed to push quotes lower.

In the example of this past Friday, fundamental traders discounted some of the bullish supply developments in last week’s DOE report on Wednesday, but they had not yet discounted the very bearish demand factors that were revealed in the weekly statistics.  When the stronger dollar and weaker equities failed to trigger index fund buying on Friday, the weak demand figures finally had a chance to come home to roost.

Either way, the process starts with equities and currencies; in the first case, it’s a simple push or pull; in the second case, it’s either a pull or it’s nothing – which, in turn, allows bearish fundamentals a day in court. 

To many, such a fine distinction may seem pointless.  To us, though, it is the difference between a two-pronged bull market (like the one we had in the first half of 2008) with internal (fundamental) and external (dollar, equities) both pulling prices higher, and a two-way market that could suddenly drop.

At some point, the Fed will raise interest rates again.  And, even if it does this a quarter-point at a time and only goes to 4%, that could be 16-24 months of weaker equities and stronger dollar values.  At that point, we expect that this market’s fundamentals, whatever they may be then, will be what will determine the changing price for oil.  So to us, the distinction remains important.

Technicals

           Oil prices were all lower again, on Friday, but they all ended the week with gains.  Crude gained $1.48, heating oil gained 4.59 cents and gasoline gained 6.45 cents.  Objectives higher remain in place, with crude objectives to $96.22, $99.00 and $107.35.  Heating oil has objectives to 214.50 and 224.25 and there is resistance in gasoline up to 211.24.

Cents per gallon

Above:  The gasoline over heating oil spread finished on Friday at 3.18 gasoline under.  It is usually lower by now.

December crude oil now has buy-stops over $82.00, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $79.55, $77.64, $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 212.12, 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 205.45, 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 207.51, 208.15, 208.55, 211.24, 214.00, 222.70, and 228.86.  Sell-stops are under 200.00, 195.37, 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 lost seven yards on second and 12 to go, making it third and 19 to go.  The burden of proof is on the bulls.

Technical Support & Resistance

Dec crude oil                        Support:             $79.55-$79.70, $77.64-$77.70, $76.80-$77.00, $74.40-$74.55, $72.80-$73.00.

                                           Resistance:        $81.75-$82.00, $84.70-$84.83, $85.00-$85.15, $89.70-$89.82, $90.85-$91.00.

Nov heating oil     Support:             205.45-205.55, 202.00-202.10, 199.80-200.00, 193.90-194.10, 192.15-192.30.

                             Resistance:        212.00-212.12, 215.95-216.07, 224.15-224.25, 225.65-225.80, 226.90-227.05.

Nov Rbob                     Support:             200.00-200.15, 195.37-195.40, 192.00-192.20, 186.25-186.35, 183.90-184.05.

                                           Resistance:        206.80-207.00, 207.40-207.51, 208.00-208.15, 208.40-208.55, 211.10-211.24.

Oil Inventory Reports

      Traders will be looking for signs of distillate demand over the next two reports, in particular, and through spring, in general. Two weeks ago, temperatures in the North were two months ahead of time, running roughly 12-18° colder than is normal for this time of year.  There was a reaction in underground natural gas storage figures, but we have not seen any reaction, yet, in heating oil/distillate.  Because we sometimes end up playing catch-up in distillate, seeing demand on the refill runs, traders will be looking for that in this week’s numbers or in next week’s report.  They will also be looking for a rebound in refinery utilization this week; seven of the last eight years had increases of 1.37% on average.

     Distillate stocks are now 42.3 million bbls, or 33.15%, higher than a year ago.  Heating oil inventories are 12.2 mln bbls, or 30.89%, higher than they were a year ago.  Gasoline stocks are 14.5 mln bbls (up 7.53%) higher against a year ago.  Crude oil stocks are now 30.9 million bbls, or 10.03%, higher than a year ago.  Residual stocks are 5.0 mln bbls (12.76%) lower than a year ago, jet fuel stocks are 7.0 mln bbls, (18.37%) higher than a year ago.  Utilization is 3.70% lower than a year ago and 6.30% below the eight-year average.  It is 9.40% 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 15,643 contracts on Thursday, when prices were lower.  That looks like heavy, new selling, which would be bearish.  We have seen some large changes in open interest recently. 

      Heating oil open interest was up by 271 contracts on Thursday, when prices were lower.  That looks like new selling, which would be bearish.

      RBOB open interest rose by 2,839 contracts on Thursday when prices were lower.  That looks like decent, new selling, which would be bearish. 

      Natural gas open interest fell by 7,639 on Thursday when prices were lower.  That looks like net, long liquidation, which would be supportive.  It suggests profit-taking by longs.

Thursday’s Open Interest Changes:  

Crude 1,228,682  up 15,643       Heat 317,330   up 271       RBOB 240,246  up 2,839       Nat gas 712,314  dn 7,639       

CFTC Commitments of Traders for Nymex  (for the period ended Tuesday, Oct 20th)   

 As of Oct 20th:                 Long                   Short:

Crude oil                    275,122               200,739                           -contracts held by speculators:  1.37 long

                                          568,480               647,639                               held by the trade

                                          102,377                 97,601                               held by small specs and hedgers.

Spreads….dn 31,203 contracts   The ratio went from 1.38-to-one long to 1.37-to-one over the last week.

   Large speculators added 22,795 new long contracts and added 17,248 shorts over the week under review.  Commercials liquidated 33,046 longs and covered 16,679 shorts.  Small specs and hedgers liquidated 5,383 longs and covered 16,203 shorts.  Open interest fell by 46,837 contracts as prices were up $4.94/barrel.  Large speculators (Managed Money added 19,508) added positions; commercials, smaller traders and spread traders took them off.  Small trader covering made the difference. 

   The average large speculator has 2,435 long contracts (113 accts, dn 3) which is up 260 contracts, and 1,825 shorts (110 accts, dn 1), down 104 contracts.  Commercials held 7,383 longs (77, dn 7), up 222 contracts and 7,277 shorts (89, dn 7), up 357 contracts.  Reportables held 3,978 longs (280, dn 18 acct), up 101 contracts, and 4,238 shorts (264 accts, dn 16), up 133 contracts.  Eighteen reportable long and 16 reportable short accounts were closed over this week with half being spreads.

Heating oil                   55,312                 15,645                           - contracts held by speculators:  3.53 to 1 long

                                          179,250               235,523                              held by the trade.

                                            41,174                 24,568                               held by small specs and hedgers.

Spreads….up 4,290 contracts.    The ratio of large speculative longs to shorts went from 2.22-to-one to 3.53-to-one in 3 weeks.

       Large speculators added 3,312 longs and added 102 shorts.  Commercial accounts liquidated 2,594 longs and added 5,442 shorts.  Small speculators and hedgers added 604 longs and covered 4,222 shorts.  Open interest grew by 5,612 contracts as prices rallied 12.35 cents.  That looks like net, new buying, which would be supportive.  Large speculators did the best buying, although spread traders added a large proportion of the new open interest.  The trade sold into higher prices, as is expected.

       The average large speculative long is holding 1,317 contracts (dn 169 lots on 42 accounts, up 7), while the average short has 602 contracts (up 66 lots on 26 accts, dn 3).  The average commercial long is holding 2,636 contracts (dn 162 contracts on 68 accts, up 3) compared to the average short holding of 2,981 contracts (dn 46 lots on 79 accts, up 3).  The average reportable position is 1,975 long (dn 164 lots on 139 accts, up 13) while the average short holding is 2,189 (up 25 lots on 133 accts, up 3). There were 13 new reportable long accounts, with seven of those opened by large speculative concerns.

Rbob Gasoline            74,574                13,521                          -contracts held by speculators:  5.52 to 1 long

                                           118,504              183,618                             held by the trade.

                                             19,600                15,539                              held by small specs and hedgers.

Spreads…up 1,630 contracts   The ratio of large speculative longs to shorts went from 2.80-to-one to 5.52-to-one in 3 weeks.

     Large speculative holdings grew by 21,412 longs and grew by 64 shorts over the latest week. Commercial holdings grew by 5,008 longs and rose by 27,830 shorts.  Small speculators and hedgers’ positions grew by 481 longs and fell by 993 shorts.  Open interest rose by 28,531 contracts as prices rallied 15.59 cents, which looks like heavy, new buying.  Large speculators were far and away the best buyers, while commercials were equally large sellers.  Almost all the new buying came from Managed Money (up 20,568) while the selling came from real commercials (up 27,385)

   The average holdings are 1,286 contracts for each large speculative long (58 accts, up 16 accts) and 588 for each large speculative short (23, dn 2).  The average commercial long now has 1,743 contracts long (68, unch) and 2,267 short (81, dn 4). Average reportable holdings are 1,429 long (150, up 31) against 1,820 short (120, dn 9).  There were 31 new reportable long  accounts, which cut the average holding by just 15 lots, and there were 9 less shorts, which boosted the average short by 356.

Naturalgas                89,751               241,791                           -contracts held by speculators:  2.69 to 1 short

                                         300,799               192,653                               held by the trade.

                                           95,785                 51,891                           held by small specs and hedgers.

Spreads…dn 852 contracts    The ratio of large speculative shorts to longs went from 2.48-to-one to 2.69-to-one in a week.

  Large speculative holdings dropped by 9,581 longs and dropped by 4,584 shorts over the latest week. Commercial accounts dropped by 9,334 longs, and fell by 10,255 shorts, while small speculators and hedgers added 5,469 longs and added 1,393 shorts.  Open interest fell by 14,298 contracts as prices rose 57.3 cents.  That looks like heavy short-covering, which we did see by commercials and by large speculators.  Only small specs and hedgers were buying new contracts.  Both large speculators and commercials were also liquidating longs, presumably to lock in profits. Short-covering is not generally supportive as prices rise.

  The average large speculator has 1,056 contracts (dn 170 lots on 85 accts, up 3) while each large speculative short is holding 2,949 shorts (up 181 lots on 82 accts, dn 7).  The average commercial long now has 3,668 contracts long (dn 114 lots on 82 accts, unch) and 2,833 short (dn 108 lots on 68 accts, dn 1). Average reportable holdings are 2,727 long (dn 73 lots on 233 accts, dn 1) long and 3,298 short (up 50 lots on 206 accts, dn 8).  There was one less long and eight fewer short accounts in the reportable category, which highlights the short-covering because that many more short accounts were closed.

Natural Gas & Utility Generation

Natural gas prices were slightly higher before dropping to levels beneath Thursday’s lows on Friday.  By the final bell on Friday, November futures had fallen 16 cents on the day.  The decline in open interest on Thursday, when prices dropped 15.3 cents/mmBtu, suggested profit-taking by longs, and we have every reason to believe that there was additional profit-taking by longs on Friday.  We will not see the numbers until late this morning or early this afternoon, though.  Still, it makes sense to expect that the profit-taking continued on Friday. 

Last week’s EIA underground storage report came in on expectations, showing a build of 18 bcf on estimates calling for a build of 18-19 bcf.   Last year, for the corresponding week, there had been a build of 70 bcf, although that was 27% higher than the eight-year average of similar Friday’s, which was a build of 54.75 bcf.  Not that this statistic is a truly valid one, but this year’s build was 67% lower than last year’s.  Perhaps more relevant is that it was 36.75 bcf lower.  Ostensibly, that should have been considered bullish, especially in an advancing market.  Instead, two days of profit-taking seems like a severe reaction.

In cash trading on Friday, Henry Hub prices were at $4.73-$4.97, down $0.09-$0.17 on the day (DJN).  SoCal prices were at $4.68-$5.19, down $0.11-$0.48 on the day.  El Paso Permian prices were down $0.08-$0.24 at $4.70-$5.00.  Katy prices were down $0.05-$0.18 at $4.70-$4.99.  Waha prices were down $0.06-$0.20 at $4.70-$5.03.  Transco 6 was down $0.18-$0.23 at $5.05-$5.35/mmBtu, according to Dow Jones News (DJN). 

Palo Verde prices were last quoted at $46.50-$48.00/mwh.  Northeastern prices last traded at $46.70-$52.50.  Entergy was last at $38.00-$39.50.  Ercot was last at $39.50-$41.00/mwh. 

Baker Hughes reported an increase of four gas rigs, to 725, in its weekly survey, released on Friday.  The rig count has been growing recently, but it fell fairly consistently from September, 2008 to some point in the third quarter of this year.  Even if drillers increase activity steadily over the next several months, there almost has to be a window of time during which production will have declined significantly.  The timing of that is open to debate right now, but once it begins, it will take nearly a year to catch up, especially if the period of lower output coincides with a period of increasing economic activity and higher energy consumption. 

That, of course, is all in the future, and we cannot fix the exact time when it will begin.  As far as this week is concerned, the more immediate concern is the weather.  It has been colder and wetter than normal in the Midwest and Northeast this month, and Friday’s forecasts are calling for a continuation of the trend – which is likely to continue into and during the heating season.

Support is at $4.77-$4.79, $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 $5.05-$5.06, $5.19-$5.24, $5.30-$5.32, $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 higher and then sold off below Thursday’s low.

Dollars per million Btu

Nov Natural Gas:          Support:         $4.77-$4.79, $4.67-$4.69, $4.43-$4.45, $4.35-$4.39, $3.73-$3.75, $3.66-$3.68.

                                                    Resistance:     $5.05-$5.06, $5.19-$5.24, $5.30-$5.32, $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 18 bcf on expectations for a build of 18-19 bcf.  Stocks are now 397 bcf higher than a year ago, against a surplus of 450 bcf a week ago, a surplus of 473 bcf two weeks ago and a surplus of 491 bcf three weeks ago.  Stocks are now 11.90% higher than a year ago.  They are 432 bcf and 13.08% above the five-year average.

The five-year average for this week was a build of 44.8 bcf, while the eight-year average was a build of 39.13 bcf.  Last year’s build was 46 bcf.  The range of builds over eight years has been between 9 and 77 bcf.

EIA Report

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

News & Views

We had follow-through selling last night in early trading.  As we start another new week, the burden of proof is clearly on the shoulders of the bulls.  This is especially true of gasoline, where there has not yet been any major breakout corresponding to those seen in crude oil and heating oil prices.  If there is no breakout soon, longs will start getting out.  While much of this will depend on moves in equities and currencies, any stuttering hesitation could trigger heavy liquidation in oil.

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 late last week, but they were still lower on the week.  Prices made new lows before they rallied, but they are still extremely weak.  There are still objectives to as low as 65.20 euro cents.

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 was down more than 109 points on Friday, after a week of prices moving back and forth.  If prices cannot make new highs, soon, they may be building a top.  Activity back and forth is often indicative of a top, and October is a month when these are often seen.  The DJIA has survived a number of false breakdowns, but daily ranges have been widening and we feel that the surprises in this and a number of other markets could be suddenly lower.  Our red arrows show false breaks.

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

Recommendations for Specific Market Segments