Prices for October 26th, 2009

Market Review for Monday         

IL prices were lower yesterday, making it three days lower running now.  Crude oil prices took back all of last week’s accumulated gains – and then some – yesterday, while heating oil prices negated nearly 92% of last week’s gains of 4.59 cents a gallon.  Gasoline was the laggard, taking back just a penny of last week’s gains of six and a half cents a gallon.  And, it was once again a combination of the dollar and equities moving contrary to oil gains and letting oil fundamentals shine through.  In any event, the index funds and ETF’s were kicking out longs and the trade was selling.

Dow Jones wrote that investors were streaming out of equities and commodities and were getting back into the US dollar in a massive regurgitation of risk.  At the center of yesterday’s maelstrom was a Wall Street Journal report that Bank of America could find it difficult to repay the money lent to it by the government. This led to a general retrenchment from banking equities as investors reminded themselves of the large volume of bad debts certainly still on the books across the banking sector.

This is not something new that just cropped up, and it is unlikely to lead to a new downturn in the economy.  But equities have almost certainly gotten out ahead of the recovery, and they have been rising on a combination of actual improvement and hope with a heaping helping of denial.  Not that every market does not have that.  The most bullish markets always live in denial of bearish factors, while every bear market pretends that hope has disappeared. 

The DJIA is also a victim of its own success.  It recently broke above 10,000, but October is never a good month for it to be breaking over major psychological resistance.  That only made investors do a double take, and they suddenly discovered that it is unusual for initial recovery rallies to go much longer than six months and more than the percentages it reached a while ago.  In that respect, the DJIA found itself in a position familiar to every successful army since Biblical times; the further any army gets into enemy territory, the longer – and more vulnerable - its lines of communication.  This was also true for dollar bears and energy bulls.  They got too far away from home base.

The recent increase in equities also pushed gasoline prices higher at probably the worst time of year in easily the worst year.  The last thing this economy needed was a fresh tax of another $180 million a day at the pump.

Technicals

           Oil prices were down again yesterday, and crude oil took back all of last week’s net gains, while heating oil gave back more than 90% of their gains from last week.  Gasoline prices only gave back a penny of the 6.45 cents a gallon they added last week and they closed higher than heating oil for the first time since 9-18-2009.

Dollars per barrel

Above:  The 7:5+2 crack spread jumped from $5.72 to $6.74 a barrel yesterday as crude oil prices led the complex lower. 

December crude oil now has buy-stops over $81.58, $82.00, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $77.97, $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 211.17, 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 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 209.53, 211.24, 214.00, 222.70, and 228.86.  Sell-stops are under 202.00, 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.  There are key stops nearby.

Football: The bulls lost 18 yards on third and 19, making it fourth and 37 today.  There are major stops above and below prices.

Technical Support & Resistance

Dec crude oil                        Support:             $77.95-$78.10, $79.55-$79.70, $77.64-$77.70, $76.80-$77.00, $74.40-$74.55.

                                           Resistance:        $81.45-$81.60, $81.75-$82.00, $84.70-$84.83, $85.00-$85.15, $89.70-$89.82.

Nov heating oil     Support:             202.00-202.10, 199.80-200.00, 193.90-194.10, 192.15-192.30, 188.75-189.00.

                             Resistance:        211.00-211.17, 212.00-212.12, 215.95-216.07, 224.15-224.25, 225.65-225.80.

Nov Rbob                     Support:             202.00-202.15, 200.00-200.15, 195.37-195.40, 192.00-192.20, 186.25-186.35.

                                           Resistance:        206.80-207.00, 207.40-207.51, 208.00-208.15, 208.40-208.55, 209.40-209.53.

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 fell by 26,322 contracts on Friday, when prices were lower.  That looks like heavy, long liquidation, which would be supportive.  Open interest continues to have wide swings, which is what we typically see at tops or bottoms.

      Heating oil open interest was up by 2,681 contracts on Friday, when prices were lower.  That looks like new selling, which would be bearish.

      RBOB open interest rose by 1,504 contracts on Friday when prices were lower.  That looks like new selling, which would be bearish. 

      Natural gas open interest fell by 8,574 on Friday when prices were lower.  That looks like net, long liquidation, which would be supportive.  It suggests more profit-taking by longs.

Friday’s Open Interest Changes:  

Crude 1,202,360  dn 26,322       Heat 320,011   up 2,681       RBOB 241,750  up 1,504       Nat gas 703,740  dn 8,574    

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 down more than 27 cents/mmBtu yesterday, as gas traders seem to have taken a minor cue from falling oil prices and equities and a major cue from the latest temperature forecasts.  Dow Jones quoted meteorologists forecasting warmer-than-normal readings across parts of the North over the next two weeks.  One private forecaster quoted by the wire service is predicting varying shades of warmer temperatures from October 26th until November 9th.  This is significant, especially if it comes to pass in the event. 

Of course, our first reaction is to expect that readings will be colder than expected in the actual event, once we get there.  The trend has been for colder-than-normal readings for close to a year, now, and temperatures have consistently turned out colder once they actually have arrived at the forecast period.  This could turn out, though, to become a major shift in the underlying trend.  This is all the more critical because last year’s colder trend effectively took root with bitterly cold readings on November 2nd, which changed the previous warmer-than-normal trend.  It has been colder since then.  This trend can change.

In cash trading yesterday, Henry Hub prices were at $4.46-$4.63, down $0.27-$0.36 on the day (DJN).  SoCal prices were at $4.64-$4.80, down $0.04-$0.39 on the day.  El Paso Permian prices were down $0.27-$0.43 at $4.43-$4.57.  Katy prices were down $0.35-$0.45 at $4.35-$4.54.  Waha prices were down $0.26-$0.50 at $4.44-$4.53.  Transco 6 was down $0.21-$0.36 at $4.84-$4.99/mmBtu, according to Dow Jones News (DJN). 

Palo Verde prices were last quoted at $42.75-$44.00/mwh.  Northeastern prices last traded at $44.00-$49.00.  Entergy was last at $37.00-$38.00.  Ercot was last at $36.45-$38.30/mwh. 

The next two or three weeks will be critical – just for the weather.  That might sound like unneeded hyperbole, but we sincerely mean it, given how this same period a year ago set in motion a weather pattern that has been with us ever since.  We do not see it as a matter of mere passing interest, either, because the difference between a colder and a warmer trend could be 200 or even 300 bcf by spring.  That’s just the supply.  The difference in prices could be spectacular.  While a warmer-than-normal heating season could take prices back below $4.00 and leave them languishing there, a colder-than-usual trend could push prices back over $7.00, especially in a recovering economy. 

In this market, temperatures are infinitely more than idle cocktail party or water-cooler talk; they can be three-time market-moving factors.  They can move prices when they are forecast, when they arrive and when the underground storage figures determined by them have been released.  And, when they are trending (most of the time), they can interrupt corrections that run into Friday, as traders reduce countertrend holdings going into a weekend.  All of these are reasons to monitor the period ahead.

Support is at $4.43-$4.46, $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 $4.74-$4.77, $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.  There was a gap lower yesterday, which is a bearish signal.

Natural gas prices gapped lower yesterday, leaving a gap between $4.771 and $4.749.

Dollars per million Btu

Nov Natural Gas:          Support:         $4.43-$4.46, $4.35-$4.39, $3.73-$3.75, $3.66-$3.68, $3.50-$3.53, $3.44-$3.46.

                                                    Resistance:     $4.74-$4.77, $5.05-$5.06, $5.19-$5.24, $5.30-$5.32, $5.55-$5.57, $5.62-$5.63.

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

Yesterday’s activity in oil and equities fully illustrates our point about October being the worst month in which to buy either.  We may be looking at important turning points until next March.  If the dollar just remains relatively stable, and if the DJIA fails to burst back above 10,000, there is every reason to expect a severe revision in oil prices, which are overvalued by as much as $25 a barrel here, in terms of supply and demand.  The bulls have the initiative, and a lot to lose … . 

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 sharply yesterday, and that could spell an end, at least temporarily, to the move lower.  Objectives to targets as low as 65.20 euro cents are now on hold and could be canceled with another day or two of gains.  This allowed fundamentals to shine through in yesterday’s trading.

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 104 points yesterday, and the DJIA looks like it is on the precipice of a serious selloff.  October is the month one should expect this to be seen, of course.  And, we are nearing a point when higher pump prices have to be seen as being bad for most American businesses.  A lower dollar is also not something supportive for equities under normal circumstances.

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

A Look at Selected Spreads

The ratio of crude to natural gas was at 17.43-to-one yesterday, after reaching a recent low point of 14.12-to-one on10-05-2009.  Prior to that, this ratio had reached a high point of 27.10-to-one on 9-05-2009.  A return to 14.12-to-one represents an almost textbook 61.8% retracement of the move from 5.98-to-one, reached on 12-24-2009, to 27.10-to-one.  The actual 61.8% retracement would have returned the ratio to 14.05-to-one.

It is invisible to the eye, but gasoline prices finished back over heating oil prices yesterday, which is something we have not seen in October since 2003.  It is not unique, or even that significantly rare, but it is uncommon.  It was seen in 2002, as well, but both years are a ‘lifetime’ away in terms of the oil markets.  In those years, we still spoke of the all-time highs as having been reached at $41.15, and we were as near the major lows of $10.35 as we were to the ultimate high of $147. 

Recommendations for Specific Market Segments