Prices for October 27th, 2009

Market Review for Tuesday        

ESTERDAY’s trading was thoroughly inconclusive, with oil prices slightly higher on the day.  We had the peculiar situation of having oil prices, the DJIA and the US dollar all higher, although the dollar seems to have had the most important day on the charts.  The DJIA was up 14 points in the narrowest range seen in months, and that seems to suggest that the buying was not all that strong, after several wide-ranged days in which buying and selling seemingly alternated in waves that pushed quotes up and down liberally.  Yesterday’s activity had either rock-solid selling at its highs or just a lack of buying underneath, which is what we think.  Oil prices were slightly higher ahead of the week’s reports.

Investors had little to cheer about yesterday, after the latest ABC News consumer confidence poll showed figures at their lowest levels in three months.  Unemployment continues to weigh on people’s sense of the economy improving, and higher gasoline prices along with the higher cost of imported goods (from a weak dollar) had a negative impact on sentiment.

There was reportedly good buying yesterday in refined products cash markets, as traders bought heating oil and gasoline ahead of this week’s supply and demand statistics.  Even though refinery utilization has risen in seven of the last eight years during this corresponding week, many market observers expect to see utilization continue to trend lower than normal for this time of year.  Last week’s utilization figure was 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.  Even if this week’s DOE report shows an anticipated increase, it is still going to be well below last year’s levels, as well as well below the average for this time of year.  Last week, traders focused on the draw ion gasoline stocks.  If we see draws in all three inventory categories, which is what we had in last night’s API report, it is likely to generate buying. 

The supply side of the equation has been improving recently, although a large part of that has been the result of deliberate moves undertaken by refiners.  But, what has failed to come around is demand.  The original theory behind higher equities prices being bullish for oil markets came from the assumption that higher equities were a signal for a strengthening economy, which, in turn, was assumed capable of increasing oil demand.  That has not happened, yet.

Technicals

           Oil prices rallied yesterday, and they are at important points on the charts.  Crude found support at $77.64-$77.81, heating oil has support at 201.85-202.10 and gasoline has support at 202.00-202.50.  If gasoline breaks 211.24, it will embark on a new leg higher.  The same is true with crude oil at $82.090 and heating oil at 212.89.  This is a crucial time.

Dollars per barrel

Above:  The 7:5+2 crack spread jumped from $5.72 to $7.23 a barrel over the last two days. 

December crude oil now has buy-stops over $79.90, $81.58, $82.00, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $77.80, $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 206.42, 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 207.62, 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. 

Football: The bulls gained 9 yards on fourth and 37, making it the bears’ ball in theory today.  We will see.

Technical Support & Resistance

Dec crude oil                        Support:             $77.80-$78.10, $79.55-$79.70, $77.64-$77.70, $76.80-$77.00, $74.40-$74.55.

                                           Resistance:        $79.75-$79.90, $81.45-$81.60, $81.75-$82.00, $84.70-$84.83, $85.00-$85.15.

Nov heating oil     Support:             201.85-202.10, 199.80-200.00, 193.90-194.10, 192.15-192.30, 188.75-189.00.

                             Resistance:        206.30-206.42, 211.00-211.17, 212.00-212.12, 215.95-216.07, 224.15-224.25.

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, 207.40-207.62, 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 grew by 22,794 contracts on Monday, when prices were lower.  That looks like heavy, new selling and is bearish.  We continue to see huge swings in open interest. 

      Heating oil open interest dropped by 557 contracts on Monday, when prices were lower.  That looks like long liquidation, which would be theoretically supportive.

      RBOB open interest rose by 5,096 contracts on Monday when prices were lower.  That looks like new selling, which would be bearish. 

      Natural gas open interest grew by 9,126 on Monday when prices were lower.  That looks like net, new selling, which would be bearish.

Monday’s Open Interest Changes:  

Crude 1,225,154  up 22,794       Heat 319,454   dn 557       RBOB 246,846  up 5,096       Nat gas 712,866  up 9,126       

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 rallied back 4.4 cents per million Btu yesterday, but prices could not close the gap left between Friday’s and Monday’s activity.  Yesterday’s trading occurred within Monday’s range, making it an “inside day,” which are well known as being less significant, technically.  Options expired yesterday and November futures go off the board this afternoon, so those two factors seem to have occupied traders.  Some traders were buying after Monday’s decline, but the biggest feature on the horizon is the weather and whether warmer forecasts actually arrive over the next week.

Yesterday’s updated forecasts suggest warmer-than-normal or normal seasonal temperatures east of the Rockies.  We may have explained it repeatedly, lately, but we still feel that the way temperatures actually play out between now and November 15th will have a gigantic impact on the temperature trend this late autumn and through the winter. 

Technically, the market looks vulnerable to further weakening, and the gap overhead represents an area of major resistance.  If prices cannot settle back above the top of the gap ($4.787), we should expect further downside development.

In cash trading yesterday, Henry Hub prices were at $4.42-$4.60, down $0.03-$0.04 on the day (DJN).  SoCal prices were at $4.63-$4.79, down $0.01-$0.01 on the day.  El Paso Permian prices were down $0.01 and up $0.04 at $4.42-$4.61.  Katy prices were up $0.01-$0.02 at $4.36-$4.56.  Waha prices were up $0.01-$0.04 at $4.45-$4.57.  Transco 6 was up $0.03-$0.06 at $4.90-$5.02/mmBtu, according to Dow Jones News (DJN). 

Palo Verde prices were last quoted at $40.00-$42.75/mwh.  Northeastern prices last traded at $40.50-$47.75.  Entergy was last at $36.00-$38.00.  Ercot was last at $35.00-$36.50/mwh. 

Traders may take direction from today’s DOE oil statistics, but they are certainly going to be influenced by this afternoon’s November contract expiration.  The weather and any changing forecasts will also play important roles, and how these arrive (or don’t) in the event will be instructive. 

In the meantime, even though prices look heavy enough to decline from here, we would expect bargain-hunting and short-covering to remain important factors during any move lower.  They should prevent any retreat from deteriorating into a full-fledged rout.   

Longer-term we feel that prices are likely to continue moving higher.  Corrections are more or less inevitable in every market.  Right now, traders are going to buy or sell based on weather forecasts and any changes they may have, but storage figures will also play their part.  Economic expectations are also likely to be increasingly important in this market, moving forward from here. 

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 $4.63-$4.64, $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.  The gap remains a significant chart factor.

Natural gas prices had an inside day yesterday and rallied lightly..

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:     $4.63-$4.64, $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

Today’s DOE report will set the stage for the remainder of the week.  While many observers are sure to focus on supply figures, we continue to see the real future of this market reflected through the demand statistics.

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 again yesterday, breaking above the breakdown point.  The objectives to targets as low as 65.20 euro cents have now been negated.  They could be reinstated or even exceeded with a fresh breakdown below the lows in this market, but the dollar has negated two weeks of lower quotes over the last two days.

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 up more than 14 points yesterday, in a very narrow trading range.  Yesterday’s trading range was the narrowest range seen in a very long time, going back weeks and months.  After a number of sessions with very wide ranges, this suggests that selling took a pause, but also that buyers were not willing to pay up beyond a certain point.  In this context, it suggests weakness and a lack of heavy enough buying interest to push quotes past selling.

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

A Look at Selected Spreads

The gas crack has improved fairly dramatically recently, finishing at $7.41 yesterday after reaching a low of $1.67 on September 29th.  Recent declines in refinery utilization have helped crack spreads to rebound over the last few days.  They are still well beneath highs seen earlier in the year.

The heat crack has also improved in the last few sessions, and is now trading at $6.76, up from a low of $3.18 on September 10th.   The recent improvement has come as a result of the decline in refinery utilization seen over the last few weeks.  Despite the improvement, refinery margins are still on the poor side and well below the year’s highs.

Recommendations for Specific Market Segments