Prices for October 28th, 2009

Market Review for Wednesday 

HIS weeks DOE report had some surprisingly bearish numbers in it, with crude oil and gasoline inventories both increasing.  Distillate stocks dropped, but there was still little sign of any weather-related increase in demand, which was up just 15,000 bpd against last week’s figure.  Refinery utilization followed the pattern established over seven of the last eight years for this week, and was up 0.7%.  Total products demand was down against last week’s figure and lost ground rather heavily against a year ago.  It was a bearish DOE report.

The bears also had the benefit of a stronger US dollar and a weaker stock market.  The Dow Jones Industrial Average (DJIA) dropped more than 119 points, registering its lowest point in some 13 sessions.  The dollar had it shallowest gains yet this week, but oil traders had not fully discounted the bearish implications of Tuesday’s dollar gains going into yesterday’s trading session.  The result was a unified set of bearish signals, and that helped the oil complex break beneath key support levels yesterday (p 2).

Equities investors have had a number of economic factors to discount this week, with August’s world trade volume down after “strong monthly gains in June and July,” according to Capital Economics (CE).  The UK-based analysts expect it to take two years for the volume of world trade to get back to its pre-2008 levels.  CE also noted that the Federal Reserve’s Treasury buying program will end this week, and that could lead to higher interest rates if foreign investors do not step in to plug the gap.  It did note, though, that some of the same goals can be reached through a weaker dollar.  And it also noted that commercial banks have been increasing their purchases of treasuries recently and CE feels that trend could continue.  Investors also had to deal this week with an unexpected decline in September in new home sales, something that CE says is an indication “that the economic recovery is still struggling to gather any real forward momentum.”  Durable goods orders increased by 1.0% month over month in September, with non-defense core capital goods back up by 2.0%.  CE sees this as a sign that overall GDP, out today, “expanded by about 4% annualized,” it noted in its United States Data Response, released yesterday.

The stock market is being faced with a number of disappointing factors that argue against further upside development over the near term. 

Technicals

           Oil prices broke beneath important support levels yesterday at $77.64 in crude, 201.85 in heating oil and 202.00 and then 200.00 in gasoline.  Oil prices have now had a significant failure to break to fresh highs, and once again, the downs system proved remarkably prescient.  It told us yesterday that it was the bears’ ball today (while we weren’t sure).

Ratio

Above:  The crude to natural gas ratio finished yesterday at 18.06-to-one, its highest ratio since 19.83-to-one on September 22nd.

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 $77.00-$77.05, $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 205.75, 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 199.25, 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 197.95, 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 bears took over with first down and went to the air for a 21-yard gain straightaway.  It is their first down again.

Technical Support & Resistance

Dec crude oil                        Support:             $77.00-$77.05, $76.80-$77.00, $74.40-$74.55, $72.80-$73.00, $72.00-$72.15.

                                           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:             199.25-199.40, 193.90-194.10, 192.15-192.30, 188.75-189.00. 186.50-186.65.

                             Resistance:        205.60-205.75, 206.30-206.42, 211.00-211.17, 212.00-212.12, 215.95-216.07.

Nov Rbob                     Support:             197.95-198.10, 195.37-195.40, 192.00-192.20, 186.25-186.35, 183.90-184.10.

                                           Resistance:        206.80-207.00, 207.40-207.62, 208.00-208.15, 208.40-208.55, 209.40-209.53.

Oil Inventory Reports

      A majority of market observers almost certainly was disappointed by builds in gasoline and, to a lesser degree, in crude oil stocks, and they apparently were not impressed by the larger-than-expected drawdown in distillate inventories.  The jump in refinery utilization was slightly larger than anticipated, but runs are still well-below historical figures for this time of year.  From our perspective, the really bearish aspects of this week’s report came from demand, or the lack thereof.  Not only did we not see any significant increase in distillate demand against last week’s numbers (it was up 15,000 bpd on the week), but four-week total products supplied dropped 97,000 bpd and is now 3.03% lower than a year ago, compared to down 0.12% last week.

     Distillate stocks are now 40.2 million bbls, or 31.50%, higher than a year ago.  Heating oil inventories are 11.8 mln bbls, or 29.57%, higher than they were a year ago.  Gasoline stocks are 15.1 mln bbls (up 7.80%) higher against a year ago.  Crude oil stocks are now 29.8 million bbls, or 9.61%, higher than a year ago.  Residual stocks are 5.0 mln bbls (12.72%) lower than a year ago, jet fuel stocks are 7.7 mln bbls, (20.16%) higher than a year ago.  Utilization is 3.50% lower than a year ago and 6.69% below the eight-year average.  It is 9.90% 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 4,614 contracts on Tuesday, when prices were higher.  That looks like comparatively light short-covering, which would be bearish.  It seems to have been profit-taking by the bears.

      Heating oil open interest were up by 1,025 contracts on Tuesday, when prices were higher.  That looks like new buying, which would be supportive.

      RBOB open interest rose by 906 contracts on Tuesday when prices were higher.  That looks like new buying, which would be bullish. 

      Natural gas open interest grew by 9,731 on Tuesday when prices were higher.  That looks like net, new buying, which would be supportive, especially going into expiration yesterday.

Tuesday’s Open Interest Changes:  

Crude 1,220,540  dn 4,614       Heat 320,479   up 1,025       RBOB 247,752  up 906       Nat gas 722,597  up 9,731          

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 dropped 26.8 cents per million Btu yesterday, breaking into the gap established by the switchover in expiring contracts from October to November.  With yesterday representing the switchover from November to December as the front month, natural gas has come full circle in one month.  After October expired, the new November expiring-contract never returned to test the gap left by the change in front months.  On Monday, a new gap was formed, and it may be a while before it gets filled on a subsequent advance.  Yesterday’s return, to the gap created one month ago – on September 28th – and consistently below the market as support until yesterday, encapsulates the market’s action lately.

November started its run as the front month with a gap below it and an undervalued market that had discounted everything bearish but little on the upside.  December starts with a return to levels not seen since October expired, with a slew of unpleasant questions over the future of the US and world economies.  Where November had an almost unbroken string of colder-than-normal temperature forecasts in front of it, December begins with the weather in doubt, just as we enter winter.

In cash trading yesterday, Henry Hub prices were at $4.44-$4.65, up $0.02-$0.05 on the day (DJN).  SoCal prices were at $4.64-$4.87, up $0.01-$0.08 on the day.  El Paso Permian prices were up $0.03-$0.09 at $4.45-$4.70.  Katy prices were up $0.05 and down $0.01 at $4.35-$4.61.  Waha prices were up $0.02-$0.08 at $4.47-$4.65.  Transco 6 was up $0.08 and down $0.07 at $4.83-$5.10/mmBtu, according to Dow Jones News (DJN). 

Palo Verde prices were last quoted at $43.10-$44.50/mwh.  Northeastern prices last traded at $40.50-$49.50.  Entergy was last at $37.00-$38.25.  Ercot was last at $36.50-$37.50/mwh. 

The trend has now turned lower over the near term, in this case mirroring developments in oil markets and (apparently, for now, at least) in equities.  The longer trend is higher, but temperatures and storage reports will have huge impacts on where we go next.  In that regard, today will play a part.

Dow Jones is expected a build of 29 bcf, while Bloomberg compiled a survey showing a median expectation of 28 bcf and an average build estimate of 31 bcf.  Its range of estimates was between 23 and 48 bcf higher.  Dow Jones has last year’s build at 49 bcf, using the same date, while we have a build of 46 bcf reported last year on the corresponding Friday.  It has a five-year average build of 43 bcf, where we have a five-year figure of 44.8 bcf, again with the difference coming from whether one uses precise dates or corresponding Friday figures.  Our eight-year Friday average build was 39.13 bcf.  If this week’s build comes in near expectations, storage amounts will move nearer the historical numbers for 2008 and the five years ending with it.

Support is at $4.23-$4.25, $4.05-$4.08, $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 fell to their lowest levels since the switch to the November contract a month ago.

Dollars per million Btu

Nov Natural Gas:          Support:         $4.23-$4.25, $4.05-$4.08, $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.  Dow Jones is looking for a build of 29 bcf; Bloomberg is expecting a build of 28-31 bcf.

EIA Report

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

News & Views

The recovery predicted by equities since March has failed to embrace consumers or jobs, and it has failed to stimulate the oil demand that seemed so inherent a part of the promise … a promise that now seems to be slipping our grasp.

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 continued moving higher yesterday, and objectives lower have been negated and will not be reinstated until and unless prices break the recent lows.

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 dropped more than 119 points yesterday, in another fairly narrow trading range day, but the average reached its lowest point in 13 trading sessions.  This market has been resilient, but this is October, and that could turn this ugly at some point.  In any event, it looks like 10,000 is a lot further away than it recently was.

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 9.113 million bpd, up 0.09% against last year.  Thirteen-week supply is at 9.847 mln bpd, down 0.65%.  Thirteen-week implied demand is at 9.898 mln bpd, down 1.97%.

A Look at Distillate Supply & Demand

Thirteen-week demand is at 3.443 million bpd, down 14.54% against last year.  Thirteen-week supply is at 4.133 mln bpd, down 4.23%.  Thirteen-week implied demand is at 4.072 mln bpd, down 8.89%.

A Look at Refinery Utilization Rates

Utilization is 3.50% lower than a year ago and 6.69% below the eight-year average.  It is 9.90% lower than the four-year, pre-Katrina average. 

Recommendations for Specific Market Segments