Prices for November 13th, 2009

Market Review for Friday & over the Weekend     

OLD prices were higher on Friday, and the US dollar ended lower.  But, while the weak greenback helped precious metals, the luster was off oil.  The strength of the dollar on Thursday, along with the possible double bottom formation, gave fundamental oil traders a chance to push quotes lower after the DOE report was released.  Friday’s decline in the dollar was not enough to negate the double bottom and it took back only half of Thursday’s gains.  More than anything, it did not negate the bearish factors in last week’s DOE statistics. 

One sentence sums it up in spades; even with a drop in utilization, refined products inventories still increased.  And the decline in utilization combined with a small increase in crude oil imports to give us a build in crude oil stocks.  Last week was the first week in a quarter of a century that refineries ran at less than 80% without there being a hurricane involved.  Even with utilization rates as low as they are, stocks are still rising.

The higher dollar on Thursday may have given the fundamentals just a temporary inroad back to influencing the market.  If the double bottom in the dollar holds, it might turn into something more.  But the fundamentals were so bearish that they seem to have gained the ability to influence prices for at least a day more on Friday.

What happens with the dollar next will help determine how big an opening the fundamentals will have, moving forward.  That’s why the potential double bottom formation is so important.  If the dollar has, in fact, reached a significant bottom, it will open the door to fundamentals that have effectively been ignored for weeks or even months. 

The potential double bottom in the US dollar is the biggest factor going forward.  As long as the lows reached last week hold, the fundamentals in the oil market will get a chance to shine through.  If the dollar breaks to new lows, though, oil prices will rally.  But, because of the possible double bottom pattern, the burden of proof is with the dollar bears; they have to break the currency down to avoid losing.  If the dollar’s weakness is removed from the equation, oil prices are easily way too high at existing levels.

Technicals

           Oil prices were lower on Friday.  Crude confirmed its breakdown beneath $96.50, and heating oil broke below 196.50, although they did not settle beneath that figure.  Gasoline still has support at 190.26 and needs a break and settlement below that level to head lower from here.  The double bottom in the dollar may really be the key.

Cents per gallon

Above:  Gasoline prices are still above critical support at 190.26.  They need to settle beneath that to head lower.

December crude oil now has buy-stops over $77.70, $80.34-$80.52, $81.06, $81.58, $82.00, $84.83, $85.13, $89.82, and $90.99.  Sell-stops are under $75.55, $74.75, $74.40, $72.80, $72.00, $70.60, $68.88, $68.00, $65.80-$66.20, and $64.95.  December heating oil has buy-stops over 200.70, 209.05-209.20, 210.00, 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, and 299.71. Sell stops are under 196.50, 195.00, 193.90, 192.15, 188.75, 186.50, 182.63, 177.00, 176.68, 173.75, 171.10, 170.35, 168.60, 167.65, and 166.90.  December RBOB has buy-stops over 196.05, 201.75, 202.30, 203.20-203.60, 207.62, 209.53, 211.24, 214.00, 222.70, and 228.86.  Sell-stops are under 190.60, 190.00-190.25, 186.25, 183.90, 179.20, 177.30, 175.14, 171.40, 170.25, and 168.85. 

Football: The bears gained six yards on Friday on first down, making it second and four to go as we start this new week.

Technical Support & Resistance

Dec crude oil                        Support:             $75.55-$75.65, $74.75-$74.90, $74.40-$74.45, $72.80-$73.00, $70.60-$70.75.

                                           Resistance:        $77.60-$77.70, $80.34-$80.52, $80.95-$81.06, $81.45-$81.60, $81.75-$82.00.

Dec heating oil      Support:             196.50-196.65, 195.00-195.15, 193.90-194.10, 192.15-192.30, 188.75-188.90.

                             Resistance:        200.55-200.70, 207.60-207.75, 209.05-209.20, 209.90-210.00, 211.00-211.17.

Dec Rbob                     Support:             190.60-190.70, 190.25-190.40, 186.25-186.35, 183.90-184.00, 179.20-179.35.

                                           Resistance:        195.90-196.05, 200.70-200.80, 201.65-201.75, 202.15-202.30, 203.17-203.60.

Oil Inventory Reports

      This week’s DOE report should show a drawdown in distillate stocks, and has in five of the last eight years.  Still, we might not get a drawdown in this week’s figures, if last week’s report is any kind of indicator.  Gasoline stocks are likely to build, as they have in seven of the last eight years during this week.  Low demand is likely to give us another build in this week’s report, even though utilization is substantially lower than it has been at this time in previous years.  Crude oil stocks are also likely to increase this week, as higher expected imports combine with low utilization to give us left over crude.

     Distillate stocks are now 38.7 million bbls, or 30.00%, higher than a year ago.  Heating oil inventories are 10.7 mln bbls, or 26.29%, higher than they were a year ago.  Gasoline stocks are 14.4 mln bbls (up 7.33%) higher against a year ago.  Crude oil stocks are now 23.6 million bbls, or 7.51%, higher than a year ago.  Residual stocks are 3.3 mln bbls (8.40%) lower than a year ago, jet fuel stocks are 6.4 mln bbls, (16.71%) higher than a year ago.  Utilization is 4.67% lower than a year ago and 7.42% below the eight-year average.  It is 11.37% 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 19,413 contracts on Thursday, when prices were lower.  That looks like heavy, new selling, which would be bearish.  Coming on a major technical breakdown makes it that much more significant.

      Heating oil open interest was up 213 contracts on Thursday, when prices were lower.  That looks like light, new selling and is bearish. 

      RBOB open interest rose by 1,259 contracts on Thursday when prices were lower.  That looks like new selling and would be bearish.

      Natural gas open interest rose by 11,574 on Thursday when prices were lower.  That looks like heavy, new selling and is bearish.

Thursday’s Open Interest Changes:  

Crude 1,264,735  up 19,413       Heat 322,781   up 213       RBOB 253,418  up 1,259       Nat gas 730,825  up 11,574     

CFTC Commitments of Traders for Nymex  (for the period ended Tuesday, Nov 10th)   

 As of Nov 10th:                 Long                   Short:

Crude oil                    269,879               181,834                           -contracts held by speculators:  1.48 long

                                          608,136               719,207                               held by the trade

                                          104,297                 81,271                               held by small specs and hedgers.

Spreads….dn 10,281 contracts   The ratio went from 1.62-to-one long to 1.48-to-one over the last two weeks.

   Large speculators liquidated 7,146 long contracts and added 8,626 shorts over the week under review.  Commercials added 29,339 longs and added 24,291 shorts.  Small specs and hedgers added 31,985 longs and added 21,261 shorts.  Open interest grew by 43,897 contracts as prices dropped $0.55/barrel.  That looks like heavy, net new selling, which we saw from all three categories.  Large speculators were also liquidating longs, while commercials and non-reportables were buying into weakness.

   The average large speculator has 2,076 long contracts (130 accts, dn 2) which is down 23 contracts, and 1,976 shorts (92 accts, dn 5), up 140 contracts.  Commercials held 7,071 longs (86, dn 2), up 494 contracts and 7,265 shorts (99, dn 1), up 316 contracts.  Reportables held 3,846 longs (294, dn 5 accts), up 104 contracts, and 4,337 shorts (266 accts, dn 8), up 209 contracts.  There were five fewer long accounts and eight fewer short accounts in the reportable category.

Heating oil                   57,810                 12,291                           - contracts held by speculators:  4.70 to 1 long

                                          181,044               237,759                              held by the trade.

                                            42,574                 31,378                               held by small specs and hedgers.

Spreads….up 627 contracts.    The ratio of large speculative longs to shorts went from 2.22-to-one to 4.70-to-one in 6 weeks.

       Large speculators liquidated 1,150 longs and covered 1,257 shorts.  Commercial accounts added 10,445 longs and added 3,310 shorts.  Small speculators and hedgers liquidated 2,174 longs and added 5,068 shorts.  Open interest rose by 7,748 contracts as prices dropped 2.10 cents.  That looks like new selling, which would be bearish.  The heaviest selling came from non-reportable traders, followed by commercial accounts.  Large and small speculators were liquidating longs.

       The average large speculative long is holding 1,204 contracts (dn 50 lots on 48 accounts, up 1), while the average short has 473 contracts (dn 69 lots on 26 accts, up 1).  The average commercial long is holding 2,550 contracts (up 181 contracts on 71 accts, dn 1) compared to the average short holding of 3,010 contracts (up 116 lots on 79 accts, dn 2).  The average reportable position is 1,950 long (up 108 lots on 144 accts, dn 3) while the average short holding is 2,195 (up 68 lots on 133 accts, dn 3). There were three fewer long and short reportable accounts.

Rbob Gasoline            78,963                16,130                          -contracts held by speculators:  4.90 to 1 long

                                           129,307              198,349                             held by the trade.

                                             22,007                15,798                              held by small specs and hedgers.

Spreads…up 1,517 contracts   The ratio of large speculative longs to shorts went from 5.55-to-one to 4.90-to-one in 2 weeks.

     Large speculative holdings fell by 5,946 longs and grew by 742 shorts over the latest week. Commercial holdings grew by 5,002 longs and fell by 920 shorts.  Small speculators and hedgers’ positions rose by 938 longs and grew by 172 shorts.  Open interest rose by 1,511 contracts as prices dropped 2.30 cents, which looks like new selling.  Most of the increase in open interest came from spreads and there was very little new selling, with the best selling coming from large speculative liquidation.

   The average holdings are 1,144 contracts for each large speculative long (69 accts, dn 4 accts) and 849 for each large speculative short (19, up 1).  The average commercial long now has 1,724 contracts long (75, up 3) and 2,333 short (85, up 5). Average reportable holdings are 1,406 long (164, up 11) against 1,767 short (134, up 7).  There was one new reportable long  account, which cut 5 from the average long holding.  There were seven new short accounts, which decreased the average short holding by 87 contracts.  There were four less large speculative longs and one less large speculative short.

Naturalgas                73,392               231,042                           -contracts held by speculators:  3.15 to 1 short

                                         304,460               175,623                               held by the trade.

                                           68,724                 39,911                           held by small specs and hedgers.

Spreads…dn 5,554 contracts    The ratio of large speculative shorts to longs went from 2.48-to-one to 3.15-to-one in 3 weeks.

  Large speculative holdings were up by 9,518 longs and were up by 11,787 shorts over the latest week. Commercial accounts were up by 13,854 longs, and rose by 15,056 shorts, while small speculators and hedgers added 10,210 longs and added 6,739 shorts.  Open interest rose by 28,028 contracts as prices fell 45.5 cents.  That looks like heavy new selling, and each of the three categories added fresh short positions over the week under review.  Commercials sold the most, followed by large speculators, but all three categories were also buying fresh longs.  As prices dropped, everyone was buying on a scaled-down basis.

  The average large speculator has 1,011 contracts (up 06 lots on 82 accts, up 9) while each large speculative short is holding 3,372 shorts (up 332 lots on 72 accts, dn 4).  The average commercial long now has 3,316 contracts long (dn 30 lots on 96 accts, up 5) and 2,648 short (up 175 lots on 72 accts, up 1). Average reportable holdings are 2,683 long (dn 39 lots on 238 accts, up 10) long and 3,354 short (up 57 lots on 200 accts, up 3).  There were 10 more long accounts and three more short accounts in the reportable category.  There were nine new large speculative longs and four fewer short accounts. 

Natural Gas & Utility Generation

Natural gas prices were lower early on Friday, but they rallied later in the day.  A quick look at the chart on the following page shows a very orderly decline in prices, almost like an escalator, following a straight diagonal line.  This is a sign of strong scaled-down buying, which is borne out by the changes in open interest.  While each category was selling new shorts heavily, there was also heavy buying as prices dropped, along the straight line seen on the chart.  This is actually a bullish sign.  Heavy selling is pressing quotes lower, but the decline is not able to break the market, and the buyers are holding their ranks in a very orderly withdrawal, rather than the vertical decline seen in a rout or all-out retreat. 

This is typically a bullish sign.  It means that the buying is steady and regular despite consistent selling over the last 11 days or so.  The fact that this selling has not broken the bulls and turned them into a retreating mass of confused and disoriented longs looking to get out at any price.  It is not normal to see the longs hold such a steady line through continuous and determined selling; once the selling ends, prices will pop up dramatically, we have found. 

In cash trading on Friday, Henry Hub prices were at $2.30-$2.74, down $0.66-$0.70 on the day (DJN).  SoCal prices were at $2.40-$2.80, down $0.65-$0.70 on the day.  El Paso Permian prices were down $0.43-$0.70 at $2.30-$2.80.  Katy prices were down $0.57-$0.62 at $2.37-$2.69.  Waha prices were down $0.58-$0.74 at $2.25-$2.65.  Transco 6 was down $0.80-$0.87 at $2.55-$2.82/mmBtu, according to Dow Jones News (DJN).  Prices were very weak at the end of last week.  Bids just dried up and sellers were forced to hit successively lower bids to get filled.

Palo Verde prices were last quoted at $25.00-$28.75/mwh.  Northeastern prices last traded at $26.00-$37.00.  Entergy was last at $24.50-$25.75.  Ercot was last at $25.50-$26.00/mwh. 

The last of the affected gas production (by Hurricane/Tropical Storm Ida) returned to service on Friday, and last week’s EIA underground storage report showed a build of 25 bcf on estimates for a build of 15 bcf.  It was less than the five-year average and it was less than last year’s build, and those factors were the ones that apparently made the biggest difference at the end of the day.  But, taken at its face value, the end of Ida’s influence, a bigger-than-expected build, weaker oil prices and forecasts for mild temperatures over the next two weeks would seem to be bearish in combination.  Instead, we had short-covering and bargain-hunting.

Once temperatures do get colder, which the calendar tells us will be the case, soon, we have to expect the selling to taper off.  It is clear to us that there has been strong scaled-down buying into consistent selling and, once the selling lets up, we expect a steep rally.  Traders seem to have discounted the bearish news already.  Almost anything bullish should get pretty good purchase in this market – in every sense of the word.    

Support is at $4.35-$4.37, $4.28-$4.29, $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, and $240-$2.43.  Resistance is at $4.66-$4.70, $4.87-$4.89, $4.94-$4.99, $5.05-$5.06, $5.19-$5.21, $5.26-$5.28, $5.31-$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 continued moving lower on Friday, but they rallied into the close.  There has been scaled-down buying.

Dollars per million Btu

Dec Natural Gas:          Support:         $4.35-$4.37, $4.28-$4.29, $4.23-$4.25, $4.05-$4.08, $3.73-$3.75, $3.66-$3.68.

                                                    Resistance:     $4.45-$4.46, $4.51-$4.52, $4.66-$4.70, $4.87-$4.89, $4.94-$4.99, $5.05-$5.07.

EIA Weekly Storage Figures

Last week’s EIA report showed a build of 25 bcf on expectations for a build of 15 bcf.  Stocks are now 350 bcf higher than a year ago, against a surplus of 379 bcf a week ago, a surplus of 373 bcf two weeks ago and a surplus of 397 bcf three weeks ago.  Stocks are now 10.10% higher than a year ago.  They are 409 bcf and 12.01% above the five-year average.

The five-year average for last week was a build of 30.6 bcf, while the eight-year average was a build of 18.00 bcf.  Last year’s build was 62 bcf. 

EIA Report

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

News & Views

As we start this new week, the key factor is the US dollar.  If it holds the double bottom it formed on Thursday, oil prices are likely to follow their fundamentals lower.  If the dollar makes new lows, oil prices will rally.

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 dropped on Friday, although it did not take back all of Thursday’s gains, nor did it negate the double bottom pattern formed on Thursday.  The dollar is still in a trading range between 66.20 and 69.00, roughly.

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 73 points on Friday, as the US dollar dropped and investors focused on the factors supporting an economic recovery.  The DJIA is poised to make new highs, but it did not make fresh highs on Friday. 

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 9.091 million bpd, up 0.55% against last year.  Thirteen-week supply is at 9.835 mln bpd, down 0.93%.  Thirteen-week implied demand is at 9.847 mln bpd, down 1.14%.

A Look at Distillate Supply & Demand

Thirteen-week demand is at 3.480 million bpd, down 12.60% against last year.  Thirteen-week supply is at 4.168 mln bpd, down 2.76%.  Thirteen-week implied demand is at 4.108 mln bpd, down 7.44%.

A Look at Refinery Utilization Rates

Utilization is 4.67% lower than a year ago and 7.42% below the eight-year average.  It is 11.37% lower than the four-year, pre-Katrina average.

Recommendations for Specific Market Segments