Prices for February 18th, 2010
| HEATING OIL cents per gallon | | MONTH | HIGH | LOW | SETTLE | CHANGE | | MAR | 205.67 | 197.96 | 205.16 | up 04.49 | | APR | 206.73 | 198.95 | 206.22 | up 04.54 | | MAY | 207.58 | 200.00 | 207.13 | up 04.48 | | JUN | 208.74 | 201.34 | 208.32 | up 04.48 | | JUL | 210.25 | 203.51 | 210.25 | up 04.34 | | AUG | 211.46 | 205.77 | 212.25 | up 04.24 | | SEP | 213.50 | 207.64 | 214.33 | up 04.17 | | OCT | 216.66 | 209.89 | 216.66 | up 04.10 | | NOV | 218.75 | 217.17 | 218.92 | up 04.06 | | DEC | 221.07 | 214.64 | 221.18 | up 04.02 | | JAN | 221.80 | 221.73 | 223.43 | up 03.94 | | FEB | ---.-- | ---.-- | ---.-- | -- --.-- | | Estimated Volume (day before) total all prev day 78,593 | | NYMEX CRUDE OIL dollars per barrel | | MONTH | HIGH | LOW | SETTLE | CHANGE | | MAR | 79.29 | 76.32 | 79.06 | up 01.73 | | APR | 79.65 | 76.71 | 79.42 | up 01.69 | | MAY | 80.08 | 77.20 | 79.85 | up 01.63 | | JUN | 80.50 | 77.69 | 80.27 | up 01.56 | | JUL | 80.87 | 78.25 | 80.68 | up 01.52 | | AUG | 81.06 | 78.66 | 81.04 | up 01.47 | | | | | | | | | Estimated Volume… 572,537 Opec Basket…$74.33 up $1.27
Prompt #2 Oil NYH 88..-1.50 to -1.25, 74 Lo S…+0.75 to +1.25
US Gulf 88 grade…-4.50 to -4.00, 74 grade Lo S…-1.50 to -1.00 Group .........-4.75 to -4.25 Lo S.....-4.75 to -4.25
Chicago ......-2.25 to -1.75 cash quotes by Dow Jones | | | |
| NYMEX RBOB GASOLINE cents per gallon | | MONTH | HIGH | LOW | SETTLE | CHANGE | | MAR | 207.36 | 198.42 | 206.92 | up 06.21 | | APR | 218.58 | 210.42 | 218.10 | up 05.31 | | MAY | 219.02 | 211.42 | 218.96 | up 05.01 | | JUN | 219.14 | 212.10 | 219.01 | up 04.83 | | JUL | 218.20 | 212.56 | 218.41 | up 04.64 | | AUG | 217.26 | 214.25 | 217.45 | up 04.43 | | SEP | 216.27 | 213.10 | 216.34 | up 04.28 | | OCT | 206.10 | 203.50 | 206.16 | up 04.07 | | Estimated RB Volume day before 77,456 | | NYMEX NATURAL GAS dollars per mmBtu | | MONTH | HIGH | LOW | SETTLE | CHANGE | | MAR | 5.419 | 5.135 | 5.172 | dn 0.214 | | APR | 5.395 | 5.127 | 5.164 | dn 0.199 | | MAY | 5.444 | 5.196 | 5.226 | dn 0.190 | | JUN | 5.477 | 5.267 | 5.298 | dn 0.184 | | | Estimated Volume…day before (202,333)
Nymex statistics are based on composite Access & Day Sessions
Prompt Gasoline NYH M5 -1.00 /-0.50 RBOB +3.50 /+4.00
US Gulf M4: -3.00 to -2.75 RBOB +0.75 to +1.25
L.A. Conv Reg 209.00-210.00, N-grade Group 203.15-203.40 Chi 199.40-201.40 | |
Market Review for Thursday
HIS week’s DOE report was surprisingly upbeat for distillate, showing a larger-than-expected drawdown in stocks and a minor improvement in demand. Gasoline stocks increased, but imports dropped 459,000 bpd and output was down 379,000 bpd. Demand dropped 245,000 bpd, but there was still a net movement of 593,000 bpd away from the supply side. It will be interesting to see if that holds up next week, after an increase in utilization of 0.64% this week. We would expect some of that lost demand to reappear. A large part of it is certainly a matter of blending, rather than actual output. Four-week total demand also staged a comeback in this report, and is now up 0.18%, compared to being down 0.83% last week. Four-week distillate demand was also improved, down 7.35% in the latest week, compared to down 8.05% a week ago. Four-week gasoline demand came in at 8.630 mln bpd, a decline of 20,000 bpd on the week, and a drop of 1.26% against a year ago. The one-week demand figures were disappointing at 3.787 mln bpd in distillate and 8.521 mln bpd in gasoline.
| Fuel for Thought The International Atomic Energy Agency (IAEA) reported to the UN yesterday that it has information suggesting that Iran is really looking to build a nuclear weapon, after all. That, of course, has been the cold, hard assessment of many to begin with. Iran has denied this as an objective. Iran has tried to impede the IAEA’s efforts to establish the true purpose of its nuclear program. The IAEA report “raises concerns about the possible existence in Iran of past or current undisclosed activities related to the development of a nuclear payload for a missile.” Israel cannot afford the luxury of waiting to see if Iran is sincere in its denials. We sense an open window closing … and chaos in oil in its wake. |
In a surprising move late yesterday afternoon, the Federal Reserve raised the discount rate 25 basis points from 0.50% to 0.75%. The Fed said that this is not a broad tightening of credit, but anyone who has watched interest rates knows that this is the first step in many. The Fed has basically decided that the economy is strong enough for a tentative raising of rates. More should be expected to follow over time.
The Fed said, “These changes are intended as a further normalization of the Federal Reserve’s lending facilities.” This is almost certainly the start of a long process towards normalization. Normally, the discount rate is a full percentage point above Fed Funds.
In trading after the news, the US dollar broke decisively to new recent highs and now has objectives to the 77.60 euro cents level. Of course, those will need to be confirmed. Oil prices were lower, we would imagine partially in response to the Fed move and dollar strengthening. By the book, the increase in the discount rate, and the message it sends about a process begun is bearish for equities and commodities and bullish for the dollar.
Technicals
The oil complex was higher yesterday, and crude oil prices broke and settled above $78.04, gasoline broke and settled over 201.03 and then over 206.62. Heating oil came within seven points of 205.74, but nether broke it nor settled over it. Prices sold off last night, after the Fed hike in the discount rate. But, if they manage to continue higher today, and if heating oil can settle over 205.74, the trends higher will be confirmed.
Dollars per barrel
Above: Crude oil prices need a settle over $85 to start a new leg higher.
March crude oil now has buy-stops over $79.31-$79.47, $80.67, $82.35, $83.95, $84.83, $85.13, $89.82, $90.99, $93.02, $96.03, and $100.37. Sell-stops are under $76.30, $73.70, $72.60, $71.30, $70.75, $69.30, $68.55, $68.00, $65.80-$66.20, and $64.95. March heating oil has buy-stops over 205.75, 208.10, 210.91, 211.90, 217.55, 222.72, 225.80, 227.05, 229.08, 238.95, 249.62, and 251.50. Sell stops are under 197.95, 190.80, 189.95, 187.45, 186.50, 182.63, 177.00, 176.68, 173.75, 171.10, 170.35, and 168.60. March RBOB has buy-stops over 207.36, 208.30, 214.60, 219.27, 222.70, 228.86, 240.10, 250.40, 252.00, 265.10, 267.85, and 270.85. Sell-stops are under 198.40, 191.85, 187.00, 184.15, 182.40, 181.20, 179.20, 177.30, 175.14, 171.40, and 170.25.
Football: The bulls gained 17 yards yesterday on second and seven to go, and that gives them another set of downs.
Technical Support & Resistance
Mar crude oil Support: $76.30-$76.60, $73.35-$73.50, $72.60-$72.75, $71.15-$71.30, $70.55-$70.70.
Resistance: $79.29-$79.50, $80.60-$80.70, $82.20-$82.35, $83.85-$83.95, $84.75-$84.85.
Mar heating oil Support: 197.95-198.05, 190.75-190.90, 189.95-190.15, 187.45-187.60, 186.50-186.65.
Resistance: 205.60-205.75, 207.90-208.10, 210.80-210.91, 211.80-211.90, 217.45-217.55.
Mar Rbob Support: 198.40-198.60, 191.85-192.00, 188.90-189.00, 188.25-188.40, 187.00-187.15.
Resistance: 207.20-207.36, 208.20-208.30, 214.50-214.60, 219.15-219.30, 222.55-222.70.
Oil Inventory Reports
This week’s DOE report showed a larger drawdown in distillate stocks than had been expected, and it showed minor increases in demand figures. Gasoline stocks were up about as expected, although there was a net decline in production and imports of 838,000 bpd. This was offset partially by the decline in demand of 245,000 bpd. Both distillate and gasoline demand figures were lower than they have typically been at this time of year, up until this recession. The year-on-year surplus in gasoline stocks increased from 13.0 million barrels ((5.98%) to 15.2 million barrel (7.01%).
This Week’s Inventory Comparison: Distillate stocks are now 8.8 million bbls, or 6.09%, higher than a year ago. Heating oil inventories are 4.9 mln bbls, or 13.17%, higher than they were a year ago. Gasoline stocks are 15.2 mln bbls (up 7.01%) higher against a year ago. Crude oil stocks are now 19.2 million bbls, or 5.43%, lower than a year ago. Residual stocks are 1.0 mln bbls (2.71%) higher than a year ago, jet fuel stocks are 1.3 mln bbls, (3.14%) higher than a year ago. Utilization is 2.55% lower than a year ago and 7.11% below the eight-year average. It is 9.57% lower than the four-year, pre-Katrina average and 4.65% below the average of the four years since the big hurricanes (Katrina & Rita) in 2005.
This Week’s Demand: Four-week, total refined products demand came in at 18.995 million bpd, up 0.089 mln bbls on the week, and up 0.034 mln bpd and 0.18% against a year ago. One week ago, it was 0.159 mln bpd and 0.83% lower than a year ago. Four-week gasoline demand is at 8.630 mln bpd, down 1.26%, compared to up 0.32% six weeks ago. It lost 20,000 bpd on the week. Four-week distillate demand is now at 3.717 mln bpd, down 7.35%, compared to down 0.98% six weeks ago. Four-week jet demand is now at 1.370 mln bpd, up 1.41% against a year ago, compared to up 8.17% six weeks ago. Four-week residual fuel demand is at 0.647 mln bpd, up 3.69%, compared to down 34.14% two weeks ago. Propane use is up 9.65%, to 1.511 mln bpd. Gasoline supply decreased by 838,000 bpd this week, after gaining 465,000 bpd in last week’s report.
This Week’s API Report: This week’s API report showed a draw of 0.063 mln bbls in crude oil stocks, a build of 1.283 mln bbls in distillate stocks and a build of 1.428 mln bbls in gasoline inventories. Utilization was up 2.9% to 79.9%. Implied demand came in at a pathetic 7.946 mln bpd in gasoline and at an anemic 3.337 mln bpd in distillate. Crude oil imports were down 0.336 mln bpd to 8.039 mln bpd. Both implied demand figures were so incredibly low we had trouble believing them. The gasoline demand was low because of the snow, but the cold weather should have helped distillate demand.
DOE Weekly Inventory Statistics
| Category | Final DOE Estimate
This Week’s Estimate | History
Last Year’s Report | Most Recent Changes
This Week’s DOE Report | Versus A Year Ago
Millions of Barrels |
| Distillate | dn 2.00 to 2.50 mln bbls | dn 0.800 | dn 2.937 mln bbls | up 8.800 |
| Gasoline | up 1.00 to 1.50 | up 1.100 | up 1.620 | up 15.200 |
| Crude oil | up 1.25 to 2.25 | dn 0.200 | up 3.085 | dn 19.200 |
| Utilization | up 0.3% to 0.8% | up 0.7% at 82.3% | up 0.64% at 79.75% | |
| Crude Imports | dn 0.000 to 0.500 mmbd | dn 0.859 to 8.793 | up 0.206 to 8.548 mln bpd | |
| DOE Distillate Demand | 3.787 mln bpd | up 091,000 | Gasoline Demand | 8.521 mln bpd | dn 245,000 |
| DOE Distillate Production | 3.433 mln bpd | up 020,000 | Gasoline Production | 8.428 mln bpd | dn 379,000 |
| DOE Distillate Imports | 0.391 mln bpd | dn 239,000 | Gasoline Imports | 0.709 mln bpd | dn 459,000 |
Source: US Department of Energy’s Energy Information Administration
Open Interest Analysis
Crude oil open interest grew by 3,966 contracts on Wednesday, when prices were higher. That looks like new buying, which would be supportive.
Heating oil open interest fell by 1,977 contracts on Wednesday, when prices were higher. That looks like short-covering and is bearish.
RBOB open interest fell by 2,017 contracts on Wednesday, when prices were higher. That looks like net short-covering, which would be bearish.
Natural gas open interest fell by 1,739 on Wednesday, when prices were higher. That looks like short covering, which would be bearish.
Wednesday’s Open Interest Changes:
Crude 1,305,590 up 3,966 Heat 298,800 dn 1,977 RBOB 253,807 dn 2,017 Nat gas 778,738 dn 1,739
CFTC Commitments of Traders for Nymex (for the period ended Tuesday, Feb 2nd)
Crude oil prices dropped $3.53/bbl over the latest reporting period, and the best selling came from the “other reportables” category, which liquidated 2,360 longs, but which also added 517 new shorts. Producers added 1,290 shorts and added 2,221 shorts. Managed Money added 1,220 longs and covered 2,931 shorts while Swap Dealers added 3,517 longs and covered 1,555 shorts. Producers actively sold short in this market, but they bought about half of what they sold. The “other” selling did it.
In heating oil futures, prices dropped 9.77 cents a gallon, and the best net selling came from Managed Money liquidation. That category liquidated 6,267 long contracts and sold 161 new shorts. Swap Dealers were the best buyers, adding 4,753 new longs against 189 new shorts. Producers bought 3,379 new longs and covered 1,147 shorts. Other Reportables liquidated 1,418 longs and covered 320 shorts.
Gasoline prices dropped 9.26 cents a gallon during the period under review. Managed Money accounts liquidated 8,639 longs and added 17 shorts, making it the best net seller. Swap Dealers liquidated 687 longs and covered 62 shorts. Producers bought into the weakness, adding 9,798 new longs, while adding 1,827 new shorts. The Other Reportable category bought 810 new longs and covered 1,357 shorts as prices dropped.
In natural gas, prices fell 17.2 cents during the period under review. Producers liquidated 78 longs and covered 1,364 shorts. Swap dealers liquidated 9,167 longs and covered 1,496 shorts. Other Reportables liquidated 286 longs and covered 3,136 shorts. Managed Money accounts added 682 longs and covered 4,999 shorts. Swap Dealer liquidation pushed quotes lower.
Natural Gas & Utility Generation
Natural gas prices were down substantially yesterday, despite a dramatic reduction in the year-on-year surplus and in the surplus against the five-year average. A week ago, the year-on-year surplus stood at 172 bcf and 8.42%. Now, it is 26 bcf and 1.30%. Against the five-year average, storage is now 53 bcf and 2.69% higher; a week ago, it was 114 bcf and 5.43%. This is a truly remarkable change in the surpluses. Traders were apparently not impressed, though. They were absorbed by fresh weather forecasts suggesting milder temperature readings as we enter March.
March natural gas dropped 21.4 cents yesterday, which leaves it one step nearer breaking the critical support at $5.00-$5.06. We still have a number of problems with prices being under $5.00 – starting with the fact that we do not think it represents a “fair” price in relation to high-priced oil, here. As we have noted here, some of the same “investors” that have pushed oil prices to levels probably $20-$25/bbl above what a logical price might be based on fundamentals, have been selling natural gas futures short. And, for reasons that make sense only to them, they have pressed natural gas prices with a quarter of levels that many who understand the commodity would consider a bargain. Most people we know feel that gas under $5.00/bbl would be a bargain, especially with oil prices where they are. With gas storage levels this much closer to where they were a year ago, they honestly strike us as more likely to belong near $6.00 than threatening to break beneath $5.00/mmBtu. But, if temperatures do change towards the warmer for any extended period, then the surpluses can be expected to return. At least that is the thinking of the bears. Problem is, the cold trend has been in place for 15 months and one set of moderating forecasts is not going to change it. It takes three weeks of dramatically divergent weather to alter an existing trend in place.
Next week’s report is strategically important here. According to our records, last year’s report showed a drawdown of 101 bcf, and the five-year average was a draw of 132.4 bcf. The eight-year average (of similar Friday’s) was a draw of 130.5 bcf, so we can say fairly confidently that a draw of 130-135 bcf should keep the existing surplus against the five-year average. At the same time, a draw of that much would erase the year-on-year surplus. We have had back-to-back draws of 190-191 bcf; we should be able to get a draw of 150 bcf or more in next week’s figures.
In cash trading yesterday, Henry Hub prices were at $5.32-$5.46, down 0.05-$0.11 on the day (DJN). SoCal prices were at $5.33-$5.40, down $0.03-$0.04 on the day. El Paso Permian prices were down $0.06-$0.07 to $5.12-$5.20. Katy prices were down $0.04-$0.21 to $5.15-$5.39. Waha prices were down $0.05-$0.11 at $5.23-$5.28. Transco 6 was down $0.20-$0.21 to $5.85-$6.05/mmBtu, according to Dow Jones News (DJN).
Palo Verde prices were last quoted at $41.00-$44.00/mwh. Northeastern prices last traded at $42.00-$50.50. Cinergy was last at $37.00-$40.00. Ercot was last at $42.00-$42.75/mwh.
Support is at $5.12-$5.14, $5.06-$5.08, $4.96-$4.99, $4.83-$4.85, $4.64-$4.66, $4.40-$4.43, $4.15-$4.17, $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, and $2.69-$2.70. Resistance is at $5.46-$5.47, $5.55-$5.60, $5.87-$5.90, $5.99-$6.03, $6.09-$6.11, $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.
Mar Natural Gas: Support: $5.12-$5.14, $5.06-$5.08, $4.96-$4.99, $4.83-$4.85, $4.64-$4.66, $4.40-$4.43.
Resistance: $5.46-$5.47, $5.55-$5.60, $5.71-$5.73, $5.87-$5.90, $5.99-$6.03, $6.09-$6.11.
Natural gas prices dropped yesterday and are one good push away from breaking support at $5.00-$5.06.
Dollars per million Btu
The crude-to-gas ratio was 15.29-to-one, its highest level since January 15th.
Ratio
EIA Weekly Storage Figures
This week’s EIA report showed a draw of 190 bcf on expectations for a draw of 187-190 bcf. Stocks are now 26 bcf higher than a year ago, against a surplus of 172 bcf a week ago, a surplus of 199 bcf two weeks ago and a surplus of 120 bcf three weeks ago. Stocks are now 1.30% higher than a year ago. They are 53 bcf and 2.69% above the five-year average.
For this week, the eight-year average (of similar Friday reports) was a draw of 139.63 bcf. The five-year average was a draw of 126.0 bcf. Last year’s draw was only 24 bcf.
EIA Report
| Region | 02-12-10 | 02-05-10 | Change | Last Year | 5 Yr Avg |
| Cons East | 1030 | 1135 | dn 105 | 951 | 1048 |
| Cons West | 322 | 344 | dn 22 | 314 | 270 |
| Producing | 673 | 736 | dn 63 | 735 | 655 |
| Total US | 2025 | 2215 | dn 190 | 1999 | 1972 |
Bcf, or Billions of cubic feet. Source: Energy Information Administration, US Department of Energy
News & Views
| In trading on Nymex, March crude oil prices were down $0.91 at $78.15/barrel at 11.30 PM EST, last night. March heating oil prices were down 1.92 cents to 2.0324/gallon. March RBOB prices were down 2.11 cents to 2.0481. March natural gas prices were down $0.031 to $5.141/mmBtu. Asian equities markets were lower very late last night (our time) or early this morning. The dollar was strong, and now seems to have initiated a new leg higher. Still, if oil can finish in positive ground today, it will be a huge tactical victory. We will start the gasoline seasonal in a little over a week. If one had bought two June gasoline contracts on March 1st and sold one on May 1st and the other on May 15th, in each of the last 25 years, one would have made an average of 10.6 cents on both, per year. Over the last nine years, that increases to 18.68 cents per contract each year. Over the last four years, it has ballooned to 35.26 cents per contract each year. That does not mean it will work this year, but it is worth knowing … . 
Crude oil prices advanced dramatically yesterday, rising in sympathy with higher equities and in reaction to a DOE report that was more supportive than had been expected. Prices broke $78.04. | 
Heating oil prices were higher yesterday, but they did not break above the resistance at 205.74. They need a decisive finish above that level to make the next move. The normal precursor of the March advance - comparatively lower refinery utilization – has been different this year. Utilization has not kept falling; it just started at post-hurricane levels and never rose above that. As a result, it may not be the major factor this year. What has amazed us, after watching this seasonal now for three decades, is that something almost always happens. Usually, we get a Nigerian component. Often, we get a refining component. Sometimes, we get an economic factor. Other years, we see spring usher in – as it has for thousands of years – a campaigning season among the world’s soldiering class. There is always a chart point broken that brings in new buying, so we typically see a speculative component. March is often colder than expected, so we often see a renewed interest in physical heating oil. March is also the official start of spring, and there is usually talk of increased driving, which helps gasoline. Opec sometimes does something bullish. This year, it could be economic recovery, or something to do with Iran retaliating against something done in exasperation over its nuclear policy. Or, it might not work at all this year. We wouldn’t sell it, though. Not against the odds we have seen. |
| Crude prices have broken the resistance at $78.04. | |
The Fed’s hike in the discount rate will be the central focus of this morning’s early trading. As the day continues, though, other factors may come into play. A positive settlement in oil prices today would be a major tactical success.
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 higher yesterday and it decisively broke to new high ground in trading yesterday late afternoon, after the Fed raised the discount rate. This move confirms the bulls’ prescience. There is an objective to 77.60-77.70 euro cents.
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 ended the day up 83.66 points yesterday. Equities were higher on a continuing sense that the economy is strengthening. Today’s result will be critical.
Source: http://money.cnn.com/quote/chart/chart.html?symb=djia&sid=1643&time=6mo&Submit1=Refresh
HEATING OIL – March Seasonal Tendency, Part One
The seasonal tendency for oil prices to reach a significant bottom in the first half of March is well-established. Over the last few years, we have seen less of a decline in February than in years gone by, but the seasonal tendency for strength still seems to be in place. It has worked in all but the most exceptional circumstances. In 2003, we had the invasion of Iraq, so it did not work. That was the one time it would have yielded certain losses in a quarter of a century.
Heating oil futures have been trading for the longest period of any energy contract, so we consider this a heating oil seasonal tendency, even though it works even better in gasoline. We will take a look at trading strategies and tactics that have worked with this seasonal tendency.
The table below looks at the settlement prices for June heating oil over the last 30 years. Checkmarks indicate that the seasonal worked, equal signs that it broke roughly even and “x’s” that it failed. We just need prices to move higher after March 1st to score it a success. We have marked as uncertain close figures either way, even if profits were possible to obtain. In the three years with equal signs below, one could have broken even with no effort either way. And, at no time were there spectacular profits or losses during the even years.
June Heating Oil Futures - Settlement on day closest to day listed
Year 3/1 4/1 4/15 5/1 5/15 Result
2009 117.87 136.84 142.35 138.84 141.88 ü
2008 278.03 283.67 323.34 311.77 362.24 ü
2007 177.98 187.10 186.63 188.29 189.02 ü
2006 178.11 187.63 203.55 205.88 194.50 ü
2005 138.63 165.60 146.38 146.32 135.03 ü
2004 89.90 84.16 94.83 94.49 104.09 ü
2003 86.28 72.45 72.88 69.10 75.04 û
2002 59.10 68.94 63.84 67.42 67.79 ü
2001 69.89 67.01 79.23 76.47 76.63 ü
2000 71.57 65.85 62.93 67.44 77.25 ü
1999 33.05 43.40 43.08 44.47 42.95 ü
1998 42.92 43.83 44.28 45.78 41.64 ü
1997 52.99 53.95 53.89 54.33 56.48 ü
1996 53.42 57.08 62.62 54.16 54.81 ü
1995 46.44 47.47 48.79 51.09 49.86 ü
1994 45.55 45.80 47.40 47.57 47.81 ü
1993 55.79 56.25 55.83 55.88 54.08 =
1992 50.12 53.97 55.00 56.70 57.18 ü
1991 50.49 52.18 56.32 54.27 55.52 ü
1990 53.56 54.51 51.19 52.97 51.72 =
1989 46.94 50.62 52.25 49.46 49.87 ü
1988 41.33 44.84 48.44 45.95 47.98 ü
1987 43.33 48.92 47.44 48.15 51.89 ü
1986 38.33 35.33 37.66 40.56 43.62 ü
1985 68.40 74.50 73.90 71.89 70.32 ü
1984 77.20 77.31 78.01 78.63 81.37 ü
1983 70.24 75.81 77.60 78.33 76.68 ü
1982 75.34 77.69 86.98 89.32 92.90 ü
1981 96.95 95.10 96.50 91.49 92.46 û
1980 78.25 77.00 77.85 78.00 78.30 =
Overall Trading Strategy
The rule calls for the purchase of June heating oil in the first two weeks of March. At some point between then and mid-May there will be a profit. Some years it is better to sell in April than in mid-May, but many times, it makes sense to hold the long positions until May 15th. We have illustrated extended buying plans and extended selling plans, but it seems that they all even out. In effect, the trade calls for buying during March up to and including April 1st. Over the next 45 days, these long positions are sold.
We like to institute a “time-buying” plan where we divide up a certain number of lots over the trading days in the first half of March. If there are ten trading days and you need to buy ten lots, buy one a day - just like a multiple vitamin. If you have 50, buy one each hour. If you have two, buy one each week, and so on. Then, once they get into profit territory in April, we start unwinding them, using technical analysis of overbought pressures and resistance to help us adjust the timing and number of lots in each sale.
The biggest question with this trade is when to get out. There is not as hard and fast a rule for getting out as there is with getting in. And the system has never really worked with a stop-loss point, so we have no guidelines on avoiding disastrous losses other than the rules one might use in normal trading. You need to be able to take a long-term view of this trade, and if you are going to start it this year, you pretty much have to make a commitment to stay with it year after year.
In the 30 years listed above, this trade was a big loser in just two years, it broke even in three years (although there were opportunities to get out at a profit), and could have made money in the other 25 years. That is 6.67% wrong, 10.00% undecided, and 83.33% ‘right.’ We put quotes around “right” because you did need luck and timing in two of the last ten years to make it work. Still, it did yield profits for good and/or lucky traders in those years.
Most years offer steady gains that more than offset the break-even years or the worst possible loss in the two years that did not work – 1981 and 2003. But since there was no history of any tendency in the two-and-a-half year-old heating oil contract in 1981, there was no reason to have made that trade in the first place. That losing year was just a theoretical beam in this market’s eyes. In 2003, there was no reason to make this trade. The US was just about to invade Iraq and prices were high on war fears in February. It was the one year that we did not try to use it (since we started following this seasonal); the anticipation of war skewed the seasonal tendency, bringing early buying and a premature high on ‘victory relief selling.’
In many years, traders get this sudden urgent sense that winter is coming to an end after the first week of February through Valentine’s Day. In years when it is very cold beyond that, or when supplies are tight, prices will keep advancing through the end of February. In either case, prices still seem to end up being higher at the end of March than they were at the beginning. Every year it looks less likely to work, but still does. Recently, prices have seemed high to begin with, in the first two weeks of March. In other years, it had been so disappointing a winter that no one wanted heating oil at the end of February into early March. In 25 of the last 30 years, something happened to get prices higher by either April or May. In 23 of those years, or 76.67% of the time, prices were higher in early April 1st than they had been on March 1st. In 23 years, 76.67% of the 30 years, prices were higher on May 15th than they had been on March 1st. In thirty years of watching commodities, there is no more reliable seasonal tendency than that of oil markets to rally after early March. It works exceptionally well in heating oil and even better in gasoline futures.
While it rarely seems wise, at the time, to buy in March, but something always seems to happen to push quotes higher by April or May or both.
Tactical Variations
We have a few different variations on the basic theme, and they tend to make the trade more disciplined for those who are unhappy with the rather vague procedure outlined above.
1. Short-Term Trade
This one calls for the purchase of the full long line on March 1st, and the sale of half of the position on April 1st and the other half on April 15th.
June Heating Oil Futures - Settlement on day closest to day listed.
Year 3/1 4/1 4/15 Avg Sale P/L Result
2009 117.87 136.84 142.35 139.59 +21.72 ü
2008 278.03 283.67 323.34 303.50 +25.47 ü
2007 177.98 187.10 186.63 186.87 +8.89 ü
2006 178.11 187.63 203.55 195.59 +17.48 ü
2005 138.63 146.32 135.03 140.68 +2.05 ü
2004 89.90 84.16 94.83 89.49 -0.41 û
2003 86.28 72.45 72.88 72.67 -13.61 û
2002 59.10 68.94 63.84 66.39 +7.29 ü
2001 69.89 67.01 79.23 73.12 +3.23 ü
2000 71.57 65.85 62.93 64.39 -7.18 û
1999 33.05 43.40 43.08 43.24 +10.19 ü
1998 42.92 43.83 44.28 44.05 +1.13 ü
1997 52.99 53.95 53.89 53.92 +0.93 ü
1996 53.42 57.08 62.62 59.85 +6.43 ü
1995 46.44 47.47 48.79 48.13 +1.69 ü
1994 45.55 45.80 47.40 46.60 +1.05 ü
1993 55.79 56.25 55.83 56.04 +0.25 ü
1992 50.12 53.97 55.00 54.48 +4.36 ü
1991 50.49 52.18 56.32 54.25 +3.76 ü
1990 53.56 54.51 51.19 52.85 -0.71 û
1989 46.94 50.62 52.25 51.43 +4.49 ü
1988 41.33 44.84 48.44 46.64 +5.31 ü
1987 43.33 48.92 47.44 48.18 +4.85 ü
1986 38.33 35.33 37.66 36.49 -1.84 û
1985 68.40 74.50 73.90 74.20 +5.80 ü
1984 77.20 77.31 78.01 77.66 +0.46 ü
1983 70.24 75.81 77.60 76.70 +6.46 ü
1982 75.34 77.69 86.98 82.33 +6.99 ü
1981 96.95 95.10 96.50 95.80 -1.15 û
1980 78.25 77.00 77.85 77.42 -0.83 û
2008 was its best year, but 2009 was a close second. In 23 out of 30 years, there was a profit in this trade; seven years returned a loss - assuming fills at the day’s settlement levels. Following this system to the letter would have resulted in net profits of 124.55 cents, or $52,311.00 per contract before commissions and fees. That is an average of 4.15 cents per year (over 30 years). The biggest losses were 13.61 cents in 2003 and 7.18 cents in 2000. The gain in 2006 was the third largest ever, and the largest gain before those in the last three years was 19 cents in 1999. Prior to those years, the biggest loss was 1.84 cents in 1986 and the biggest gain was 6.99 cents in 1982. The violent trading years since 1999 have increased the volatility in this trade substantially. Volatility has only increased over the last three years, and with the threat of a continuing the major threat to profits in this trade this year, we must argue for intelligent money management. Please consult experienced brokers or advisors before entering any trade in futures or options contracts.
We did not recommend making this trade in 2003, because prices had just started coming down from then all-time highs of $1.31/gallon in heating oil. American forces were on the brink of removing Saddam Hussein from power. Prices had risen steeply going into the war, which started March 19, 2003.
Part Two, which has additional trading strategies will be coming in a subsequent report.
Our normal DOE charts will also be included in the next few reports.
Recommendations for Specific Market Segments
Heating Oil Distributors Heating oil prices were up yesterday, although they curiously fell a few points short of breaking the important high at 205.74. Crude oil and gasoline prices broke above their respective highs, and settled clear above them. This was curious, because heating oil/distillate had the best report of the three. Inventories fell more than had been expected, and distillate demand was not as low as API implied demand had placed it. We now have six trading days before the start of the March seasonal and every distributor has to ask essential questions. Knowing the history, can one afford not to buy caps or calls for the next few months? Should one buy something for next winter? Those who have long-standing plans should stick with them, and everyone needs to practice sound money-management. If it goes wrong, when and where does one get out? These questions need to be asked and answered over the next six days – before March 1st. Diesel Users We would hold our caps and will be buying more, soon. NYH Ultra Low Sulfur Diesel.…209.15-209.65 plus 4.250 USG Ultra Low Sulfur Diesel.…205.40-205.90 plus 0.500 Jet/Kerosene Users & Airlines New York Harbor cash market differentials were 3.50 to 4.25 cents over January heating oil in NY Harbor and 0.25 under to 0.25 over the screen in the US Gulf. Jet fuel demand this week, at 1.225 mln bpd, was its lowest since Feb 6, 2009. Diesel & Gasoline Marketers We would keep product hedged, but March may be time to risk it. Gasoline Blenders & End-Users We are coming into the most reliable seasonal tendency in commodities. The short side is off limits here. Prompt NYH Fuel Ethanol…..179.00-182.00 Prompt USG Fuel Ethanol….170.00-172.00 Quotes from 02-18-10 Heating Oil End-Users We will be looking to get in on the long side in heating oil on any dips between now and March 15th. Use this week to answer the questions above (first section on this page). Speculators We will be looking to buy calls on any weakness between now and March 15th, increasing our positions the nearer we get to March. Refiners The 7:5+2 crack spread was $7.64 yesterday. Crude Oil Producers Crude oil prices broke to the upside yesterday, and they now seem to be gaining momentum. Their reaction to the discount rate hike will be critical. | Prompt Jet Fuel Prices New York Harbor 208.65-209.40 US Gulf 204.90-205.40 Midwest (Group Three) 206.65-207.15 Midwest (Chicago) 205.65-206.65 Los Angeles 208.00-209.00 San Francisco 208.00-209.00 Portland, Oregon 208.00-209.00 Cents per gallon Propane Prices Mont Belvieu……….…..non-TET………$1.230330 Cents per gallon  Gasoline prices were higher yesterday, and they settled above the resistance at 206.62, which suggests there is more on the upside coming. It now looks like Wednesday’s activity was just a pause in a bigger move higher.
Now, the big test will be to see how prices react to last night’s rise in the discount rate. If prices can settle again today in positive territory, it will be bullish technically. We are entering gasoline’s wheelhouse, seasonally. |