Prices for March 22nd, 2010

Market Review for Monday         

N a stunning turnaround from trends seen most of this month, Friday’s steep decline in prices was accompanied by the liquidation of a massive 78,902 contracts in the crude oil contract.  Out of that total, 29,201 contracts were April contracts being exited before yesterday’s contract expiration.  But 18,628 contracts were liquidated from May’s holdings and another 25,794 June contracts were liquidated.  Those figures suggest that investors were bailing out of their long positions, or their fund managers were.  What would be infinitely more interesting, though, would be discovering why their mood had changed so completely on Friday.  These funds and their investors had been buying all this month.

It is not just a question being asked by a perennially curious writer (although it is that, too).  Somewhere in the answer is something genuinely worth knowing.  These investors or fund managers may have lost patience.  Or they may have learned something that will affect the influence of the dollar or equities on oil prices.  Or it might just have been health care jitters.

Oil prices were higher yesterday as traders reacted to a US dollar in retreat, equities rallying and short-covering in the expiring April contract.  This short-covering should not be downplayed, because such a large number of longs apparently liquidated their holdings on Friday that the best “natural” selling had already been seen when shorts showed up to buy back positions yesterday.  The result was a choppier trading path higher. 

Everything had been moving the other way earlier in the day.  Crude oil prices had fallen as low as $78.57/bbl, the dollar had rallied to its recent highs and equities had fallen in the first round of trading yesterday.

That changed as investors returned to equities, some say as the result of investors covering short positions initiated late last week ahead of the Sunday vote on health care.  Some said yesterday that investors did not like uncertainty and that they started “handicapping winners and losers” instead, in the wake of the vote (according to WCBS Radio).  The dollar sold off after hitting resistance, and traded back and forth on competing views of the Greek debt situation, with an EU summit scheduled for the end of this week.

Technicals

  Oil prices sold off early yesterday morning before turning back up.  Of perhaps equal technical importance was the US dollar getting turned back down by resistance near the 74.20 euro cents area (page 7).  Once that happened, crude oil found support at $78.57, after having triggered sell-stops under $79.00.  Heating oil prices broke beneath 204.50 and gasoline broke under 220.26, both triggering sell-stops, before buying returned.  The bulls have a lot to prove, here.

Dollars per barrel

Above:  Crude oil prices have advanced on good, new fund buying, and sold off on Friday on what we believe was fund liquidation. 

May crude oil now has buy-stops over $81.85, $82.50, $83.18, $83.95, $84.83, $85.13, $89.82, $90.99, $93.02, $96.03, and $100.37.  Sell-stops are under $78.85, $78.00, $77.00, $76.30, $73.70, $72.60, $71.30, $70.75, $69.30, $68.55, $68.00, $65.80-$66.20, and $64.95.  April heating oil has buy-stops over 209.00, 211.60, 214.42, 217.55, 222.72, 225.80, 227.05, 229.08, 238.95, 249.62, and 251.50. Sell stops are under 202.50, 201.55, 200.55, 199.00, 196.40, 190.75, 189.95, 187.45, 186.50, 182.63, 177.00, 176.68, 173.75, 171.10, 170.35, and 168.60.  April RBOB has buy-stops over 226.15, 230.40, 231.50, 240.10, 250.40, 252.00, 265.10, 267.85, and 270.85.  Sell-stops are under 220.00, 219.00-219.10, 215.50, 213.70, 203.80, 202.25, 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 six yards yesterday on first down.  That makes it second and four to go, here.

Technical Support & Resistance

May crude oil                       Support:             $79.40-$79.50, $78.85-$79.00, $78.00-$78.10, $77.00-$77.20, $76.30-$76.45.

                                           Resistance:        $82.35-$82.50, $83.00-$83.18, $83.85-$83.95, $84.75-$84.85, $85.00-$85.15.

Apr heating oil      Support:             206.60-206.75, 206.00-206.20, 205.00-205.15, 204.50-204.65, 202.50-202.65.

                             Resistance:        208.85-208.95, 211.45-211.60, 214.30-214.42, 217.45-217.55, 222.65-222.75.

Apr Rbob                      Support:             225.00-225.10, 223.50-223.60, 221.70-221.90, 220.00-220.15, 219.00-219.15.

                                           Resistance:        225.95-226.15, 230.25-230.40, 231.35-231.50, 239.95-240.10, 250.25-250.40.

Oil Inventory Reports

This week’s DOE report has shown gasoline inventory drawdowns in each of the last eight years.  Distillate stocks have dropped in seven of the last eight years.  Crude oil inventories have increased in six of the last eight years, with crude oil imports up in four of the last six years.  Utilization has dropped in four years and risen the other four years.  The declines and increases in utilization were almost the same.  At this time of year, the DOE report is supposed to be bullish for refined products and bearish for crude.  More often than not, products lead the entire complex higher. 

Last Week’s Inventory Comparison:  Distillate stocks are now 2.9 million bbls, or 2.00%, higher than a year ago.  Heating oil inventories are 3.8 mln bbls, or 10.38%, higher than they were a year ago.  Gasoline stocks are 11.3 mln bbls (up 5.23%) higher against a year ago.  Crude oil stocks are now 14.8 million bbls, or 4.12%, lower than a year ago.  Residual stocks are 0.2 mln bbls (0.51%) lower than a year ago, jet fuel stocks are 0.8 mln bbls, (1.89%) higher than a year ago.  Utilization is 1.50% lower than a year ago and 6.41% below the eight-year average.  It is 8.70% lower than the four-year, pre-Katrina average and 4.12% below the average of the four years since the big hurricanes (Katrina & Rita) in 2005.

Last Week’s Demand:  Four-week, total refined products demand came in at 19.347 million bpd, down 0.065 mln bbls on the week, and up 0.654 mln bpd and 3.50% against a year ago, reportedly.  Five weeks ago, it was 0.159 mln bpd and 0.83% lower than a year ago.  Four-week gasoline demand is at 8.947 mln bpd, up 1.15%, compared to down 1.26% four weeks ago.  It was up 82,000 bpd on the week.  Four-week distillate demand is now at 3.725 mln bpd, down 3.07%, compared to down 9.08% six weeks ago.  Four-week jet demand is now at 1.289 mln bpd, down 6.59% against a year ago, compared to up 8.17% ten weeks ago.  Four-week residual fuel demand is at 0.588 mln bpd, up 7.89%, compared to up 25.96% one week ago.   Propane use is up 7.34%, to 1.330 mln bpd.  We are still concerned about the DOE’s figures.  According to the figures for all products supplied, released a year ago, this year’s total four-week average would be up 1.18% on the year, rather than up 3.50%.

Last Week’s API Report:  This week’s API report showed a build of 0.403 mln bbls in crude oil stocks, a draw of 0.756 mln bbls in distillate stocks and a draw of 3.654 mln bbls in gasoline inventories.  Utilization was up 0.4% to 81.3%.  Implied demand came in at a very healthy 9.850 mln bpd in gasoline (second strong week in a row) and at a decent 4.153 mln bpd in distillate.  Crude oil imports were down a stunning 1.225 mln bpd to 7.917 mln bpd.  Crude imports are at post storm levels.

                                                                    DOE Weekly Inventory Statistics

Source: US Department of Energy’s Energy Information Administration  

Open Interest Analysis

      Crude oil open interest fell by 78,902 contracts on Friday, when prices were down.  That looks like heavy, long liquidation just a day after large, new positions had been taken.  The open interest increase for March went from 129,459 to 50,557.

      Heating oil open interest fell by 3,775 contracts on Friday, when prices were lower.  That looks like long liquidation and is supportive.  Open interest has increased by 29,013 contracts since March 1st.

      RBOB open interest fell by 971 contracts on Friday, when prices were lower, which looks like long liquidation.  Open interest is up 60,197 since March 1st.  It was a peculiar combination of new positions late last week with liquidation on Friday.

      Natural gas open interest grew by 1,810 on Friday, when prices were higher.  That looks like new buying, which would be supportive.  Open interest is up by 28,834 contracts since March 1st.    

Friday’s Open Interest Changes:  

Crude 1,324,564   dn 78,902       Heat 325,660  dn 3,775       RBOB 321,964  dn 971      Nat gas 844,965  up 1,810        

CFTC Commitments of Traders for Nymex  (Forensic analysis for the period ended Tuesday, March 9th)   

Crude oil prices gained $0.21/bbl over the latest reporting period, and the best buying once again came from Managed Money, which added 10,830 new longs and covered 189 existing shorts.  Other Reportables, which include commission houses, added 2,598 new longs and covered 1,212 shorts, and that helped push prices higher.  Swap Dealers liquidated 12,095 longs and added 951 shorts, while Producers added 11,035 new longs but also added 10,061 new shorts.  Funds were the best buyers, with some light commission house buying, although Producers bought a little more than they sold.  Swap Dealers were good sellers. 

    In heating oil futures, prices gained 2.45 cents a gallon, and the best net buying came again from Managed Money accounts, which added 2,166 new longs and covered 312 shorts.  Producers bought 11,132 longs against the sale of 10,474 shorts.  Other Reportables were selling into the market’s strength, liquidating 243 longs and adding 3,841 shorts.  Swap Dealers liquidated 21 longs and covered 951 shorts.  Managed Money buying and short-covering was the motive force behind higher prices.

    Gasoline prices gained 1.47 cents a gallon during the period under review.  Managed Money accounts were buying, adding 4,647 new longs and covering 1,991 shorts.  Swap Dealers added 463 new longs and covered 121 shorts.  Producers bought 10,534 new longs, but added 18,242 new shorts, selling into the market gains.  Other Reportables added 191 new longs and covered 187 shorts.  The funds’ buying pushed prices higher, with some light buying and covering by commission houses.

    In natural gas, prices dropped 16.9 cents during the period under review.  Managed Money accounts sold 15,514 new shorts against the purchase of only 1,394 new longs.  Other Reportables were the only other seller, selling 2,584 new shorts against 4,290 new longs.  Producers bought 4.165 new longs and covered 1,050 shorts, while Swap Dealers added 489 new longs and covered 6,326 existing shorts.  The big funds continued their hammering of the market by selling short aggressively; everyone else was a net buyer. 

Natural Gas & Utility Generation

Natural gas prices turned back down yesterday, giving back all of Friday’s gains and then some in a nine-cent decline.  In the process, prices for April delivery broke below the previous support at $4.05 and fell to a new six-month low of $4.036 per million Btu.  Traders were selling against “mild weather and ample supplies,” according to Dow Jones, but we fully expect to discover that it was large fund selling, probably just as crude oil prices rallied, that pushed quotes lower.  Now, the big question facing us is whether traders will see a potential break below $4.00/mmBtu as a stop-loss point or as the year’s outstanding buying level.  We tend to see value at existing numbers, but we are not already long. 

Those that are already long have been so based on the most devastating of market factors – logic.  After having fallen by as much as they have, prices have been looking like “value” since breaking below $5.00/mmBtu.  This is especially true given price levels just slightly below that figure as we started the heating season with even more abundant storage numbers.  Prices have been dropping despite a really rather extraordinary reduction in the amounts being held in storage, over this past winter.  And they have been falling despite a rise in oil prices, which have been pushed higher by investors drawing straight lines from higher equities prices to stronger economic activity to a faith-based (not in any religious sense) assumption that the next step would be stronger oil demand – presumably in a vacuum and without gains in employment, on one hand, or in natural gas demand, on the other.  It is an argument only a spread trader with existing positions could believe.  Nevertheless … prices fall.

Temperature forecasts are not likely to give us normal March consumption numbers, and that is undoubtedly bearish.  The only problem is that this market has been using only the bearish aspects of logical thinking.  We could subscribe to the logic of selling against a warmer March – but only if we had actually already seen a rally based on the winter reduction of storage levels.  We somehow skipped that part, which makes selling here less logical.

In cash trading yesterday, Henry Hub prices were at $3.99-$4.12, up $0.03-$0.04 on the day (DJN).  SoCal prices were at $4.08-$4.20, up $0.08-$0.08 on the day.  El Paso Permian prices were up $0.03-$0.03 at $3.90-$4.02.  Katy prices were up $0.01-$0.09 to $3.99-$4.15.  Waha prices were down $0.00-$0.01 at $3.89-$3.98.  Transco 6 was up $0.06-$0.09 to $4.30-$4.40/mmBtu, according to Dow Jones News (DJN).  

Palo Verde prices were last quoted at $37.75-$40.00/mwh.  Northeastern prices last traded at $38.25-$42.35.  Cinergy was last at $32.25-$34.00.  Ercot was last at $33.50-$34.25/mwh.

Support is at $4.03-$4.05, $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 $4.16-$4.18, $4.29-$4.30, $4.36-$4.37, $4.44-$4.47, $4.59-$4.63, $4.76-$4.79, $4.86-$4.89, $4.97-$5.00, $5.16-$5.17, $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.  

Apr Natural Gas:                 Support              :     $4.03-$4.05, $3.73-$3.75, $3.66-$3.68, $3.50-$3.53, $3.44-$3.46, $3.28-$3.32.

                                                    Resistance:     $4.16-$4.18, $4.36-$4.37, $4.44-$4.47, $4.59-$4.63, $4.76-$4.79, $4.86-$4.89.

Natural gas prices dropped again yesterday, establishing fresh lows for this move lower.

Dollars per million Btu

The natural gas price oscillators are getting oversold, here.

Ratio

EIA Weekly Storage Figures

Last week’s EIA report showed a draw of 11 bcf on expectations for a draw of 28-35 bcf.  Stocks are now 40 bcf lower than a year ago, against a deficit of 71 bcf a week ago, a deficit of 71 bcf two weeks ago and a deficit of 56 bcf three weeks ago.  Stocks are now 2.41% lower than a year ago.  They are 73 bcf and 4.73% above the five-year average.

For this week, the eight-year average (of similar Friday reports) was a draw of 42.12 bcf.  The five-year average was a draw of 42.0 bcf.  Last year’s build was 03 bcf.  We have had two builds this week in the last eight years.

EIA Report

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

News & Views

Whichever way prices break from yesterday’s trading range in crude seems likely to give us our next direction.  Of equal importance, though, with an EU summit later this week, is the technical action of the US dollar against the euro.

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 tried to move higher yesterday, but it ran into resistance near its recent highs.  From those highs, prices sold off.  They have rallied slightly overnight as traders seem to have revisited the whole Greek debt picture, which at one point was looking better yesterday.  That reportedly helped press prices back from their intraday highs.

   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: One-Year Chart

The DJIA ended with a gain of 43.91 points yesterday, after having being lower early in the day.  The initial selling was reportedly in reaction to the health care bill voted through the House of Representatives on Sunday.  As the day wore on, though, short-covering reportedly boosted prices.  Some were saying that uncertainty was worse for prices last week.

Source:  http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=DJIA&sid=1643

A Look at Crack Spreads

Crack spreads have improved lately, largely on higher gasoline quotes.

The heat crack has languished, though.

Recommendations for Specific Market Segments