Morning Petrospective – August 31, 2010       

he oil complex was lower on Monday, preventing a three-day rally from extending into a fourth day. While the fundamentals remain overwhelmingly bearish, with inventories now at three-decade highs one could easily describe as being ample to the point of being burdensome, it was not these that triggered Monday’s decline. Instead, it was weakness in equities from that other form of “stocks” – shares in companies – and a decline in the euro that either provided an opening for the fundamentals to work upon the market or just persuaded investors to liquidate their long holdings in oil, which they see not as a commodity but as an “asset.”

It has been an ongoing question for which we do not yet have an answer. We know that prices rise when equities and the euro are higher. And we know, just as reliably, that oil prices decline when those two decline. But, many of the investors that buy oil futures on the strength of these other two outside influences only buy and they do not adopt short positions. As a result, it is clear enough to see that they are buying on moves higher. But it is less clear that they are consistently liquidating longs (they don’t get short) when prices drop. And there are times when prices fall that open interest rises. In those situations, it seems more likely that the decline in equities and in the euro have opened the way for fundamental traders to sell this market.

Used in combination as diagnostic tools, we tend to believe that open interest increases on price declines represent fundamental or old-school technical selling (producer hedging or old-school speculative selling, often through commission houses). We tend to see higher open interest on an advance as fund buying along with producer selling or speculative/technical selling. When open interest declines on a price rise, we tend to see in that the signs of end-user short-covering or covering by someone else who has been short. And a decline in both prices and open interest can be interpreted as long liquidation by the long-only funds.

If the link between prices and the equities-euro influence were cut and dried, we would see an increase in open interest on every advance and a decline in open interest (as funds liquidate longs) on every selloff. The fact that it is not always so neat suggests to us that fundamental traders are still getting their licks in, but that they are only making any real headway on those days when equities or the euro are either unchanged or lower. We will not know until Tuesday which one was more likely on Monday, but until then, it will have to suffice to say that oil prices were lower primarily because both equities and the euro were lower. By the end of Monday’s trading session, traders were aware that the tropical wave behind Hurricane Earl had been upgraded into Tropical Storm Fiona. Early indications suggest that Fionma will become a powerful storm, but a number of storm-watchers believe that it is likely to follow the same course that Daniele did – out into the Atlantic Ocean.

This week’s DOE report will be viewed with interest by old-line oil market observers, but the number that everyone expects to have the biggest effect this week is Friday’s monthly unemployment number for August. On Monday, the Commerce Department reported that consumer spending had increased by 0.4% in July, but no one saw in that widely-expected figure any reason to buy equities. Investors were still aware of the promises implied by Fed Chjairman Bernanke on Friday, but they did not seem to have any real legs to carry them forward as a factor in Monday’s trading.

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Platts oil

• Tropical Storm Fiona formed in Atlantic 890 miles east of Leeward Islands. Hurricane Earl is now a Cat 4. Danielle is TS in open Atlantic.
• Greenpeace making headlines today - four activists have scaled a drilling rig offshore Greenland, calling for an end to Arctic exploration.
• Noble Energy is to drill the Leviathan-1 well in October this year in a water depth of 1,630 meters, the deepest ever offshore Israel.

Bentek Energy

• Power Burn Analytic Report - Earl Continues to Strengthen as it Approaches East Coast
• Gulf Coast Production Analytic Report - Tropical Storm Fiona Develops in the Atlantic
• California SW Observer - SoCal's Line 3000 Capacity Falls to Zero; Price Impact Delayed
• Supply/Demand Balance Analytic Report – Injections Down to 5.5 Bcf/d as Demand Increases
• Texas Observer – Texas Storage Inventory’s Decline in July and August

Bloomberg 

• Crude Oil Heads for First Monthly Slide Since May on Slowing Global Growth
• Oil Supply Climbing to One-Month High in Bloomberg Survey
• Hurricane Earl Passes Puerto Rico, Heads for North Carolina
• Lukoil Second-Quarter Profit Falls 16% to $1.95 Billion as Sales Climb 29%
• U.S. Power Acquisitions Surge as Blackstone, NRG Hunt Bargains
• High Seas Delay BP's Efforts to Permanently Plug Gulf of Mexico Oil Well

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