 | As we commented last week, for reasons unbeknownst to us, speculative bullish enthusiasm in the gas pit continues to build. As of last Tuesday non-commercial net length stood at 45,261 contracts, a seven-year high! Although, perhaps some of this bullish torque will be reduced now that team Klotzbach/Gray have come clean on the 2006 Atlantic basin hurricane season.
With “time decay” on both GoM tropical cyclone activity and excessive cooling demand accelerating, bulls are going to find themselves in an increasingly difficult position trying to spin a positive story over the next three months. However, there are two avenues for them to focus on. First, the contango on the NYMEX continues to incentivize storage.
This winter that inventory will be liquidated, meaning of course those hedges will have to be bought back… at a cost. Secondly, even though the liquids complex has collapsed, on a thermal comparison nat-gas is still the cheapest Btu in the stack next to coal. What’s more, our HHub/Cushing ratio settled at 11.4/1 last night, i.e. 1 barrel of WTI can purchase 11.4 decatherms of gas. That’s more than 2½ standard deviations above normal. In other words gas is “cheap” and/or oil is “dear”. |  |
Despite the funds disposition in WTI, or perhaps because of it, oil prices continue to trend lower. As of a week ago yesterday non-commercial net futures length dropped 12% to 60,861 contracts, a five-week low, but still large nonetheless. What’s more, since the “Prudhoe Bay Island Reversal” the front-month contract for Oct’06 delivery has closed lower two out of every three sessions, losing 12½% as a result. Fund managers et al may no longer own this market in a figurative sense, however they are still quite long in the literal, and thus vulnerable to further weakness.
What’s more, inventories in Cushing, OK, now stand at 24.3 MMbbls, 6.34 MMbbls or 35% higher year-on-year. However, the term structure continues to encourage a bid for tankage, assuming of course it can be found. The contango on the 1st/2nd month calendar spread has increased 185% since the end of the second quarter to $1.17 per barrel as of last night and the 1st/6th month spread has jumped by 254% to nearly $4. In other words, production will continue to bid for storage given the premium accorded the deferred contracts. Nevertheless, the funds own 2½ times as many “paper barrels” than actual physical barrels deliverable against the contract. |  |
Transatlantic rates are retreating from their post Prudhoe Bay highs. For instance, Suezmax WA/USGC, which had jumped to ws 200 three weeks ago has retreated since, and is now commanding between ws 180 and 170. Meanwhile, per the latest EIA numbers imports for crude oil, finished products and blendstocks continue to surge, thus lending further support to freight markets. Cargoes of foreign crude oil and products have averaged above 13.0 MMbbl/d 5 out of 6 weeks this year. What’ more, the disruption to ANS production should help offset a decline in demand through turnarounds. |  |
Bulls simply can not stem the bleeding in the gasoline pit. Since the August 02nd “island reversal” the Oct’06 has closed lower two out of every three sessions. The contract has lost more than 1/4th of its dollar value, or $23,297 per lot as a result. Regarding today’s session, offers below yesterday’s 163.50 low signal further bearish trade towards the bottom of the March 03rd weekly pivot area, 160.88. Failure here should test the 160.00 psych-support while setting the table for a deeper push towards the longperiod trend at 154.53. Otherwise, a rebound above yesterday’s 168.50 pivot area high alerts to further corrective trade towards 170.00 and the Ivan trendline at 172.63. |  |
The situation is not much better for the bulls over in the heating oil pit. But unlike mogas, at least the fall and winter seasons loom. Then again, supplies of heating oil and diesel are running about 10½% and 5% above their respective five-year averages.
As far as today goes, offers below yesterday’s 193.10 low alerts to further weakness towards a long-term trendline at 192.25 and the 190.00 psych-support. Penetration of this critical point of reference should then find a path towards a weekly trendline near 187.16. Otherwise, a rebound above the 14-day pivot moving average, 197.25 cautions to further corrective trade back towards the 2.000 critical point of reference and last week’s 202.75 high. |  |
As of last Friday New York harbor barges for low sulfur 0.7 fuel oil (LSFO) ended the week below 50.00 for the first time in two months. As a result of this weakness the LSFO/WTI crack moved out for a second straight week, or 1.06 to minus 19.81. Meanwhile gas traders at various citygates in key market areas saw values fall towards the approach of the long holiday weekend. At New York gas plunged to more than a 3.000 per decatherm discount of 0.7% in the Harbor. As a result molecules finished the week at a discount for a twenty-third consecutive time. |  |
According to the Weekly National Agricultural Summary, favorable temperatures and soil moisture levels in the Corn Belt continue to promote strong corn and soybean development. As such, more than 9/10ths of the nation’s corn crop was beyond the dough stage (i.e. near maturation); with 57% of the entire crop rated to be inGood-to-Excellent condition. Farmers are expected to produce 10.98 billion bushels this year. Of that output roughly 20% or 2.2 billion bushels is slated for ethanol distillation. That’s up from 14% of the 2005 crop, and is enough feedstock to produce approximately 5.8 billion gallons of ethanol. However, that productio n is only ableto displace approximately 4.0 billion gallons of gasoline based on comparative thermal values. Thus, despite an expected “bumper” corn crop, that equates to less than | 3/100ths of the 141 billion gallons of gasoline that will be consumed in the United States this year. Even if we dedicated the entire crop to ethanol this year we are still only talking about 5% of our needs. Add these constraints to the ethical debate of diverting corn from the global food supply and it is clear that ethanol or specifically, corn-based ethanol is not the panacea to wean the U.S. consumer off of its dependence on foreign oil. Rather, along with corn-based ethanol it will likely require an arsenal of initiatives -- cellulosic ethanol, biodiesel, fuel cells, hydrogen, conservation, etc - - to lessen our dependence on the whims of the likes of Ahmadinejad and Chavez. |  |
NAT-GAS… Last week spot gas for Oct’06 closed below the 6.000 psych-support for the first time since the third week in January 2005, i.e. 21 months ago. Without the introduction of a tropical threat to the GoM -- and according to Klotzbach/Gray the odds of such an event have lengthened considerably in the last four weeks -- the table then appears set for further weakness as we head towards the heating season. Thus, failure to hold last week’s 5.820 low print should find a path towards the next ratchet of support in between a long-term trend at 5.814 and the year-to-date at 5.534. Penetration here can then target the weekly downside range from 5.429 to 5.185. Alternatively, a rebound above the 6.000 critical point of reference cautions to further corrective trade into last week’s pivot range from 6.046 to 6.385. Bids above here can then target the weekly upside range from 6.362 to 6.696.
CRUDE OIL… Since posting that “Prudhoe Bay Island Reversal” between August 07th/09th, the front of the NYMEX Board has collapsed, closing lower in two out of every three sessions. As a result the Oct’06 contract came into this week down $9.23 per barrel or 12%. Failure this week to hold last week’s 68.65 low print alerts to a potential flush into the next ratchet of support between a weekly trendline at 65.85 and the Ivan mean trend at 62.91. Otherwise, a rebound above last week’s 69.94 pivot area high signals further corrective trade towards the 70.00 critical point of reference and a long-term trendline at 70.49. Bids above here can then target the week upside range between 72.69 and 74.27. | |  | 
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