Complacency Takes a Hit

  1. Crude prices and open interest rise
  2. Crude prices add more than ten per cent
  3. Crude prices could reach $55
  4. Natural gas stocks still ballooning

 

Al pic 2009_cropped

Sincerely,
Alan Levine Chairman, Powerhouse
 
 
 2015-08-31_18-37-39
 
Table covers crude oil and principal products. Other products, including residual fuel oil and “other oils” are not shown, and changes in the stocks of these products are reflected in “Total Petroleum Products.” Statistics Source: Energy Information Administration “Weekly Petroleum Status Report” available at www.eia.doe.gov
 

The Matrix

Prices for oil appear to be seeking a bottom as August draws to a close. And market action has been so typical for energy futures.

WTI September futures topped at $49.36 on July 30 and moved down through August with nothing that looked like an attempt to rally. Prices fell to $37.75 by Monday, August 24, a decline of $11.61. Crude oil lost nearly a quarter of its value in one month.

Volume and Open Interest fell. The pace of the market slowed dramatically. On Tuesday, August 25, Powerhouse released a note to clients in which we sensed a change in the situation. We wrote,
The biggest fear we have is complacency. Everything looks weak just now but that could turn on a dime. If, for example, the Iranian deal falls apart, prices could rally on the belief that less crude oil than expected would be coming on the market. Or, the Saudis might decide to change their policy and cut production as they used to.

This is why I’d like to see buyers establish at least small positions to make sure they don’t miss the move. Waiting for the bottom and missing it is one of the most common experiences we have in the futures market.

Our observation was not simply a matter of sensing the market action – although that shouldn’t be minimized. There was other evidence as well. Open interest, the number of future contracts in existence, started to rise and WTI prices made higher lows. Together these factors point to a rally. Moreover, technical chart analysis started to turn bullish as well.

Elliott Wave counted a completed three wave, opening the way to a fourth wave rally correction. One Elliott Wave analyst noted that such a correction “won’t be the final bottom [remember, a fourth wave rally leads ultimately to a final fifth wave down] but it should lead to the biggest rally since 2011-2013.” The 2011-2013 rally lifted prices 45.5 per cent. If $37.75 is truly a third wave bottom, a rally to nearly $55 could be on tap.

When other financial markets started to respond bullishly after a punishing sell-off in equity markets, WTI could only join the uptrend. WTI added 13.5 per cent to value in only three trading sessions, a typical reaction in the oil futures.

Supply/Demand Balances

Supply/demand data in the United States for the week ending August 21, 2015 were released by the Energy Information Administration.

Total commercial stocks of petroleum increased 2.9 million net barrels during the week ending August 21, 2015.

Builds were reported in stocks of RBOB, distillates, propane, other oils, fuel ethanol, and residual fuel oil. A draw was reported in stocks of K-jet fuel.

Crude oil supplies in the United States decreased to 450.8 million barrels, a draw of 5.5 million barrels.

Crude oil supplies decreased in four of the five PAD Districts. PADD 2 (Midwest) stocks decreased 0.3 million barrels, PADD 3 (Gulf Coast) stocks declined 1.7 million barrels, PADD 4 (Rockies) fell 1.4 million barrels, and PADD 5 (West Coast) stocks decreased 2.3 million barrels PAD Districts. PADD 1 (East Cost) crude oil stocks experienced a build of 0.3 million barrels.

Cushing, Oklahoma inventories increased to 57.7 million barrels, a build of 0.3 million barrels.

Domestic crude oil production decreased 11,000 barrels daily to 9.337 million barrels per day.

Crude oil imports averaged 7.199 million barrels per day, a daily decrease of 0.839 million barrels.

Refineries used 94.5 per cent of capacity, a decrease of 0.6 million barrels from the previous week.

Crude oil inputs to refineries decreased 117,000 barrels daily; there were 16.658 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 103,000 barrels to 16.980 million barrels daily.

Total petroleum product inventories saw an increase of 8.4 million barrels. Gasoline stocks grew 1.7 million barrels; total stocks are 214.4 million barrels.

Total product demand fell 1.974 million barrels daily to 19.423 million barrels per day.

Demand for gasoline decreased 516,000 barrels per day to 9.189 million barrels daily.

Distillate fuel oil supply gained 1.4 million barrels. Government data show this is the fourteenth consecutive weekly build in distillate inventories. Stocks are 149.8 million barrels. National demand was reported at 3.601 million barrels per day during the report week. This was a weekly decrease of 0.294 million barrels daily.

Propane added 1.9 million barrels to supply. There are 95.7 million barrels in storage. Current demand is estimated at 0.923 million barrels per day, a decrease of 87,000 barrels daily from the previous report week.

Natural Gas

According to the EIA:

Net storage injection is higher than the five-year average, but lower than last year’s build. The net injection reported for the week ending August 21 was 69 Bcf, up from 53 Bcf the previous week. This compares with the five-year average increase of 61 Bcf for the week and last year’s increase of 77 Bcf. Working gas inventories for the storage week totaled 3,099 Bcf, 480 Bcf (18%) higher than last year at this time and 88 Bcf (3%) higher than the five-year (2010-14) average.

Production in the Northeast reached a record high of 20.4 billion cubic feet (Bcf) on Monday, August 24, according to Bentek Energy data. In the last several years, growth in total U.S. natural gas production has been driven largely by production gains in the Marcellus and Utica shale plays. Marcellus, which spans Ohio, Pennsylvania, and West Virginia, is the most productive U.S. shale play, and alone accounted for 21% of total U.S. dry natural gas production in the first five months of 2015. During that period, total U.S. dry gas production grew 8% over 2014 levels for the same period, with increases in Marcellus production contributing more than half of that growth. The record high Northeast production on Monday may be attributed to the completion of maintenance in the area.

Natural gas prices appear to have declared for the downside. Prices tested support at $2.624 following release of the injection numbers. A break of support is consistent with an Elliott Wave count that reaches around $2.39.

 

 

Futures trading involves significant risk and is not suitable for everyone. Transactions in securities futures, commodity and index futures and options on future markets carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged”. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit. Past performance may not be indicative of future results. This is not an offer to invest in any investment program.Vol. PH 04 NO. 34

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