Dennis Mangan, Logi Energy, November 2:
This week we finally saw weakness return and closed down $3.50 at $77.00. We had a BUY SIGNAL and we have put on partial hedges at around the 25% level. Considering the current Crack Spreads, the Crude Oil is where we want to hedge. The Indicators changed direction and triggered a Buy Signal, but this week we will not hedge more as they have went to neutral. Fundamentally, I am negative on the market, but I never let my bias about market fundamentals stop me from following the mathematics of the market. Too many times, I have seen the Indicators end up being right. Thus, to ignore them over fundamental facts is not wise. The market has changed to a bullish scenario. The main, and the only reason I can see, is the continued weakness in the US $. This week we saw the $ stabilize a bit, but we will see how long that lasts. One week does not make a trend. When the US $ strengthens the market should head lower. Then a break to the $67.50-$72.50 level is probable. If dollar weakness reasserts itself, we will see higher prices until the weakness reverses. This week HO prices rose and the HO Crack rallied a bit. The 3:2:1 Crack Spread is holding above the breakeven price for refineries. This will lend support to Crude Oil as long as we hold at this level or higher. Crude Oil is susceptible to price weakness if the Crack Spreads again begin to fail. The Heat Crack Spread lost 9.82 cpg or 38%, as the Gas Crack dropped 27.02 cpg or 68% and the 3:2:1 Crack dropped 60% of its value during that break. Thus, we may be low enough for now on the Crack Spreads. That though can change in a hurry if inventory and demand do not act better going forward. The refiners are a little better than breakeven as of now and that must remain stable. We have had a number of Refiners shut down operations and if the spreads do not stay at these levels or higher more will also shut down. If we see weakness in the Crack Spreads, that should signal weakness to come in the Crude Oil. If the 3:2:1 Crack Spread weakens Crude Oil could have a severe break. Distillate Inventory is huge and we still have very small amounts of demand. A mild winter could easily trigger the Crack Spreads to go into a collapse. Crude Oil prices can go back down to $34 if demand falls apart. With a colder than normal winter, and with increasing demand, the higher margins should stop that scenario from playing out. The Vol Price Indicator is at the top of its range for the 8th week in a row, this is bullish. The % Total Count is 79%, falling and this is bearish. The other two Indicators are at 77% and 76%, both rising and this is bullish.
We fell back this week losing 7.04 cpg to close at 200.52 cpg. Last week we generated a BUY SIGNAL but because of the HO Crack spread, we are using Crude Oil for the hedge. This week the weakness turned us to a neutral signal. I expect to see weakness return to this market. The huge inventory and low demand are simply the facts. Production remains high relative to the demand, which is worse than poor considering the time of year. Inventory is 41 million barrels above a year ago, with the demand still in the lower 20% of the 10-year range. This has been going on for the last 28 weeks in a row. Production finally fell back below the 50th Percentile, which is good but it must continue. The facts, and the price action, have not been agreeing lately. As always, there is no reason to try to argue with the price action. The fundamental facts appear, and are, very negative. That said the price still has been going up. The Crack Spread must hold these levels or we will eventually see price problems. We have too much inventory. We have too much production. We have too little demand for product. Yet, as of now, the market does not care. When it does is anyone’s guess, but it more than likely will at some point down the road. If the US $ begins to recover then we will see weakness. I cannot see how weakness will not return in the weeks ahead. Over the last 63 weeks, we have seen only 4 weeks of increases on a year over year basis in usage. It would appear that the only way to decrease the inventory is by a cut in production cut. If the demand cannot increase, along with production decreasing, we cannot clear the huge inventory as we go through the winter. Then we go into the March timeframe with very high or record inventory and then we have storage problems and that spells price declines. If, that is what eventually happens, I expect to see a price collapse in both Heating Oil and the HO Crack Spread. I would a drop of 50-75 cpg in Heating Oil, and 15-20 cpg in the Crack Spread. This market has run up to 210 cpg from 115 cpg while the inventory increased from 145 mm barrels to 171 mm barrels. Thus, we can fall right back to where it began once the market turns over. If demand stays depressed, price will have a hard time maintaining these levels, and the price break could be quick and large. The Vol Price Indicator is at the top of its range for the 7th week in a row, this is bullish. The % Total Count is 75%, stable and this is bearish. The other two Indicators are at 74% and 73%, one rising and one falling and this is bearish.
Heating Oil Crack Spread:
We closed up this week gaining 1.29 cpg and closing at 17.19 cpg. The market rally appeared to have stalled last but this week regained its footing. We will now see if we can rise to, and above, the 17.50 cpg level. The huge inventory build caused the price break. That with the worst product demand in 10 years triggered the downside action. Thus, inventory building, with a demand collapse, drove us to record supply levels. The lack of product demand might allow us to maintain close to record levels of inventory for an extended period. How will we ultimately work this inventory down is the key question. Will we get into a literal storage problem if we cannot? The inventory and the demand should limit a huge price advance. The low is 5.10 cpg made the week of 5/29. The two major lows were the week of 5/29 and the week of 9/11 at 8.10 cpg. I think that these lows are going to be tested. If we take out the low of 5.10 cpg, expect the break to carry us down to the -2.00 to 2.00 cpg level. If we exceed the 17.50 cpg level, expect the run to carry us up to the 22.50-25.00 cpg level. Considering inventory and demand, the logical conclusion appears to be price weakness. Considering the market action of the last few weeks that would have been wrong. I think we have had a rally that was caused by the market being oversold, not a shift in the underlying facts. Distillate Inventory is at 99th Percentile. Production is at the 39th Percentile, Imports at the 20th Percentile and Product supplied is at the 17th Percentile. These facts are simply terrible. Especially the Products supplied number. If the refiners do not scale back operations, and inventory builds going into the winter, the Crack Spreads will collapse. If we do not see demand increase, with a drop in production, inventory will not drop to a lower level. If that is what happens over the next 5 months we have a huge price problem. Refining run rates need to go down to the 75% level. For now, I think inventory, production and demand levels put a cap on a large sustained price move up. The Vol Price Indicator is at the bottom of its range for the 3rd week in a row, this is bearish. The % Total Count is 49%, falling and this is bearish. The other two Indicators are 55% and 57%, one falling and one stable and this is neutral to bearish.