The problem with heating oil is oversupply. In anticipation of last year's conditions, a large national 47-day supply was built up in inventory. This is not working off easily and container ships are being used for storage. Even colder weather and improved economic conditions are going to be trumped by the supply situation for the foreseeable future. The main support for heating oil prices comes from the futures market itself, as investors jump at every little seasonal hint of a cold snap.
January Heating Oil:
12-17-2009: January Heating Oil: Huge Oversupply Trumps Colder Weather
Introduction
Parabolic Chart
January Heating Oil:
Latest American Petroleum Institute (API) readings for distillate stocks are bullish. Cold months are forecast ahead and stocks have declined 2.6 million barrels in the latest weekly report. Traders expect to see a 500,000 barrel decline in the next Energy Information Agency (EIA) report. But instead what they got was a 2.9 million barrel decline. Industrial production is up suggesting more industrial demand. Yet with all this, overall fundamentals are considered still bearish. Recent strength may be a reaction to oversold conditions. A strengthening U.S. Dollar could push crude oil prices lower and heating oil prices along with them. Some had expected energy prices to increase when the Federal Reserve pushed up interest rates after a producer price index increase of 2.4% in November. But the Fed said it would leave interest rates near zero for an "extended time." In contrast, the API report showed a 900,000 barrel build in crude oil. The EIA report showed a corresponding decline by 3.7 million barrels, adding question to the validity of either report. An existing huge winter heating oil supply in the Northeast doesn't necessarily guarantee lower prices, despie the fact it is near record levels. AT least 11 million barrels are stored in New England alone, while nationally stockpiles reached a 26-year high of 167.3 million barrels, which is a 47-day supply, up from a 33-day supply this time last year. A glut of supertankers, multi-hundred thousand ton ships are being used simply to store heating oil. Global recession is blamed and still with us. November was warm in the Northeast giving a weak start to the heating oil season. December is off to a cold start however, and cold is expected to grow. The enormous inventory is why prices haven't increased due to the cold forecast. January heating oil is around $1.92 per gallon, less than half of last year's peak of $4.00. What strength there is in heating oil prices comes from the "paper market" for heating oil futures. Even a brief cold snap can be traumatic enough to cause investors to anticipate a spike in demand. The supply side mitigates against any strong price increases for the foreseeable future.
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I NYM - Jan-10 Heating Oil #2, 42000 gal, c/g Cm.=0.01 Lim.= 0.3
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The above point-and-figure chart is giving a conventional sell signal.
We are headed toward a cyclical high and are in a seasonal down period.
Our best-performing internal program is "Stochast." It is giving a sell signal.
Results of "Stochast" for Heating Oil (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system is woking on a long-term buy signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $420. Initial margin on a single contract is $10,969. Use of options is advised.
Scale traders are not a factor in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that a major direction is down from the last volatility low point.
Our option trade recommendation is to Sell the Heating Oil March 188 Call @ 17.92 or better.
What the Jan. - Mar. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go lower. The best time to enter or leave the above spread is when it is at -3.00 or narrower selling the near as prices are falling and then buying the far, and exiting or entering when it is at -6.00 or wider buying the near as prices are rising and then sellling the far.
Here's an intraday chart for the previous day ( 12/16 ).
Risk Versus Opportunity Report
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HOF0 January Heating Oil
High Price: 199.4
Current Price: 190.3
Low Price: 171.6
Risk: -0.098
Opportunity: -0.202
(O/R) Ratio = 2.055
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | - 1 |
| Nirvana Chart | + 1 |
| News | - 1 |
| Point & Figure | - 1 |
| Cyclicals | + 1 |
| Seasonals | - 1 |
| Internal System 1 | - 1 |
| Internal System 2 | 0 |
| Third System | + 1 |
| Commitment of Traders | - 1 |
| Historic Range | 0 |
| Range/Volatility | - 1 |
| Level Table | + 1 |
| Other Factors | - 1 |
| Total | - 4 |
Place 2 January Heating Oil Sell Watch with stoploss @ +7.00 above the get-in point.________________________________________________________________________________________________________R.S.
