12-22-2011: January Heating Oil: Undexpected Inventory Declines
The current situation seems to be that inventories are decreasing faster than expected with comparitively mild weather in the Northeast. That seems bullish and added to that is the wild card that Iran might develop a nuclear bomb within the next few months causing the U.S. and Europe to tighten sanctions against buying Iranian oil and driving up prices in the energy complex. But the fact remains that weather is mild, and a temporary blip does not a trend make. Technical indicators suggest that fears of Iran blocking the Straits of Hormuz are unlikely to be realized, at least according to the opinions of the bulk of traders. That would leave temperatures (degree days) the determining factor.
We fed into a neural network to get the following result:
December Palladium:
December Palladium:
Private industry data coming in the day before this writing showed a much larger-than-expected decline in distillate supplies in the preceding week. The latest EIA report showed a decline of 1.0 million barrels, but the private industry data was larger than that. Given comparitiively warm temperatures in the Northeast that have reduced heat-related demand, this shows a chance for a distillate supply surprise. Heating oil prices jumped 4% in the last few days but may require more bullish data to sustain the bounce higher. European debt concerns are considered reduced in the past few days and this provides support for oil product prices. The European Central Bank proposed a long-term refinancing offering (LTRO) which is the main source for optimism. Year-end inventory adjustments provide an added level of volatility to futures price action. Natural gas prices have been trending down which does not support heating oil prices. There has also been an unexpected draw in gasoline supplies as indicated also from private industry data, which could draw off some refinery support for heating oil supplies. Citgo-Venezuela is trying to beef up its image by helping more than 400,000 people in 25 U.S. states, especially American indians, with heating oil needs. Citgo is based in Houston, but is owned as a subsidiary of Petroleos de Venezuela, S.A., the national oil company of Venezuela. Venezuela has been disadvantaging competitors such as Shell Oil with any former interests in Venezuela by nationalizing their assets. Danfoss makes kits to attempt to convert existing oil burner systems to being able to use biofuels. The percentage of biofuels therein is rather low, as varish-like desposits will eventually destroy pumps, preheaters and nozzles. Growing pressures on Iran to stop its nuclear program include sanctions on buying Iran oil from both the U.S. and the European Union could cause a surge in prices that could threaten global economic recovery. The North Korean situation also has bolstered international tensions. Housing starts data in the U.S. helped boost energy prices. Northeastern senators are pushing Congress not to abandon programs for low income heating oil help, especially those from Maine and Vermont. A White House proposed budget would cut assistance by 45%. A current bill funded heating oil programs at $4.7 billion but so far only $1.7 billion has gone out and New England lawmakers want to ensure the rest of the money goes out. Maine and Vermont have a unique and overwhelming dependence upon home heating oil.
370.0I T 12/21
I NYM - Mar-12 Heating Oil #2, 42000 gal, c/g Cm.=0.01 Lim.= 0.9
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350.0I_________________________________________________________________________
IX
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330.0I______________________________________XO_________________________________
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310.0I_OX_______________________________X_XOXO__X_XO__XO_______________________
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290.0I___OX_X___________________________X____OXOXOXOXOXO_______________________
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270.0I_______O__________________________X______________________________________
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250.0I_______O__________________XO____X_X______________________________________
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230.0I_______O__________X_X_XOXOXOX_X_X________________________________________
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210.0I_______OX_XO______XOXO___O_OXOXOX________________________________________
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190.0I_________OXOX___XOXO_____________________________________________________
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170.0I_________OX__OX_X________________________________________________________
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150.0I_________________________________________________________________________
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130.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
11111111111 111 11 11
00000111222112233356780121255678912233345556688901
01222000113020201302211121102321010201310121201112
90029346571836627042072385757031772415129257931401
The above point-and-figure chart is giving a conventional buy signal.
We are headed toward a cyclical high and a seasonal down period.
Our best-performing internal program is "Pattern." It is giving a buy signal.
Results of "Pattern" for Heating Oil (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a buy signal. (Note, disregard the year 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 $6,532. Use of options is advised.
If we discount the blip in 2008, then scale trade sellers are entering the market for the long term 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. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that a downtrend remains intact from the last volatility low point.
Our option trade recommendation is to Sell the Heating Oil March 2.80 Call @ 0.210 or better. (Note: On the bottom table and chart option and futures prices are multiplied by 100.)
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 down. The best time to enter or leave the above spread is when it is at -1.30 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +2.20 or wider buying the far as prices are rising and then selling the near.
Here's an intraday chart for the previous day ( 12/20 ).
Risk Versus Opportunity Report
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HOF2 January Heating Oil
High Price: 3.04
Current Price: 2.91
Low Price: 2.64
Risk: -0.092
Opportunity: -0.190
(O/R) Ratio = 2.077
| Factors | Weighted Points |
|---|---|
| Inter-Market Analysis | + 1 |
| 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 |
| Historic Range | - 1 |
| Commitment of Traders | - 1 |
| Range/Volatility | - 1 |
| Level Table | - 1 |
| Other Factors | - 1 |
| Total | - 2 |
Place 2 January Heating Oil a Sell Watch with stoploss @ +10.48 below the get-in point when the current price is represented as "290.90."_____________________________________________________________________________________________________________________________R.S.
