Crude Oil, Natural Gas and U.S Dollar Commentary For Wednesday Evening

Crude oil [May contract] closed up $1.59 a barrel at $102.63 today. Prices closed nearer the session high today and saw short covering after prices Tuesday hit a seven week low. A weaker U.S. dollar index supported crude today. A five week old downtrend line is still in place on the daily bar chart. Bulls and bears are on a level near term technical playing field.

Gold futures [June contract]closed down $1.70 an ounce at $1,659.00 today. Prices closed near mid range in quieter, consolidative trading. The key outside markets were in a bullish posture today, as the U.S. dollar index was weaker and crude oil prices were higher. That did limit the downside in gold today. The bears still have the slight near term technical advantage in gold. A five week old downtrend is in place on the daily bar chart.

Natural gas [May contract] closed down 4.4 cents at $1.987 today. Prices closed near the session low again today and hit another fresh contract and 10 year low today. The bears have the solid overall near term technical advantage. There are no early clues to suggest a market low is close at hand.

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Crude Oil Falls on a Decline in China's Fuel Imports and Speculation on U.S. crude Stockpiles

Crude oil [May contract] closed lower for the second day in a row on Tuesday due to a decline in China's fuel imports and speculation that U.S. crude stockpiles rose to the highest in 22 years raised concern of slowing global demand.

The low range close sets the stage for a steady to lower opening on Wednesday. Stochastics and the RSI are neutral to bearish signaling that sideways to lower prices are possible near term.

If May extends the decline off March's high, the 38% retracement level of the October-March rally crossing at 97.84 is the next downside target. Closes above the 20 day moving average crossing at 105.18 are needed to confirm that a short term low has been posted.

First resistance is the 10 day moving average crossing near 103.62. Second resistance is the 20 day moving average crossing at 105.18. First support is today's low crossing at 100.68. Second support is the 38% retracement level of the October-March rally crossing at 97.84.

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Chesapeake Energy, one Natural Gas Producer That's Taking the Road Less Traveled

Chesapeake Energy [CHK] is one natural gas producer taken the road less traveled by entering 2012 "naked" with none of its gas volumes hedged, betting that gas prices would rise.  Exiting the positions was profitable, but could prove to be short sighted and misguided by over confidence as it essentially left the company fully exposed to the languishing commodity price, while aggravating its already tight liquidity ratios (both current and quick ratios stood at 0.4x as of Dec. 31, 2011).  In contrast, other natural gas companies, like Encana, Linn Energy, Venoco and Range Resources  have hedged at least 75% of their 2012 production.

Henry Hub natural gas price has tanked 48% to a 10 year low in the past twelve months closing at $2.11 per mcf as of Monday, April 9.  Record production from new shale plays aided by new technology such as horizontal drilling and hydraulic fracturing ("fracking"), a sluggish U.S. economy, and a much warmer than normal winter have all conspired to depress the the price the natural gas since 2009.

Chart Source: FT.com, April 9. 2012

The situation could get even worse this year. 

The latest data from EIA showed that working gas in storage rose by 42 billion cubic feet (Bcf) to 2,479 Bcf as of Friday, March 30, 2012 hitting an all time high for March month for the week ended March 30, 2012.  This is 56% higher than last year at this time, and 60% or 934 Bcf above the 5 year average of 1,545 Bcf (see chart below).

NOAA announced that March 2012 is already the warmest March on record for the contiguous United States, a record that dates back to 1895 (See Map Below).  A warm winter does not necessarily guarantee a very hot summer, which is one way to burn off some of the gas inventory glut.

Analysts at Barclays estimate the average cost of drilling for domestic natural gas is roughly $4, but may be as low as $2.50 or so in easier to drill plays like the Marcellus Shale in the Appalachian region.  That suggests  almost all the new drilling of unconventional plays are under water at the current Henry Hub price level.

Producers are feeling the pain.  Companies including ConocoPhillips, Chesapeake Energy, Encana, Ultra Petroleum, Talisman Energy have shut in production and/or cut their 2012 capital budget.  However, these planned curtailments most likely will not be enough to balance out the massively over supplied market.

In its March 2012 Short term Energy Outlook, EIA now expects inventory levels at the end of October in both 2012 and 2013 will set new record highs as well.  At this rate, some analysts are projecting storage capacity could be close to max out by October of this year.  In an extreme case, with no storage space available, some produced natural gas may get dumped on the spot market, and we could see natural gas breaking below the $2 mark this year. 

Chart Source: Yahoo Finance, April 9, 2012

In this challenging commodity price environment, producers with the better risk and portfolio management skill would likely weather the storm better than peers, while companies like Chesapeake Energy may have to bite its time as well as bullet.  Chesapeake Energy stocks have dropped about 37% in the past 12 months vs. +4.07% of S&P 500 in the same period (see chart above). 


Posted courtesy of Econmatters


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Gold Prices Are Set for Further Decline

In the not so distant past arguing that precious metals prices were setup to fall generally elicited a response which was not real pleasant. In fact, during gold’s infamous bull market rally on several occasions I called for pullbacks which regardless of the accuracy of my call generated hate mail that seemingly never ended.

Fast forward to the present and hardcore gold bugs remain transfixed on the idea that precious metals must rise. The gold bull market has ended, at least for now and those still holding the bag are looking at large losses from the all time highs set back in 2011.

These same gold bugs will cite a litany of reasons why gold should be moving higher from the unprecedented printing of money by global central banks to the deficit spending and eventual fiscal day of reckoning facing most Western nations. I do not disagree with the gold bugs that in the long run gold prices will rally above the all time highs, but in the short to intermediate term there are several forces which have the potential to drive gold prices lower.

Gold prices cannot rise continually,regardless of the macro-economic backdrop. Nothing, not even Apple Computer (AAPL) or Priceline.com (PCLN) will rise forever. Eventually prices will come back down to earth and revert to the long term mean. It has happened in gold and it will happen to Apple Computer and Priceline.com at some point in the future, it is simply a matter of time.

Before I discuss my reasoning as to why gold and silver are likely to pullback in the intermediate term, I need to remind readers that I remain long term bullish of precious metals. While the long term remains bright, the short term is especially murky and dark.

The first primary concern for gold bugs should be the price behavior of the U.S. Dollar Index recently. The Dollar has rallied sharply higher after carving out a higher low on the daily chart (bullish). The Dollar is on the verge of breaking out above a major descending trendline on the daily chart. Once that breakout to the upside has occurred it will become likely that the recent highs will be tested and possibly taken out. The daily chart of the Dollar Index is shown below.

Dollar Index Daily Chart

The U.S. Dollar’s price action shown above is not indicative of bearish expectations. In fact, I would argue that the Dollar is, and likely will remain in a bull market in the short and intermediate time frames. However, it is important to recognize that strong periods of volatility will persist as Ben Bernanke and the Federal Reserve will continue to try to break the Dollar’s rally as it tries to grind higher.

The Federal Reserve hates deflation, and a stronger Dollar will push risk assets like equities lower and right now that is not part of the Federal Reserve’s election playbook. QE III will likely be announced at some point in the future as an attempt to break the Dollar’s rally and to put a floor underneath stock prices.

The Federal Reserve has used QE I and QE II to help prevent economic disaster. Recently “Operation Twist” has also been used to increase liquidity while keeping the bullish game going. Low interest rates and additional easing adjustments have staved off disaster before and they will likely be utilized again by the Federal Reserve.

Ultimately the free market and cycles will exert their will and the Federal Reserve will be left helpless. The day where monetary easing has no major impact is coming, but we are not quite there just yet.

In addition to the strength in the Dollar Index, the gold miners have been under major selling pressure. In fact, the gold miners have recently broken down out of a major consolidation zone that will likely lead to lower prices in the near term.

Unless gold miners can regain the breakdown level on a major reversal this coming week, the most we can hope for is a backtest of the support trendline sometime in the near future once the miner’s become significantly oversold. The weakness in the miners is just another example as to why lower prices for gold appear to be likely in the short to intermediate time frames. The weekly chart of the gold miners ETF is shown below.

Gold Miner’s (GDX) Weekly Chart

The gold miners are likely to lead equity markets lower in the near term, but lower prices for gold miners is certainly not positive for gold either. Obviously there are several economic factors which could still see gold prices working higher such as a collapse of the Eurozone, however at this moment the likelihood of that outcome in the short to intermediate term is not likely.

The European Central Bank and the Federal Reserve are not going to give up that easily. The process of admitting defeat will take time and global central banks will print money until they feel they have papered over the issue. It is the culmination of either QE III or other monetary easing around the world that will eventually move gold back above the all time highs. Unfortunately the short term price action of gold will most certainly remain under selling pressure barring any major unexpected announcements. The daily chart of gold futures is shown below.

Gold Futures Daily Chart

As shown above, I believe that short term targets to the downside are likely somewhere in the 1,475 – 1,525 price range. I think gold will find a major bottom near these levels and a strong bounce will play out. For long term buyers, I would take advantage of the forthcoming pullback. However, I would be mindful that further selling is quite possible before gold finds a major bottom.

As I said before, the longer term is bright for gold. However, the short to intermediate term will likely see more selling pressure. Until either the Dollar tops or some form of major quantitative easing is announced, I would anticipate lower prices in the yellow metal.

In the near term gold does not look attractive, but the longer term the catalysts for a major move above recent highs are present. The real question has become when and where will the Dollar top? When the Dollar tops and gold finds a major bottom, the potential for a monster move higher will become likely.

Until then, risk remains high.

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Can Crude Oil Bulls Rebound off of Mondays High Range Close

Crude oil [May contract] closed lower on Monday however the high range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are neutral to bearish signaling that sideways to lower prices are possible near term.

If May extends the decline off March's high, the 38% retracement level of the October-March rally crossing at 97.84 is the next downside target. Closes above the 20 day moving average crossing at 105.47 are needed to confirm that a short term low has been posted.

First resistance is the 10 day moving average crossing near 104.20. Second resistance is the 20 day moving average crossing at 105.47. First support is today's low crossing at 100.81. Second support is the 38% retracement level of the October-March rally crossing at 97.84.


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A Big Mea Culpa About Seadrill's [SDRL] Dividend

From guest blogger Kevin McElroy........

On March 22, 2012 I wrote an article about what I perceive to be a potential danger to investors: a dividend trap. The premise of the article is simple: investors are starved of yield - by design of the Treasury and the Federal Reserve - and Wall Street knows it. So Wall Street will likely conspire to inflate yields to draw investors into stocks.

I pointed out that famed market guru Bruce Krasting noted a tendency of companies to pay dividends from debt. He wrote: "These are referred to as Dividend Deals. The borrower takes on new debt in order to pay a stock dividend to common shareholders. (I prefer to see dividends paid from cash flow from operations, not new debt.)"

I then made a big and frankly pretty stupid mistake with reference to an example of such a company. I talked about Seadrill (NYSE: SDRL), a deep sea driller that pays a substantial dividend with a high level of debt. But I then incorrectly pointed out that Seadrill pays out MORE in dividends than it makes in earnings. I made a mistake of not really digging through the relevant SEC reports to double check my premise.

In hindsight using SDRL as an example of a debt funded dividend payer wasn't the right choice. The metric I was looking at was the company's dividend payout ratio, which based on EPS looks tenuous at best. But as some readers have suggested, a look at cash flow suggests the dividend is more reliable.

One of the keys to Seadrill's dividend success in the future is that the debt to fund expansion of new rigs appears to promise continued growth and sustainable cash flows. This debt vs. growth conversation gets into a broader discussion than I had intended with the article so I won't get into the details.

But I do stand by my point that investors need to be wary about chasing yield and do their homework to understand where those dividends are coming from - my Seadrill faux-pas being just the latest relevant (and professionally embarrassing) example of how easy it is to make foolhardy assumptions about the relevant details.

So let my mistake serve as a lesson to really make sure a company can afford to sustain its dividend.

For a final warning of how dangerous it can be to chase yield, take a look at this chart plotting dividend cutters against other classifications of dividend companies:

(click to enlarge)

Being the owner of a dividend cutter essentially means losing money over the long term. So you should avoid companies that have any potential whatsoever of cutting their dividend.

Be careful out there. It's easy to make mistakes. And they're usually expensive.

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Don’t Count Your Easter Eggs Before They Hatch and do not Count......

From guest blogger Phil Flynn......

Don’t count your Easter eggs before they are hatched and do not count your barrels of oil until they come into port. A supply side surge in oil and a seemingly faltering Eurozone sent oil prices crashing back down to earth. The Energy Information Administration sent oil on a big ride by reporting that U.S. commercial crude oil inventories increased by 9.0 million barrels from the previous week. At 362.4 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year.

The build came after a surge of delayed imports. The EIA reported that U.S. crude oil imports averaged nearly 9.8 million barrels per day last week, up by 505 thousand barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged about 9.0 million barrels per day, 59 thousand barrels per day above the same four week period last year. We saw a supply surge into the Gulf Coast as all of the crude that was lost in the fog showed up all at once. We also saw supply increase into Cushing, Oklahoma.

In an excellent article the EIA says that, “Crude oil inventories at the Cushing, Oklahoma storage hub, the delivery point for the NYMEX light sweet crude oil futures contract, have risen by 12.0 million barrels (43%) between January 13, 2012 and March 30, 2012. This was the largest increase in inventories over an 11 week period since 2009. The inventory builds can be partly attributed to the emptying of the Seaway Pipeline, which ran from the Houston area to Cushing, in advance of its reversal. While Cushing inventories are now approaching the record levels of 2011, the amount of available storage capacity at Cushing is much greater now than it was a year ago, relieving some of the pressure on demand for incremental storage capacity.

Historically, the Seaway Pipeline delivered crude oil from the U.S. Gulf Coast to Cushing, where it then moved to the refineries connected by pipeline to the storage hub. In November 2011, Enbridge Inc. acquired a 50% share in the pipeline from ConocoPhillips; at this time, Enbridge and joint owner Enterprise Product Partners announced they would reverse the direction of the pipeline to flow from Cushing to the Gulf Coast. Currently, the pipeline is expected to deliver 150,000 barrels per day (bbl/d) from Cushing to the Gulf Coast beginning in June 2012. The companies plan to expand Seaway's capacity to 400,000 bbl/d in 2013 and to 850,000 bbl/d in 2014."

"In early March, approximately 2.2 million barrels from the Seaway pipeline was emptied into Cushing storage in order to prepare for the pipeline's reversal. This accounts for about 20% of the build in inventories during this period. However, even without the emptying of Seaway, inventory builds over the past months have been particularly steep compared to the five year average. As of January 13, Cushing inventories stood at 28.3 million barrels, slightly below their seasonal five year average. After the 12.0 million barrel increase, inventories were almost 11 million barrels above their average level, the largest such variation to average since June 2011. This is largely due to flows into Cushing as a result of increasing production in the mid-continent region."

If you thought the euro crisis was solved with the Greek bailout then you were counting your Easter Eggs before they were hatched. Of course oil will focus on demand and the fear it may slow. The euro zone looks like it is headed back into a crisis. Weaker than expected data and concerns about Spain. A weak Spanish bond auction is raising fears that Spain is on a path to economic crisis bringing the EU and the world down with it. Here we go again.


Phil can be reached at 800-935-6487 or email him at pflynn@pfgbest.com

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EIA: Spot Crude Prices Near 12 Month High, Natural Gas and Power Prices Near 12 Month Low

Key wholesale energy price benchmarks for crude oil, natural gas, and electric power reflect contrasting trends over the past year. International events have contributed to higher wholesale crude oil prices, whereas high levels of domestic natural gas production coupled with mild weather and record storage inventories have lowered wholesale natural gas prices. Because natural gas remains the marginal fuel in most electric power markets and because low heating and cooling demand in recent weeks have reduced electricity demand, electric power prices remain low as well. The figures above compare recent weekly price ranges (for March 29, 2012 - April 4, 2012) to the range of wholesale prices during the past year.

Crude Oil Gets a Lift From Job Report

Crude oil [May contract] closed higher due to short covering on Thursday as it consolidates some of Wednesday's decline. The high range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning neutral hinting that a low might be in or is near.

Closes above the 20 day moving average crossing at 105.73 are needed to confirm that a short term low has been posted. If May extends the decline off March's high, the 38% retracement level of the October-March rally crossing at 97.84 is the next downside target.

First resistance is the 10 day moving average crossing near 104.63. Second resistance is the 20 day moving average crossing at 105.73. First support is Wednesday's low crossing at 101.88. Second support is the 38% retracement level of the October-March rally crossing at 97.84.

We are looking at a possible positive divergence for crude oil using the Williams% R indicator. Yesterday’s move in the May crude oil gave us a perfect 61.8% Fibonacci retracement for this contract. We expect this market to regroup and consolidate around current levels. Longer term we remain positive given the fact that our monthly Trade Triangle is in a green positive mode.

We are looking for crude oil to make its highs probably somewhere in the April/May period. With a trading score of -60 this commodity is currently in trading range. Long term traders should remain long this market with appropriate money management stops.

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Has Gold Embraced it’s Fibonacci Number and Began to Base Out?

Is it safe to start buying Gold Stocks yet?

Yesterday the gold market pulled back into a perfect 61.8% Fibonacci retracement. We expect this market to begin to regroup around current levels between $1600 and $1620. With a trading score of -90 the gold market is in a strong downward trend. Look for resistance to come in between $1680 and the $1700 level. With all three of our Trade Triangles negative for gold we expect this market to remain on the defensive. Long term and intermediate term traders should be in short positions in gold with appropriate money management

But despite that gold [April contract] posted an inside day with a higher close on Thursday as it consolidated some of the decline off February's high. The high range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning bearish signaling that sideways to lower prices are possible near term.

If April extends the decline off February's high, the 75% retracement level of the December-February rally crossing at 1592.70 is the next downside target. Closes above Monday's high crossing at 1682.80 would confirm that a short term low has been posted.

First resistance is Monday's high crossing at 1682.80. Second resistance is the reaction high crossing at 1696.90. First support is Wednesday's low crossing at 1612.30. Second support is the 75% retracement level of the December-February rally crossing at 1592.70.

We show you where we think this precious metal is headed in today’s video.