Phil Flynn: Downgrade Dilemma

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The oil market wanted to believe that the worst was over for the global economy, bouncing back from a 6 month low but a downgrade of Japan means the market will have to struggle to find the lower end of our trading range. As the June contract trades its last, more drama will ensue as the market awaits talks with Iran and their nuclear program and perhaps a Japan downgrade won’t be enough to keep the oil down.

Oh Fitch, talk about the timing of you Japanese downgrade. Oil stated to fall resuming its massive retreat as Fitch lowered sovereign debt rating to A+ with a negative outlook. Oil traders reacted as the dollar rallied and demand expectations again began to fall. It appears that oil may not have found the absolute low of its trading range just yet.

Of course the offset to that will be worries surrounding Iran and the nuclear talks. The market has been hopeful that a conflict can be avoided. This comes after the US Senate keeps the pressure on by voting more sanctions on the sanction overwhelmed regime. Reuters News reported the U.S. Senate unanimously approved on Monday a package of new economic sanctions on Iran's oil sector just days ahead of a meeting in Baghdad between major world powers and Tehran.

The pressure became more apparent when Iran said that they would allow the International Atomic Energy agency to allow weapon inspectors into sites that are suspected to be producing materials needed to make a nuclear weapon. CBS and the AP reported that, “despite some differences, a deal has been reached with Iran that will allow the U.N. nuclear agency to restart a long-stalled probe into suspicions that Tehran has secretly worked on developing nuclear arms, the U.N. nuclear chief said Tuesday.

The news from International Atomic Energy Agency chief Yukiya Amano, who returned from Tehran on Tuesday, comes just a day before Iran and six world powers meet in Baghdad for negotiations and could present a significant turning point in the heated dispute over Iran's nuclear intentions. The six nations hope the talks will result in an agreement by the Islamic Republic to stop enriching uranium to a higher level that could be turned quickly into the fissile core of nuclear arms.”

Yet will oil stay optimistic if Iran at any point tries to limit what the inspectors can do? We have seen this cat and mouse game many times before not only with Iran, but the king of the cat and mouse, the late Saddam Hussein. While oil traders can remain optimistic can Israel?

The Wall Street Journal is asking whether some investors wagering on natural-gas prices are losing their spark. The Journal says that, “natural-gas prices have jumped as much as 44% since sinking to decade lows last month. Much of that rally had been powered by rising demand from utilities, which had taken advantage of the low prices by using more natural gas instead of coal. But the higher prices are making coal competitive once again. Coal prices are down 22% since the start of the year."

The Journal says that utilities are continuously fine-tuning how much coal and natural gas they're burning to generate electricity. In recent months, they've increasingly favored natural gas due to the steep drop in natural gas prices. Utilities keep the breakdown of their fuel use a trade secret. How utilities will respond to higher gas prices has spurred debate among investors. Some analysts and traders say the rally threatens to erode natural gas recent gains in market share as utilities switch back to coal, and that could limit any further price increases. A must read in the Journal Today!

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Warm Weather and Low Natural Gas Prices Dampen Spot Electricity Prices This Winter

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 The combination of one of the warmest winters (November-March) in decades and low spot natural gas prices contributed to low wholesale electric prices at major market locations during the winter of 2011-2012 (see chart below). Warm weather kept electric system load low across the East Coast and helped dampen the need for coal fired generation. Natural gas generation was up significantly to take advantage of low natural gas prices. Reduced nuclear generation due to outages and reduced hydropower generation both served to moderate declining electricity prices in much of the country.

• Spot Prices
• Weather
• Demand
• Coal vs. Natural Gas
• Hydroelectric
• Nuclear

On peak, wholesale electricity prices generally ranged from $20-$50 per megawatt hour last winter, with some exceptions. Electricity prices dropped during the winter, especially starting in January, as spot natural gas prices neared their lowest levels in the past decade.  

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Crude Oil Bulls Start the Week Higher, Bears Still Have the Advantage

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Crude oil closed higher due to short covering on Monday as it consolidated some of this month's decline. The high range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If June extends this month's decline, the 62% retracement level of the 2011-2012 rally crossing at 89.90 is the next downside target. Closes above the 20 day moving average crossing at 98.88 are needed to confirm that a low has been posted. First resistance is the 10 day moving average crossing at 94.53. Second resistance is the 20 day moving average crossing at 98.88. First support is today's low crossing at 90.84. Second support is the 62% retracement level of the 2011-2012 rally crossing at 89.90.

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Natural gas closed lower due to profit taking on Monday as it consolidates some of the rally off April's low. The low range close sets the stage for a steady to lower opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If June extends the rally off last week's low, February's high crossing at 3.040 is the next upside target. Closes below the 20 day moving average crossing at 2.388 would signal that a short term top has been posted. First resistance is last Friday's high crossing at 2.759. Second resistance is February's high crossing at 3.040. First support is the 10 day moving average crossing at 2.535. Second support is the 20 day moving average crossing at 2.388.

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Gold closed slightly lower on Monday but remains above the 10 day moving average crossing at 1579.00. The mid-range close sets the stage for a steady opening on Tuesday. Stochastics and the RSI have turned bullish signaling a low might be in or is near. Closes above the 20 day moving average crossing at 1615.10 are needed to confirm that a short term low has been posted. If June renews the decline off February's high, the 38% retracement level of the 2008-2011 rally crossing at 1487.50 is the next downside target. First resistance is the 20 day moving average crossing at 1615.10. Second resistance is this month's high crossing at 1672.30. First support is last Wednesday's low crossing at 1526.70. Second support is the 38% retracement level of the 2008-2011 rally crossing at 1487.50.

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Saudi Arabia Edges Out Russia as the Biggest Oil Producer

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Saudi Arabia boosted crude production close to a 31 year high in March, overtaking Russia as the world’s largest oil producer for the first time in six years, according to the Joint Organization Data Initiative.

Saudi crude exports rose 3 percent in March, reaching the highest level in five years as Iran cut shipments, according to government statistics posted today on the initiative’s website.

Saudi Arabia, OPEC’s largest producer, increased daily output to 9.923 million barrels in March, up 0.7 percent to the second highest level since at least 1980, according to the initiative. That topped output from Russia, which pumped 9.920 million barrels a day, for the first time since February 2006, according to the data.

The initiative, known as JODI, is supervised by the Riyadh based International Energy Forum and compiles data provided by member governments. The IEF is a group of nations accounting for more than 90 percent of global oil and natural gas supply and demand, established as a forum for producing and consuming countries to discuss energy security.....Read the entire article.

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Where is Gold, Natural Gas and Crude Oil Headed This Week

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Is the gold rally for real or just a short covering bounce? CNBC's Sharon Epperson discusses the Friday's activity in the commodities markets and looks ahead to where crude oil and precious metals are likely headed next week.



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Natural Gas Consumption Reflects Shifting Sectoral Patterns

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U.S. natural gas consumption since 1997 reflects shifting patterns. Total U.S. natural gas consumption rose 7% between 1997 and 2011, but this modest growth masks bigger changes in individual sectors. Electric power is now the largest natural gas consuming sector and it shows perhaps the greatest sensitivity to price changes. The graphics below highlight key factors that influence natural gas consumption.

The electric power sector has the flexibility to shift some amount of baseload power generation, much of which has traditionally been fueled by coal, to underutilized natural gas generators without requiring additional investments in infrastructure.



Natural gas consumption for power generation is expanding. An earlier Today in Energy article noted that consumption of natural gas for electric power (or "power burn") has exceeded natural gas consumption in the industrial sector since early 2009. The power sector added a significant amount of new natural gas fired generating capacity over the last decade, much of which was in the form of efficient combined cycle units.

For many years, while coal fired generation was less expensive, those natural gas fired combined cycle units were used at relatively low rates. Recently, with natural gas prices declining and coal prices rising, dispatching natural gas generators in some parts of the country has become increasingly competitive with running coal generators. Competition between natural gas and coal appeared first in the Southeast, where coal fired power was more expensive due to the cost of transporting coal over long distances.

In the industrial sector, natural gas consumption increased in 2010 and 2011, reversing a trend of declining consumption that lasted from the mid-1990s to 2009. Natural gas is used in the industrial sector and manufacturing subsector for process heating, steam generation, onsite electricity generation, space heating, and petrochemical processing.

The downward trend in natural gas prices has lowered the cost of a key input for some industries. However, the short term flexibility to take immediate advantage of low natural gas prices is limited in this sector, because many manufacturers that relied heavily on natural gas as fuel or feedstock closed down or moved abroad in the late 1990s and early 2000s in the face of rising natural gas prices. For various reasons, some of the remaining firms may switch fuel to natural gas, and others may never switch regardless of fuel costs, leaving a wide range of dependencies on natural gas prices (see Tables 10.15 and 10.21 from EIA's Manufacturing Energy Consumption Survey).

Domestic and global macroeconomic trends affect industrial activity, which is often tracked by industrial indices. However, some U.S. manufacturers (e.g., petrochemicals) that use natural gas derived feedstocks (e.g., ethane) are enjoying a competitive advantage while international competitors consume more expensive, oil derived feedstocks.

Residential and commercial consumption of natural gas is primarily for space heating, water heating, and cooking; the most influential short term factor for these sectors is weather (quantified here as heating degree-days).

The residential and commercial sectors have limited short-term flexibility to take advantage of inexpensive natural gas, as heating systems can be expensive to modify and are replaced infrequently. Over longer timescales, the number of households using natural gas for space heating has increased, for example, in the Northeast, households are switching their heating fuel from heating oil to natural gas. However, the increasing efficiency of home heating systems (lower average gas use per customer) masks some of the effect of the increasing number of natural gas customers, even when normalized for weather.

Seasonal patterns in natural gas consumption appear in all sectors. Colder winter weather means more natural gas consumption for space heating, and warmer summer weather leads to increased consumption in the power sector with increasing demand for air conditioning.

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ONG: Crude Oil Weekly Technical Outlook

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Crude oil dropped further to as low as 90.93 last week and broke mentioned 92.52 support. Initial bias remains on the downside this week and further fall should be seen to 61.8% retracement of 74.95 to 100.55 at 88.55. Strong support is anticipated at this 88.55 fibonacci level to bring rebound. On the upside, above 94.16 minor resistance will turn bias neutral and bring recovery. But upside should be limited by 100.68 support turned resistance and bring another fall.

In the bigger picture, price actions from 114.84 are developing into a three wave consolidation pattern. And, the third leg should have already started at 110.55. Deeper fall should eventually be seen to 74.95 low and possibly below. Though, we'd likely see strong support from 64.23 cluster level, 61.8% retracement of 33.20 to 114.83 at 64.38 and bring another medium term rise. Hence we'll look for reversal signal below 74.95.

In the long term picture, crude oil is in a long term consolidation pattern from 147.27, with first wave completed at 33.2. The corrective structure of the rise from 33.2 indicates that it's second wave of the consolidation pattern. While it could make another high above 114.83, we'd anticipate strong resistance ahead of 147.24 to bring reversal for the third leg of the consolidation pattern.

Nymex Crude Oil Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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It's a Wrap....Energy Futures End The Week Down

Make sure you understand the simple truth about trends.

The energy futures are down once again today and trading right near the lows of the trading week with crude oil down another $1.35 this Friday morning due to more pessimism about the European debt situation causing prices to be down around $5 dollars for the trading week from last Fridays closing price of 96.50 down around 4% for the week while unleaded gasoline for the June contract is higher by 150 points currently trading at 2.90 a gallon in a quiet trade so far in New York.

Heating oil futures are down slightly currently trading at 2.84 a gallon also sliding for the week around 1200 points from last Fridays close of 2.96 a gallon and in our opinion, like we have been stating in previous blogs, if you look back at 2010 when this problem came up for the first time crude oil prices plummeted on that news and then rebounded later in the year so prices are still relatively high if the situation gets worse but only time will tell.

Natural gas futures are sharply higher once again today up another 14 points in the June contract to seven week highs at 2.74 with renewed optimism that demand will come back into this market with the next major level of resistance around 2.90.

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Phil Flynn: Quantitative Conundrum

10,000 Trades have viewed this video this morning.... Here is the simple truth about trends

Gold and silver soars and oil sinks in what can be best described as a quantitative easing conundrum. Many people were confused how gold might rally after briefly dipping in bear market territory after the dollar rallied for a record 14 days. The day after the Fed minutes showed that several Fed Officials would be open to more economic stimulus if the economy turned worse all of a sudden it seemed that indeed thinks look worse.

Against a backdrop of Europe coming apart at the seams somehow contraction in the Philly Fed Manufacturing Index and Leading Economic Indicators that are leading us in the wrong direction the odds of quantitative easing are rising Howard Packowitz at Dow Jones “The Wizard of Fed Fund Future Odds” showed that Fed funds futures traders now believe that the FOMC will wait two years or longer before it begins raising the funds rate.

Packowitz pointed out that trading volume heavier than usual for longer dated contracts as July 2014 fed funds price in a 40% chance for the Fed to boost the rate to 0.5% by then, down from a 44% chance at Wednesday's settlement. November '14 fed funds see 88% chance for a 0.5% rate, down from a 96% chance at Wednesday's settlement.

Yet while those odds rise the dollar rises as it is clear that it won’t just be the US that will have to come to the printing presses. The pressure on governments around the globe are clear in the currency differentials as the British Pound and Euro falls and yen rises. China and other markets may have to stimulate. Gold now is pricing in easing.

The Brent Crude WTI spread came in as Japan announced the restart of some nuke plants and the historic reversal of the Seaway pipeline is ready to begin!

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