CRUDE OIL MARKET FUNDAMENTALS: Crude oil fell sharply overnight as there seem to be a number of factors weighing on prices that could eventually pressure the market below the December lows. Bearish outside market action with the Dollar posting strong gains and equity markets sagging is lowering the appeal of physical commodities as an inflation hedge and adding to the selling incentive in crude oil. Geopolitical factors are no longer providing support since the Russian/Ukraine gas dispute has been resolved and Israel/Hamas has apparently agreed to a Gaza ceasefire. But we suspect oil demand destruction fears amid signs of a deepening global economic recession continues to be the main issue driving oil prices lower. Problems in the UK banking sector and weaker than expected economic news from China may have the market thinking that last week’s lower oil demand predictions for this year by the EIA, IEA and OPEC are understated. In fact, market sentiment overnight has been undermined by a major investment bank predicting global oil demand to drop by at least 1.6 million barrels a day this year. It also appears that OPEC hasn’t cut enough to mop up excess world supplies considering the high level of US and OECD oil stocks and rising supplies of oil being stored offshore on supertankers. With oil supplies at the Cushing, OK delivery point at a record level, the expiration of the Feb crude oil contract today is likely adding to market volatility and could exacerbate the selling activity in today’s session. While the fundamental setup clearly favors the bear camp, the technical setup also leaves the market with ample selling capacity. The January 13th Commitment of Traders report with Options for Crude Oil showed the “combined” spec and fund net long position at 115,919 contracts as of early last week. Therefore, if economic conditions continue to worsen and the Dec low fails to hold, an eventual test of the $30 per barrel price level looks possible for March crude oil.
HEATING OIL: March heating oil has fallen off sharply in the overnight trade. The market is being undermined by the global demand outlook turning increasingly bearish now that the Russian gas dispute has been resolved and since China’s economy is showing further signs of weakening. A jump in China’s urban unemployment rate and fears that slower growth will result in greater diesel exports is certainly a concern weighing on heating oil prices.When you combine weakening global demand with US distillate demand sinking to a 5 year low amid a sharp contraction in the shipping and trucking industries, the situation could push March heating oil back to test the December lows. Temperatures in the US heating region are expected to moderate this week from last week’s frigid conditions and that takes away another recent supportive factor from the market. The January 13th Commitment of Traders report with Options for Heating Oil showed the “combined” spec and fund net long position at 21,711 contracts as of early last week. But we don’t think this market will become sufficiently oversold until the combined COT shifts to a net short position.
GASOLINE: With economic conditions clearly sliding, it’s not too surprising to see gasoline being pulled lower by the macroeconomic situation. The recent price support from improving refinery margins and some refinery glitches is starting to fade. With gasoline stocks still rising and demand still sliding it is clear that the supply/demand setup continues to favor the bear camp. A break under the 40 day moving average in March gasoline that comes in today near $1.1175 could inspire more chart based selling. With forecasters pushing an economic recovery back towards late this year or even next year certainly raises the odds for March gasoline to retest the December lows. With the January 13th COT report with options for gasoline showing the combined fund and spec net long position at 56,989 contracts as of early last week also leaves the market with ample selling capacity.
