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CRUDE OIL MARKET FUNDAMENTALS: Energy markets are seeing strong follow through gains after a sharp rally yesterday was triggered by a very bullish inventory report. The energy markets are responding to a shift starting to take place in the market’s fundamental landscape. The unexpected and sharp decline in gasoline stocks and more importantly a stronger pickup in gasoline demand along with another decline in oil imports is an indication that the supply/demand setup may start to tip back toward a balance. Although crude oil is still facing a supply glut with stocks over 50 million barrels above year ago, focus is now on gasoline and concerns that low refinery operations will significantly tighten fuel supplies this spring. With the oil market so beaten down, the fundamental changes for gasoline starting to be reflected in the EIA report seems to have inspired the trade to look beyond the current economic bleakness and start to price in the tremendous amounts of government stimulus being spent to revive the economy. It was particularly bullish to see energy markets yesterday push aside both the very bad economic news and another sharp drop in the equity markets and that suggests the energy markets are starting to pay more attention to internal fundamentals than macroeconomic issues. In fact, bullish sentiment was fanned overnight by a report that the UAE announced sharper supply cuts to Asian customers for April raising speculation that OPEC will certainly cut production at their March meeting. Certainly part of the rally this week in oil has been response to evidence of a high compliance rate by OPEC. With a variety of economic reports due out today, the resolve of the bull camp could be tested and if optimism can hold, we suspect April crude oil may have the technical capacity to rally back to the $47 to $50 price range.
PRODUCT MARKET FUNDAMENTALS: GASOLINE: The gasoline market has extended yesterday’s upward price thrust in the overnight trade. Every aspect of yesterday’s inventory report was bullish for gasoline as the 3.3 million barrel stock decline, a nearly 1% decline in refinery operations and a 1.7% rise in demand shows the fundamentals are starting to turn positive. As a result, gasoline stocks are now 17.5 million barrels below year ago levels leaving gasoline with the best fundamentals setup of the energy complex. With refineries in the midst of a heavy maintenance schedule there is certainly cause for concern for gasoline stocks to tighten sharply into the spring. It may not take too much in the way of a pick-up in gasoline demand to accelerate a fall in gasoline stocks. Since April gasoline looks to have reached a technical oversold extreme near last week’s low the market may have the capacity to rally back towards $1.40 level given the improved fundamental outlook. In fact, a push above $1.2968 could inspire more aggressive chart based buying.
HEATING OIL: April heating oil is being pulled higher by the strength in the rest of the complex. While the market’s fundamentals aren’t as strong as gasoline with distillate stocks still over 20 million barrels above year ago, low refinery rates should help to limit build ups even though demand has yet to show any signs of recovery. With market also technically oversold, we suspect heating oil could see a near-term upside price target of $1.3453 if gasoline continues to provide upside leadership.
