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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has seen a two-sided trade overnight with the market running into some profit taking on an early attempt to follow through higher after yesterday’s strong gains. But stronger global equity markets and a generally weaker Dollar are starting to provide a lift to oil prices ahead of the US session. But with crude oil back near the price levels reached earlier this month, the market is also looking a bit fundamentally overvalued considering the high level of oil stocks on hand and since a low refinery operating rate is likely to cause a further build in oil stocks in the weeks ahead, especially if imports remain high. A report showing weak oil demand in Japan, the world’s number three oil consumer, may also have some traders questioning the prospects for a recovery in global oil demand. On the other hand, the price direction in crude oil has been mostly influenced by the macro economic outlook being thrown off by the action in equities and the Dollar. Since these outside market influences have been positive in the overnight trade, it has certainly limited the profit taking interest in crude oil. In fact, the revival in macro economic optimism this week tied to better global corporate earnings, growth prospects in China, rising sentiment in Europe and lower US jobless claims has certainly stirred up expectations for a strong recovery in fuel demand. But in reality, overall oil demand remaining weak and the market may need further economic evidence that conditions are improving in order to push oil prices significantly higher. So we suspect today’s reports on 2nd quarter GDP and regional purchasing managers reports from Chicago and NY will be a critical influence on today’s trade. Given the bearish fundamental backdrop for oil, September crude oil could encounter more significant end of the month profit taking unless today’s economic news triggers a strong bullish reaction in equities and raises investor risk appetite enough to inspire fresh buying in oil up at these price levels. Unless a steady flow of news continues to validate the macro economic optimism that has been building this week that also propels equity markets higher, we have doubts that crude oil will be able to hold up at these price levels.

GASOLINE: After an early attempt to follow through higher from yesterday’s sharp move the gasoline market has encountered some light profit taking in the early overnight action. Although gasoline supplies remain ample and fuel demand anemic, ideas that macro economic conditions are set to improve and revive gasoline consumption has been a key factor sweeping the market higher. Optimism for a recovery in fuel demand has also raised speculation that refinery outages and closures could start to tighten gasoline supplies and this outlook has also provided a lift to gasoline prices. But with the current fundamental setup for gasoline not particularly supportive since fuel demand this summer has remained anemic, we suspect it will be critical that macro economic optimism continues to grow in order to support a higher trade in gasoline. Outside market action overnight has remained bullish and so far that has limited the selling interest in gasoline. But in order to prevent more extensive end of the month profit taking and clear the way for September gasoline to retest the June highs, today’s economic news will likely need to support the bullish macro economic view.

HEATING OIL: Heating oil has also seen a choppy trade overnight with the market under a light pressure from profit taking. The heating oil market has been able to recuperate the majority of losses suffered earlier in the week as a revival in macro economic optimism has raised hopes for a quicker recovery in fuel demand. Gains in equity markets overnight along with the weak action in the Dollar could provide heating oil with additional upside capacity even though this market has one of the weakest fundamentals of the energy complex with distillate stocks at 25 year highs and demand readings continuing to slump. But if a bullish fuel demand outlook holds up, speculation that lower refinery operations will help ease the supply glut has also been a supportive factor. Therefore, today’s economic news could be critical in influencing sentiment towards fuel demand and that along with the direction in equities will likely determine in direction in heating oil this session. We suspect this market will need a steady flow of bullish demand side news to support a move back to highs seen earlier in the month. Otherwise, a breakdown in macro economic sentiment could trigger extensive profit taking.

TODAY’S ENERGY MARKET GUIDANCE: With the overnight action indicating energy market maybe a bit vulnerable to month end profit taking, today’s economic reports will be a key influence on market direction as bullish surprises may be necessary for the bull camp to retain control. But if equities manage another upside thrust, oil prices are likely to follow.

This content originated from – The Hightower Report.
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