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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has seen a choppy trade in the early overnight action and has so far been able to fend off a bounce in the Dollar, but the bull camp has to be mindful of the potential risk for profit taking.
It was impressive to see December crude oil basically hold a test near $80 yesterday as the market seemed to absorb a firmer Dollar, some negative economic news and indications OPEC may raise output levels in December. Crude oil has established a strong uptrend over the last month and given the bullish environment for commodities, signs of improving macro economic conditions raising the demand outlook for oil and recent declines in product stocks is likely to eventually lift December crude oil into higher range to test price levels in the $85 to $90 zone. But in the short run, the market’s overbought condition leaves crude oil vulnerable to some additional profit taking, especially if the Dollar can gain upside traction. Therefore, the bull camp needs to be a bit cautious after the near vertical climb in prices over the last two weeks. Bernanke’s is speaking this morning and that is likely to provide direction to the Dollar and also be an impact on the oil market. While seeing any additional gains in the Dollar could certainly undermine the oil market, we suspect currency related profit taking breaks in oil will end up being short lived and a buying opportunity since the Fed’s low rate policy will likely maintain the Dollar’s downtrend for some time. Part of the strength in oil has been due to an improving outlook for a recovery in fuel demand as generally good corporate earnings support the view that economic conditions are improving. Strong 3rd quarter growth from China and indications domestic refiner demand for oil remains high also supports the view that oil demand is starting to recover globally. If more good earnings news is seen today that helps the equity market build on yesterday’s gains, then the oil market may be able to overcome its extreme overbought technical condition and push higher. But we do suspect crude oil will need fresh outside market support in order to make a push above $82 price level. We remain bullish crude oil and the trend is up, but short-term profit taking risk is also high so long position holders need to have some type of profit protection strategy in place just in case an extensive price correction below yesterday’s low is seen. If $79.86 fails to hold, closer in support for December crude oil comes in at $79.21 then $78.45 with key resistance at $82.
GASOLINE: December gasoline has pulled back a bit after initially attempting to push higher in the overnight trade. After such a sharp price climb over the last two weeks, there is the risk that the market’s extreme overbought condition could temporarily overwhelm the bullish factors that have been driving the market higher. While the market’s technical pull raises the risk for a more extensive pull back to be seen, we also suspect price corrections will end up being short lived. Since refiners are maintaining a low operating rate in an attempt to improve profit margins, there is the potential for gasoline stocks to tighten in the weeks ahead while recent measures show gasoline demand is starting to recover. In fact, the US Transportation Department said US highway travel rose in August for the third straight month. The bull trend in this market is strong evidenced by December gasoline’s recovery from session lows yesterday with buying interest clearly coming in on price dips and with positive sentiment toward demand being aided by good corporate earnings news and the recovery in equity markets. The market’s overbought status clearly leaves gasoline at risk and so long position holders should have trailing stops or some option profit protection strategies in place. But pull backs in gasoline should still be seen as buying opportunities since an up trending price pattern should be maintained by an improving supply/demand outlook and the bullish environment for commodities. Close in support comes in at $2.0096 then $1.9734 and below there at $1.9650.
HEATING OIL: December heating oil has also seen a two sided trade in the overnight action with the market’s overbought setup raising the short-term risk to the bull camp. Improving macro economic conditions for a recovery in fuel demand, the bullish outlook for commodities, low refinery operations and some weather forecasts predicting a cold winter are factors that could eventually drive the market higher. But there may need to be some adjustment to heating oil’s technical condition before a move above this week’s high is seen. The risk to long position holders is evident following a near vertical rally from the October low and unfortunately for the bull camp the first retracement of the October range is back near $2.01. But a price correction of that magnitude may not be seen since gains in the Dollar are likely to be short lived and if the equity market action stays positive. But longs should still have training profit stops in place just in case a more extensive correction in December heating oil below support at $2.10 is seen.
TODAY’S ENERGY MARKET GUIDANCE: The energy markets remain at a technically overbought extreme and if the dollar gains upside traction after bouncing overnight, it could inspire some pre-weekend profit taking. On the other hand, given the strong up trend in oil market, a technical correction could end up being shallow and short lived if outside market forces provide a fresh bullish influence.
