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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has seen a two sided trade overnight, at times trading higher with some light price support coming from bullish industry news, signs of rising global fuel demand and geopolitical supply side risk. However, the upside in crude oil is being limited by the outside market action including a firmer Dollar and generally weak trade in global equity markets which is starting to pressure crude oil ahead of the US session. If the currency action stays bearish and US equities slump, we suspect the bear camp in oil will gain more control. Aug crude oil has seen a recovery from a break below the $70 per barrel level yesterday as the bearish implications of a jump in gasoline stocks is being somewhat offset by the EIA report showing a much larger than expected 3.8 million barrel drop in crude oil supplies and a rise in gasoline demand. But the bullish oil stock data hasn’t been enough to provide lasting price support. Oil prices also seemed to get some tentative support overnight from news of rising fuel demand in China. Seeing the World Bank raise its estimate for China’s economic growth along with another attack by Nigerian militants disrupting oil flows also lent some early support to oil prices. But macro economic doubts have surfaced this week which is calling into question whether crude oil can sustain these higher price levels which seem to some traders to be out of line with the market’s current fundamentals. We suspect the oil market may need a fresh dose of macro economic optimism along with a further slide in the Dollar to support the next leg higher in oil. Although the oil market has shown remarkable resiliency to negative news, today’s report on jobless claims, regional manufacturing and leading indicators could certainly provide a fresh incentive for traders to book profits. Also, the market’s technical overbought condition still leaves Aug crude oil vulnerable to a downside break. Support for Aug crude oil comes in at $70.85 then near $69.91 with resistance at $72.43 then $72.93.
GASOLINE: August gasoline has slipped back after an earlier attempt to move higher. The EIA report showing a much larger than expected 3.3 million barrel jump in gasoline stocks due in part to higher imports, has dampened bullish sentiment a bit since it reduces some of the recent concern over tightening supplies. On the other hand, seeing US gasoline demand up 1.1% over the past four weeks compared to year ago does suggest summer driving demand is picking up despite the rise in retail pump prices and that may limit the selling interest in gasoline to a certain extent. But in order for Aug gasoline to move into a higher price zone above the $2.10 per gallon level, we suspect a strong revival in macro economic optimism will need to take hold to improve the supply/demand outlook for the fuel. In the short-run, Aug gasoline may also be constrained by the market’s overbought condition leaving gasoline vulnerable to more profit taking, especially if today’s economic data comes in weaker than expected. Close in support levels for Aug gasoline comes in at $1.9944 then at $1.9666 with resistance at $2.0378 then at $2.0450.
HEATING OIL: Trading in Aug heating oil overnight has been choppy and two sided with the market running into overhead resistance above the $1.90 price level. Early overnight gains seemed to be tied to reports that China’s May diesel exports fell over 23% from April due to rising domestic sales and tighter inventories. The market may also be getting some lingering support from yesterday’s EIA report showing a smaller than expected 308,000 barrel rise in distillate stocks. But with macro economic doubts dampening the prospects for a recovery in fuel demand and with outside market influences turning bearish, we suspect heating oil will be vulnerable to a more extensive price correction, especially since the market remains technically overbought. Unless today’s economic reports can provide a fresh dose of optimism or the Dollar reverses course, we suspect the path of least resistance for heating oil will be down.
TODAY’S ENERGY MARKET GUIDANCE: Unless today’s data can restore strong macro economic optimism and also sink the Dollar, there is a good chance for a more extensive pullback in oil markets this session as markets continue to correct from technically overbought levels.
