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Following Wednesday’s late session price slide, Feb crude oil has bounced a bit overnight on post holiday short covering action. But the market also seems to be finding support from a weaker dollar and news that more OPEC producers are cutting back on supplies.The market has no doubt become oversold with Feb crude oil breaking nearly $18 per barrel from highs posted on Dec 15th and therefore some year-end book squaring may provide more of a lift to prices in the short run. Certainly part of the speculative short covering is being inspired by reports that the UAE has followed Saudi Arabia’s lead and announced deeper supply cuts for February after lowering January allocations and also confirming a higher compliance rate by some OPEC members to the latest quota cuts. With no economic reports released today and trading conditions thin, a more extensive short covering move in crude oil may be possible. But we are skeptical the market will hold at higher price levels for too long given that the latest US economic data showed a 26 yr high in jobless claims and weakening consumer spending. With a deepening recession continuing to slow growth in Japan and China, it is clear that oil demand from major world consumers is set to slide into the New Year. In fact, with US product stocks rising sharply last week, oil supplies at the Cushing location at a record level and a growing amount of oil supply sitting on supertankers the overall supply/demand setup clearly favors the bear camp. Therefore, if technical short covering results in a $2 to $3 rally in crude oil, traders should use that rally to get short looking for an eventual test of the $30.00 level.
GASOLINE: Feb gasoline has recovered a bit after sliding sharply ahead of the Christmas holiday, but traders shouldn’t expect anything more than a temporary technical bounce. The fundamental setup for gasoline remains bearish with the economic data this week pointing to a deepening economic recession and further fuel demand destruction while gasoline stocks continue to climb sharply, in fact up 3.3 million barrels in the latest inventory report. The EIA showed gasoline demand fell 2.7% compared to year ago and since more US companies are likely to announce further layoffs in the New Year this scenario would seem to leave little leeway for gasoline demand to improve any time soon. Therefore, we suspect the supply/demand outlook still leaves Feb gasoline vulnerable to an eventual price slide back to 78 cents per gallon, which is a consolidation support area from Nov 2003 basis the monthly nearby chart.
HEATING OIL: After the crushing decline on Wednesday, it isn’t too surprising to see the heating oil market bounce in the overnight trade. While the market may be technically oversold, the fundamental setup should leave heating oil with limited upside capacity. In fact, the global supply/demand balance clearly favors the bear camp considering US distillate demand slumped over 5% last week, Japan’s product sales fell to 21 year lows in November, while China has become a bigger diesel exporter at the same time that US and European distillate stocks are climbing. In fact, the timing couldn’t be more bearish for the world’s largest refiner to start production this week in India, since it will add a significant amount of extra global processing capacity, in a period of declining demand. Therefore, we suspect bouts of short covering in Feb heating oil will be short lived with the economic environment leaving the market vulnerable to an eventual price slide back to the $1.1680 level, which is the January 2005 low basis the weekly nearby chart.
