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CRUDE OIL MARKET: While January crude oil has been able to rebound after being pushed to a new low for the move overnight, we still see limited upside potential for this market, while downside risk remains in place. With no critical economic news out early today some short covering in crude oil may be possible this session if US equity markets can build on initial overnight gains. A report that Russian oil exports in November fell to the lowest level in 4 years may have also helped the market trim overnight losses. But there are still a number of factors that will keep the path of least resistance down for energies and we think rallies in Jan crude oil back over $50 should be considered a selling opportunity. The November 25th Commitment of Traders report with Options for Crude Oil showed the “combined” spec and fund position net long 88,073 contracts, leaving the market with ample selling capacity.

Crude oil is being undermined by the uncertainty of OPEC’s next move, since Saudi Arabia’s comments regarding cartel member compliance to lower quotas is raising some doubt that another production cut will be agreed upon at the Dec 17th meeting. It also seems as if the UAE isn’t sticking to their quota since they are offering more crude oil to Asian customers next month and that appears to be undermining the cartel’s efforts to tighten supplies. In fact, with some traders expecting US crude oil stocks to rise by nearly 2 million barrels in this week’s inventory report, any additional effort by OPEC to tighten supply may be seen as too little to late.

Clearly global macroeconomic conditions are worsening given yesterday’s data showing significant weakening in US, Europe and even China manufacturing levels and that leaves the outlook for oil demand very grim. In fact, China is likely to remain a net fuel exporter due to record domestic product stocks and that will certainly undermine OPEC’s efforts to tighten global supplies. Given Bernanke’s grim economic outlook yesterday and with the prospect for weak outcomes in the rest of the US economic data being released over the balance of the week (including Friday’s employment report), we suspect there will be enough fodder to leave the energy bears in full control.

GASOLINE: Jan gasoline has been able to recover from overnight lows as we suspect the firm action in equity markets is providing some price support. But with Auto sales out later today expected to show a severe contraction, it seems as if the prospect for a recovery in gasoline will be limited. In fact, this week’s economic news will likely leave the demand outlook bearish and with traders expecting a nearly 1.5 million barrel rise in gasoline stocks, it is clear that the market’s fundamental setup still favors the bear camp. With the Nov 25 COT report with options for gasoline showing the combined fund and spec net long position at 43,088 contracts this market still appears to have ample selling capacity left. Therefore, given the number of negative factors facing this market this week it won’t be surprising to see Jan gasoline retest the November low.

HEATING OIL: January heating oil has also been able to bounce after being pushed to a new low for the move, but we see little to suggest that a significant low has been set. Certainly the recovery in US equity markets is taking some of the sting away from yesterday’s bearish reports on global manufacturing. The market may also be garnering some support from a cold Midwest temperature outlook. But with China set to stay a net diesel exporter and some traders expecting a nearly 1 million barrel rise in distillate stocks in this week’s inventory report, rally attempts are likely to be short lived. The November 25th Commitment of Traders report with Options for Heating Oil showed the “combined” spec and fund net long position at 13,396 contracts. But with global economic conditions set to worsen before getting better, we suspect the “combined” spec and fund position for heating oil will eventually shift to a large net short.

TODAY’S ENERGY MARKET GUIDANCE: The market can bounce but it probably can’t throw off the down trend pattern.

This content originated from – The Hightower Report.