January crude oil has traded firmer overnight as the bull camp seems to be getting some early leverage from a number of sources, although we have doubts that gains will be able to hold. Certainly the weaker Dollar overnight is providing outside market support to crude oil. But crude oil has also been pushed higher by the IEA’s forecast for world oil demand to grow slightly next year after falling this year, which was in contrast to the EIA’s prediction for demand to fall by 450,000 bpd in 2009. Besides seeing a slightly better outlook for world oil demand, the IEA trimmed non-OPEC supplies, which is also providing a measure of price support to crude oil. With Jan crude oil falling to nearly $40 last week, the market appears to be in a short covering mode ahead of next week’s OPEC meeting. In fact, with Saudi Arabia notifying customers of supply cuts next month, the market appears to be pricing in a production cut announcement by OPEC next week of at least 2 million barrels per day. A possible coordinated oil supply cut by Russia is also providing some price support. But there is clear evidence that macroeconomic conditions are worsening, which leaves the demand outlook weak and we suspect gains in Jan crude oil will end up being a temporary technical correction, that sets the market up for an eventual break back below $40. In fact, with yesterdays inventory report showing total product demand down over 6% compared to year ago and crude oil stocks nearly 23 million barrels above last year’s levels, it is clear that the economic downturn in oil demand has yet to trough. In fact, seeing a jump in today’s weekly US jobless claims or a roadblock in the passage of the auto sector bailout could certainly be stumbling blocks that could derail the rally in crude oil. With the flow of corporate layoff announcements and production cutbacks expected to continue into next year, the demand environment for oil will remain weak.
We also suspect the market will be disappointed if OPEC doesn’t cut by more than 2 million barrels at next week’s meeting and that traders are likely to quickly discount an OPEC cut, as more bearish economic news is revealed. In fact, with China beginning to show more economic distress, we suspect the IEA will ultimately need to revise down their oil demand outlook for next year. Given the market’s oversold condition, temporary gains in Jan crude oil back to the $46.90 to $48 price range may be possible. But traders should be considering bear put strategies on this price correction to position for an eventual sub-$40 price break.
GASOLINE: January gasoline has traded high overnight on improved sentiment tied to the IEA report and hopes for steep OPEC cuts. We also suspect the market is trading higher on short covering after becoming technically oversold following last week’s sharp price break. But with economic conditions clearly worsening and the latest EIA report showing a 1.7 million barrel jump in gasoline stocks and a 3.2% decline in demand, we don’t expect price gains in gasoline to hold. In fact, it won’t be surprising to see gasoline reverse course if Congress can’t easily pass the US auto sector bailout plan. Low pump prices have not revived consumer oil demand and with consumers fearful of more job losses ahead, a lack of economic confidence is likely to keep gasoline demand weak. With more bearish economic news on the horizon we suspect a technical correction in Jan gasoline will be limited to the $1.0265 to $1.0671 price range while an eventual slide to 78 cents per gallon still seems possible.
HEATING OIL: Heating oil has snapped higher overnight as we suspect the market had reached a technically oversold condition on yesterday’s price drop to the lowest level since May 2005 based on the weekly nearby chart. The market may see some temporary short-term gains off of the IEA forecast or expectations for an OPEC cut. But the supply/demand situation for heating oil is clearly bearish and is likely to worsen, as global economic conditions weaken into next year. The IEA is predicting a fall in world oil refining, but given the severity of the economic recession, it seems possible that product supply cuts may not keep pace with falling demand. In fact, with US industries expected to announce more production cutbacks and layoffs, the weak fundamental setup for heating oil reflected in the unexpected 5.6 million barrel jump in distillate stocks and 4% decline in demand is likely to be maintained. A lack of a consistently cold weather pattern in the US heating region so far this winter, will also leave the market less concerned over supplies. Global demand is also set to worsen as China’s economy continues to slow and seeing Chinese Nov vehicle sales slump nearly 15% suggests that China will become a larger exporter of gasoline and diesel fuel in coming months. Therefore, until global economic conditions begin to show signs of stabilizing, we suspect a downward price pattern in heating oil will be maintained unless the Senate bails out the bull camp today.
TODAY’S ENERGY MARKET GUIDANCE: Hope for a Senate bill is front and center for the bull camp today. without help the bears will regain control quickly.