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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has attempted to stage a recovery bounce in the early overnight action which isn’t too surprising since the market has seen a nearly $7 price slide this week. Sentiment turned bearish earlier in the week following the inventory report which clearly showed the economic recovery so far hasn’t been strong enough to raise fuel demand and as a result, oil supplies have continued to build. Since we suspect the fundamental setup for the oil market will worsen during the refinery fall maintenance period, we are skeptical the oil market will be able to launch a sharp recovery from here as the technical action also shows the market to be in a down trending pattern from the August high. A report showing an unexpected drop in monthly existing home sales also stoked fresh macro economic concerns while the rally in the Dollar was a key factor weighing on oil prices in yesterday’s trade. But the weaker Dollar trade overnight seems to have revived investor risk appetite that has drawn buyers back to the oil market. It also looks as if crude oil is finding support from the G20 statement with nations pledging to keep stimulus measures in place until an economic recovery takes old and this seems to have improved macro economic sentiment a bit. The oil market may also be finding price support from a prediction by Goldman Sachs, expecting higher oil prices based on rising demand and lower production. We also suspect a recovery bounce in equities is helping the oil market recover from the extreme bearish outlook seen in yesterday’s trade. With the market bouncing overnight, November crude oil may be able to hold near the bottom end of the trading range for now. The first retracement point of the last leg down in November crude oil from last week’s high to this week’s low is back near $68.64. But in order to get back to that price level, we suspect a much sharper break in the Dollar will need to be seen along with better than expected results from today’s scheduled economic reports on durable goods, new home sales and consumer sentiment. Otherwise we doubt the oil market will be able to get much upside traction. In fact, we suspect there is a chance for the market to eventually head back down towards the July lows before finding a solid bottom if oil stocks continue to build in the weeks ahead. Therefore, we still see rally attempts in November crude oil back towards retracement levels as a good selling opportunity.
GASOLINE: After an initial push lower overnight November gasoline has attempted to recover as the market may have become a bit oversold on this week’s extensive price break. In fact, with the outside market action turning more supportive overnight, gasoline may be able to recapture a portion of yesterday’s losses. The Dollar seems to be gaining some downside traction ahead of the US session and with equities also firmer, part of yesterday’s extreme bearish sentiment is being lifted. Certainly expectations for G20 nations to keep stimulus efforts in place may be brightening the macro economic outlook. In fact, if today’s scheduled economic reports come in better than expected a rally back to the $1.6741 to $1.70 price range in November gasoline may be possible. But with the fundamentals clearly worsening for gasoline and the market trend from the August high clearly in a down trending price pattern, rally attempts in November gasoline should be considered selling opportunities while the odds are rising for an eventual move back below $1.60.
HEATING OIL: November heating oil has also been able to bounce overnight after holding support near $1.70 during yesterday’s sell off. With the G20 improving macro economic sentiment a bit along with the weaker Dollar, it’s not too surprising to see heating oil trade higher as the market had likely become a bit short-term oversold on this week’s price slide. But the fundamentals will continue to work against the bull camp and in order for November heating oil to regain a sizable portion of yesterday’s losses will likely require a more extensive break in the Dollar and much better news on the economy. The big picture remains bearish for heating oil with the market in a clear technical downtrend while the supply/demand setup has a good chance of worsening ahead of the winter demand season and that combination could eventually pressure November heating oil back towards the July low. Therefore, rally attempts in heating oil back to resistance levels should be considered a selling opportunity. But unfortunately for the bear camp, the first retracement level of the September high to low range is back at $1.7732.
TODAY’S ENERGY MARKET GUIDANCE: With markets becoming a bit short-term oversold on the break, oil and products may be able to launch a stronger recovery bounce before heading lower again if a sharper fall in the Dollar can occur and if today’s reports can provide a fresh dose of macro economic optimism. Otherwise, overnight price gains may not be able to hold.
