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CRUDE OIL MARKET FUNDAMENTALS: Crude oil is attempting to bounce in the overnight trade, which isn’t surprising after yesterday’s steep market decline. However, energy markets seem to be garnering some support from the geopolitical situation again, with more European countries being affected by the Russian/Ukraine gas dispute and also with Israel apparently under rocket fire from Lebanon. Once the Russian gas dispute is resolved and unless the Middle East violence actually disrupts oil flows, any price support from geopolitical jitters will likely be temporary. In fact, given yesterday’s price action, the geopolitical situation doesn’t appear to be a strong enough supply side risk to fully offset the negative fundamental setup in the crude oil market that clearly favors the bear camp. The market was clearly shocked by yesterday’s inventory report showing a 6.6 million barrel rise in crude oil stocks which lifted supplies over 42 million barrels above year ago levels. Certainly the oil market’s price contango has encouraged physical stockpiling, which is significantly raising offshore oil supplies. However, worsening global economic conditions and oil demand destruction, (with total demand over the past 4 weeks down 2.9% compared to year ago) should be building up supplies rapidly. Yesterday’s report showing a sharp decline in December private sector employment, the recent data showing slides in both the US manufacturing and service sector, along with more companies announcing layoffs certainly leaves economic conditions patently bearish for energies. And it seems as if OPEC’s efforts to trim production have yet to soak up the excess oil in the global marketplace. Although the geopolitics may provide more temporary price support to crude oil, it seems as if the upper price range in Feb crude oil has been set near $50 for the near term unless an extraordinary supply side event is seen. On the other hand, the prospect for seeing more negative news on the economy in the next two sessions still leaves the market vulnerable to retest of support down at $40. In fact, we see the potential for another sweeping decline oil prices off of Friday’s payrolls report. If the $40 level fails to hold, Feb crude oil could make a quick return to the December lows especially when one considers the overbought condition of crude oil in the recent COT report.

GASOLINE: Feb gasoline has recovered a bit in the overnight session after yesterday’s price slide as geopolitical jitters and strength in the heating oil market are helping to underpin prices. But we doubt the current geopolitical situation will provide lasting price support unless a supply shock is seen, especially when the market is facing a bearish economic environment for gasoline demand that looks set to worsen in the early part of this New Year. Unless a supply side shock is seen, the increasingly bearish fundamental setup with gasoline stocks up 3.3 million barrels and gasoline demand down 2.2% compared to year ago suggest a near-term top in Feb gasoline has been set this week. In fact, we see the potential for Feb gasoline to slide back to the $1.00 per gallon price level if the economic data in the next two sessions points to a worsening economic condition and if the Middle East situation leaves oil supply flow unaffected.

HEATING OIL: Geopolitical factors have provided the strongest price support to Feb heating oil overnight with the market being underpinned by geopolitical jitters from the Russian gas situation. A colder temperature outlook is also likely providing a measure of support. Rising concerns that spreading Middle East violence will disrupt oil regional oil flows and speculation for a rise in product fuel demand, as more European countries are being impacted by the Russian/Ukraine gas dispute, certainly provided a lift to heating oil prices. While there is the chance that geopolitical events could pull Feb heating oil back towards yesterday’s highs, price support should prove to be temporary unless an actual supply side shock is seen. In fact, the risk premium built into the market is likely to be quickly pulled out, once the situation subsides. On the other hand, the market is facing a worsening economic downturn and that threatens to further raise distillate stock levels, as industrial and consumer demand for the fuel looks set to see a further decline. In fact, the prospects of seeing very weak economic numbers over the next two sessions will certainly be a test of the bull camp’s resolve.

This content originated from – The Hightower Report.
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