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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has gained some ground overnight finding support from the prospects for further OPEC supply cuts, firmer equity market action and possibly from short covering ahead of today’s inventory report. So far March crude oil has been able to hold several tests of the $40 to $38 price range, underpinned by better than expected production cut compliance by OPEC and with the threat of an additional 1 million barrel per day supply cut next month. The market has also been able to shrug off several negative economic reports coming out of the US and overseas and there is even some sentiment that Euro zone numbers might be slowing their deterioration. It also seems as if the energy markets are being cheered by the prospects that a US economic stimulus package will be passed soon and ideas that China’s initial stimulus efforts are having a positive impact. In fact, with March holding around the $40 per barrel level, that does seem to suggest the market is beginning to look beyond the current negative fundamentals and starting to price in the prospect for an eventual economic recovery and tighter global supplies down the road. While it might not last, the markets in general are attempting to tamp down the negative views toward the economy. Certainly today’s inventory report has the potential to throw a stumbling block in the bull camp’s path. But it seemed as if the market took yesterday’s API report of an 8.1 million barrel gain in crude oil stocks in stride. However, we do think the bull camp’s resolve will be tested if today’s EIA inventory report shows a sharply higher build than the 2.9 million barrel gain expected by most traders. An oil stock gain could prompt the market to reverse course and head lower. But, the bull camp appears to have the early edge this morning and if a variety of potentially bearish news items can be successfully absorbed, that will give a stronger indication that March crude oil has found at least a temporary fundamental value zone in the $40 to $38 price range.
HEATING OIL: After a test of yesterday’s low overnight March heating oil is trading firmer. In fact, it’s a bit surprising that the market has held up despite news that a refinery workers strike has been averted and given the temperature warm up in the forecast. Perhaps expectations for a sizable decline in distillate stocks in today’s inventory report are helping to underpin all energy prices. The market may also be finding some strength from economic optimism tied to the US stimulus plan, along with efforts by other governments to revive economic conditions. However, we do think the bull camp will be faced with several pieces of potentially bearish news over the balance of the week and if those readings can be quickly discounted, then we suspect the low prices seen in January may hold.
GASOLINE: After some early weakness overnight, March gasoline has recovered to trade firmer. This market continues to show strong resiliency to negative news with prices making a solid recovery from Monday’s sell off despite news that a refinery workers strike will be averted now that a contract dispute has been resolved. The market also seemed to take in stride yesterday’s news of sharp declines in auto maker car sales last month. In fact, it seems as if the combination of OPEC supply cuts and prospects for a huge economic stimulus plan are starting to create some long range economic optimism and helping the market look beyond the current bearish situation. March gasoline has been in a sideways consolidation pattern over the last month and technically it looks as if the market is attempting to build a base of support to trade higher. However, the market will likely be thrown a variety of bearish supply/demand news over the balance of the week which will certainly be a test for the bull camp. With API reporting a 2.1 million barrel gasoline stock rise, today’s inventory report could be the first stumbling block for the bulls if EIA gasoline stocks come in sharply higher than the 700,000 barrel rise expected by most traders. But to some degree traders may be able to discount a high stock build on ideas that refinery maintenance and low operating rates going forward will eventually tighten gasoline supplies, especially if traders start to embrace the idea that the economic stimulus package will start to revive the economy in the second half of the year. Also, seeing March gasoline hold several test of the $1.09 to $1.07 price range is also likely providing a technical incentive to buy price dips in this market. While current conditions still seem to favor the bear camp, the market’s technical setup and long range fundamental prospects are starting to favor the bulls and that’s beginning to suggest a major low in gasoline may have been set.
