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Crude oil has seen a choppy trade overnight at times finding some support from a cold temperature outlook and OPEC’s efforts to cut back production. But the market has also given up ground as equities trim gains and as the Dollar bounces off overnight lows. While trading has been whipsaw, crude oil may still find support from economic optimism linked to the prospects for a quick passage of an Obama stimulus plan and the prospects for the Fed to conduct some quantitative easing at this week’s Fed meeting. The market may also garner some support from the cold weather this week boosting fuel heating demand. It also seems as if March crude oil is in the midst of a technical correction that may temporarily provide short-term price support and possibly even push the market back towards $50. An economic rescue plan from Japan’s government and a better than expected reading on German business sentiment may also help improve market sentiment. But the price action in the energy market seems to be closely tied to the action in the equities market and crude oil has traded weaker as the stock market’s rally seems to be losing some steam. While March crude oil seems to have the technical potential to trade higher, we still have doubts that a rally above $50 will be able to hold up for too long unless an economic recovery theme is fully embraced. OPEC has shown some capacity to cut back production and that seems to have put in a temporary price floor near $40. But it’s still unclear if OPEC’s efforts will be enough to offset additional oil demand destruction which is likely to be seen if the economy continues to show signs of deteriorating. In fact, today’s reports on regional manufacturing and consumer sentiment have the potential to remind the market that the fundamentals still favor the bear camp. Also, this week’s inventory report is expected to show a sizable gain in oil stocks and that could be another limiting factor for the bull camp. On the other hand, crude oil has shown good resiliency to bad news. Technically March crude oil looks poised for a move back to test $50. But the market will likely have to absorb some negative economic news today and so higher price action in crude oil will likely require strong upward leadership from the equity markets.

HEATING OIL: March heating oil has seen a choppy two sided trade overnight as the market still looks to be attempting a technical correction from oversold levels. The market may garner some support from the cold weather seen over the last several weeks in the US heating region. In fact, most traders expect a pickup in heating demand to result in a decline in distillate stocks in this week’s inventory report. On a purely technical basis March heating oil may have the capacity to trade back to the $1.50 to $1.53 price range. But we have doubts the market will be able to hold at these higher price levels for too long, especially if today’s manufacturing report comes in weak. With US industrial energy demand on the decline and temperatures expected to turn warmer in early February, there seem to be a number of bearish obstacles that could derail the market’s technical price recovery.

GASOLINE: March gasoline also saw a choppy two sided trade overnight, but still within the range that has confined the market for more than two weeks. The technical action gives the impression that the market could be building a base to move higher. A close over $1.2782 would be needed to confirm an upside breakout. But with economic conditions likely to get worse before getting better, we have doubts gasoline demand will be able to support any significant rise in retail pump prices. Also, most traders expect this week’s inventory report to show another sizable rise in gasoline stocks and that should remind traders that the fundamental setup still favors the bear camp. In fact, the market has pulled back from overnight highs and gasoline could come under further pressure if today’s economic reports come in weaker than expected. The coiling pattern in March gasoline suggests the market is going to make a directional decision soon. However, a break back towards the December lows seems more likely unless the market begins to embrace an economic recovery theme or OPEC can further tighten supplies.

TODAY’S ENERGY MARKET GUIDANCE: Look for a choppy trade with technical signals pointing up for crude. But a rally in crude oil will need to be sparked by a strong recovery in the stock market.

This content originated from – The Hightower Report.
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