CRUDE OIL MARKET FUNDAMENTALS: After an initial price dip, March crude oil is attempting to move higher in the overnight trade but we still question the market’s ability to stage a major upside move given the latest buzz of rapidly rising supply backing up in the US. So far March crude oil has found support in the $40 to $38 per barrel price range. It certainly appears that OPEC supply cuts, threats of more OPEC action next month and perhaps even the prospect of turmoil in Venezuela ahead of a vote in that country this coming weekend, are factors underpinning oil prices. We also suspect the market could get more of a price lift off the prospects for the US economic stimulus package to be passed potentially later today. The market may also be cheered by the latest Treasury efforts to resolve the banking crisis. But once the euphoria from the stimulus plan subsides, the trade will still be faced with rising oil supplies and economic conditions that could take quite a while before oil demand is revived. In fact, this week’s inventory reports could show crude oil stocks rising by over 2.4 million barrels and with storage at the Cushing location nearing capacity, this situation has the potential to put downward pressure on front month futures. With stocks continuing to build in the US, it is apparent that OPEC supply cuts have so far had little impact. The bull camp could also be undermined by the EIA’s monthly short-term energy outlook that is expected to be released today especially if a further downward demand revision is made. While the market seems poised to rally on the coattails of the economic stimulus plan, we have doubts that bullish sentiment can last, especially if US equity markets can’t forge a strong recovery move today. In the end, we suspect the upside in March crude oil may be limited to the $42.75 to $45 price range, while a huge supply glut and a questionable demand outlook will still leave the market vulnerable to a retest of the December lows.
PRODUCT MARKET FUNDAMENTALS:
HEATING OIL: March heating oil appears to have an upward trading bias in the early going today and we suspect high hopes that the stimulus bill will passed today is giving the bull camp an edge. The market may also be finding some price support from news that China will export less diesel fuel this month, which raises some hopes that domestic demand may be reviving in China. Although distillate stocks remain relatively high, the market seems to be garnering support from the idea that a low refinery operating rate will eventually improve the supply situation even if demand remains anemic. This outlook seems to be providing strong price support for March heating oil around the $1.30 price level. Trade expectations for a sizable drop in distillate stocks in this week’s inventory report is likely another factor providing a firm early bid. Therefore, March heating oil may have the some potential to attempt a rally back towards $1.50 in the short run. But to support a move in March heating oil beyond $1.50 we suspect a much stronger optimistic view on the economy will need to take hold.
GASOLINE: The technical action in March gasoline remains positive and with prices firming overnight the market may have the capacity to trade higher on optimism tied to the economic stimulus package being passed this week. March gasoline is near the upper end of a five week old consolidation range and a breakout above $1.3176 would put the next upside target at $1.40. Ideas that low US refinery operations will tighten gasoline supplies into the spring and better align supply with demand has certainly improved market sentiment. While the trade is looking for more than a 1 million barrel rise in gasoline stocks, stocks have actually come in much lower than expected in recent inventory reports. Seeing another bullish surprise in gasoline stocks along with the euphoria tied to the stimulus package could provide a strong bullish catalyst. However, one stumbling block for the bulls could be the EIA’s energy outlook but this market has also shown good resiliency to bad news. In the end we just get the feeling that this market wants to move higher.