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CRUDE OIL MARKET FUNDAMENTALS: After yesterday’s price collapse, April crude oil has been able to bounce in the overnight trade, as equity markets have shown some attempt at steadying. With the Dollar weaker, bargain buying of crude oil also looks to be providing some early price support on ideas the market may have fallen too far too fast yesterday. But we suspect whether the oil market will be able to build on overnight gains this session is likely to be highly correlated to the ebb and flow of the equity markets. Along with auto and pending home sales data being released today, Bernanke and Geithner are both speaking to Congressional committees and that has the potential to add volatility to both stock and equity markets and therefore to energy prices. Simply put, a steady to firmer equity market trend should allow April crude oil to garner a bit more upside traction, as traders adjust ahead of this week’s inventory report, while tighter OPEC supplies may also lend some fleeting support. That may enable a bounce in April crude oil back towards the $41.00 to $41.50 price range today. However, we do have to leave open the outside chance for a move back to $42.50 especially if equity markets regain some optimism or confidence from all the Fed/Treasury chatter and stage a technical recovery effort. But to inspire a strong run in oil prices, upside leadership from equity markets will also be needed in order to offset trade expectations for nearly a 1 million barrel rise in crude oil stocks in this week’s inventory report. Oil market sentiment may also be tempered by indications that OPEC appears to be backing away from another production cut at the March 15th meeting. There may also be some hesitancy to lift oil prices too far given the potential for all markets to be rattled by the employment reports on Friday. We just can’t get too excited about the upside potential for crude oil in the current economic and financial market environment. Therefore, we feel rallies in crude oil are likely to be short lived and traders should be considering owning bear put spreads on the price bounce today since tomorrow’s inventory report and ADP private employment survey on Wednesday could be the next big volatility event for this market.
GASOLINE: April gasoline is struggling to recover from yesterday’s sharp sell off even with equity markets stabilizing a bit. Psychology has certainly been damaged by all the economic and financial sector anxiety and so far the prospect of another 700,000 barrel decline in gasoline stocks in this week’s inventory report hasn’t provided much support. Perhaps the market is bracing for more bad news from the home and auto sectors today, as that would certainly help to maintain a negative demand outlook. Without strong upside leadership from the equity markets to restore some economic optimism, we suspect any bounce in gasoline this session will be minor. In fact, unless this week’s inventory report provides a very bullish surprise, we suspect gasoline will be vulnerable to more downside risk, given upcoming reports on private employment on Wednesday and the official US unemployment number on Friday.
HEATING OIL: April heating oil is managing a modest bounce this morning and we suspect the market may be able to recover back over the $1.20 price level today if equity markets hold steady to firmer. The trade is also looking for a sizable decline in distillate stocks of around 1.3 million barrels and that may also encourage a bit more short covering. But the demand outlook for the fuel remains dismal in the US and abroad and that means the bottom in this market may not yet have been found. The US transportation industry (trucking and air) remains weak leaving the demand outlook for the fuel bearish. Therefore, given the potential for more bad news to be seen in the employment reports out later in the week, we see limited upside potential for April heating oil while remaining vulnerable to a price slide below the February low.
TODAY’S ENERGY MARKET GUIDANCE: Be poised to sell crude oil on the bounce today.
