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CRUDE OIL MARKET FUNDAMENTALS: With OPEC leaving output levels unchanged at the weekend meeting, it is no surprise to see the energy complex under pressure in the overnight trade. Since the rally in May crude oil last week was on the notion that OPEC would make fresh supply cuts, some of that premium is now being extracted. The cartel will attempt stricter compliance to remove another 800,000 barrels a day from the marketplace, but the lower price action in crude oil suggest traders have doubts this will be enough to support prices given the bearish outlook towards global oil demand. In fact, seeing the EIA, IEA and OPEC all predicting a deeper contraction in global oil demand this year, it is clear that the fundamentals still favor the bear camp, considering US oil stocks remain 48 million barrels above year ago levels. On the other hand, a slight improvement in the macroeconomic outlook tied to firmer equity markets overnight along with a weaker Dollar may help to temper the selling in May crude oil to a certain degree. But, we suspect oil market sentiment could be further undermined if today’s report on US industrial production comes in weaker than expected. The technical setup may also favor the bear camp since the March 10th COT report with options for crude oil showed the combined fund and spec net long position rising to 79,413 contracts as of early last week leaving the market with ample selling capacity if support levels are violated. May crude oil remains in a sideways consolidation pattern and after failing near the $50 price level last week, it won’t be surprising to see the market drift back towards the lower end of the range this week. Close in support for May crude oil comes in at $44.51 then $43.30 with resistance at $45.71.
GASOLINE: May gasoline is also in a sideways consolidation pattern that leaves the market vulnerable to further price weakness since last week’s attempt to break through resistance at $1.40 once again failed. The March 10th COT report with options for gasoline also shows the market to be a bit overbought as the combined fund and spec net long position stood at 52,815 contracts as of early last week. But on the other hand, the downside potential in this market may be limited to last week’s lows since the supply/demand setup for gasoline has shown signs of improving. Retail gasoline demand has picked up a bit in recent weeks and the low refinery operating rate could leave summer grade gasoline supplies relatively tight during the driving season. In the short run May gasoline could drift back towards $1.25, but down near this price range traders may consider bullish option strategies in gasoline for a position play into the summer months.
HEATING OIL: The sell off in May heating oil overnight can certainly be tied to OPEC’s decision to keep output unchanged. But we also suspect the market is under pressure from news that China’s diesel exports reached a 10 year high last month. Sentiment could be further undermined if today’s report on industrial production comes in weaker than expected. With the US supply/demand setup negative for heating oil and key energy agencies prediction a deep contraction in global fuel demand this year, the bearish fundamental situation leaves May heating oil at risk for a break below last week’s low.
TODAY’S ENERGY MARKET GUIDANCE: A lack of OPEC action gives the bear camp leverage that leaves energy markets at risk of testing the lower end of consolidation ranges unless outside markets can provide more significant price support.
