CRUDE OIL MARKET FUNDAMENTALS: Crude oil has fallen back in the overnight trade as fresh jitters over the demand outlook has triggered more extensive profit taking. The market has come under fresh selling pressure on concerns that the economic recession will be extended if some auto companies are forced into bankruptcy now that the Obama task force rejected plans by both GM and Chrysler. Rising investor risk aversion has sent equity markets sharply lower overnight and the dollar higher inspiring additional selling in oil. With at least one OPEC member saying a production cut is unlikely at the May meeting, this news may also be inspiring some of the profit taking. We also suspect the oil market is being weighed down by evidence of a further deterioration in the macroeconomic outlook with Japan’s industrial output falling 9.4% in February and the OECD predicting a 4.2% economic contraction in its 30 nation bloc. With China also reporting fuel stocks at record high levels in February and OPEC compliance appearing to have slipped a bit in March certainly makes it difficult to justify oil prices over $55 per barrel, especially if the economic outlook begins to sour again. It is also clear that June crude oil had become technically overbought near last week’s highs which was certainly reflected in the March 24th COT report with options for crude oil showing the “combined” spec and fund net long position at 103,835 contracts as of early last week, up nearly 30,000 contracts from levels seen at the beginning of the month. Unless a more optimistic outlook for an economic recovery can be revived, the bearish internal supply/demand setup for oil and negative outside market influences could pressure June crude back to test the pivotal $50 price level, especially since the trade seems to be expecting another rise in crude oil stocks in this week’s inventory report.
GASOLINE: The US auto industry news has triggered more selling in the gasoline market in the overnight trade. In fact, the highs reached last week in June gasoline appear to be a bit overpriced considering the prospects for the economy and oil demand to further deteriorate if two out of three major auto companies are forced into bankruptcy. The March 24th COT report with options for gasoline also showed the market had become overbought with the combined fund and spec net long position rising to 62,659 contracts as of early last week. Seeing June gasoline falling below last week’s low could also give the bear camp some addition technical leverage to start the week leaving the market vulnerable to a correction possibly back to the $1.40 price level.
HEATING OIL: June heating oil has extended last Friday’s price slide in the overnight trade as last week’s economic optimism has shifted to an increasingly bearish global economic view. Heating oil is certainly being weighed down by the economic news from Japan and fresh jitters over the US auto sector. But it is also clear that ample distillate supplies in the US and the 11.4% rise in refined product stocks in China last month leaves the global fuel demand outlook weak which could pressure June heating oil back to test support near $1.35 per gallon price level. This market has also become technically overbought as the March 24th COT report with options for heating oil showed the “combined” spec and fund net long position at 33,473 contracts as of early last week, more than double the net long position seen at the beginning of the month.
TODAY’S ENERGY MARKET GUIDANCE: The market’s technically overbought condition leaves the energy complex vulnerable to a deeper sell off if the economic outlook remains soured by the newest auto industry threat.