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CRUDE OIL MARKET FUNDAMENTALS: Crude oil prices have firmed in the overnight trade with the market finding some support from a bullish inventory report although equity market weakness seems to be limiting gains. Crude oil may also be finding some strength from news that port shipments of oil imports into China rose 9% in April compared to year ago. But the primary reason supporting crude oil prices is yesterday’s API report results, which showed an unexpected 1 million barrel decline in oil stocks against trade expectations for over a 2 million barrel rise. Crude oil also seemed to find some strength from the API report showing a sizable jump in the refinery operating rate which could portend a pickup in crude oil demand ahead of the driving season. But the reaction to the bullish inventory news has been muted by the weaker action in equity markets overnight tied to jitters over the results from the US bank “stress tests”. Equity markets have setback on concerns that the need for some banks to raise capital will hinder an economic recovery. If that outlook takes hold it could also dampen expectations for a recovery in oil demand and undermine sentiment in the oil market. The crude oil market has been ignoring its own internal bearish fundamental setup and has instead rallied in tandem with equity markets on the prospects for a recovery in oil demand as economic conditions have recently shown signs of improving. Therefore, a bullish surprise in the EIA report will need to be seen in order to offset the weak equity market action which is reflecting doubts that an economic recovery is set to take hold. In fact, given the oil markets high positive correlation to equities recently, an early rally in crude oil off the EIA report may not be able to hold if equities see a sharp slide. The bulls have a slight edge, but the bears could regain control if outside market action turns negative. Overhead resistance for June crude oil comes in near $55 with support at $53.50 then $52.36.

GASOLINE: June gasoline has traded higher overnight with the market finding support from an unexpected decline in API gasoline stocks. Gasoline stocks showed a 2.9 million barrel drop against trade expectations for a nearly 1 million barrel rise which occurred despite a jump in the refinery operating rate raising some concern of a tightening in gasoline stocks ahead of the summer demand season. But gains in gasoline have been limited so far as the trade seems to want confirmation of lower gasoline stock levels from today’s EIA report. While there is the chance for a bullish EIA report to initially lift June gasoline to test resistance at the $1.60 price level, we have doubts price gains can hold if losses in equity markets begin to mount. For gasoline, it is certainly possible that economic recovery doubts could carry more weight than supply side developments. In fact, a move under $1.5626 in June gasoline is likely to trigger more aggressive chart base selling. With the economic recovery fragile, we suspect strong equity market backing will be needed to hold gasoline up at these higher price levels.

HEATING OIL: Heating oil is holding relatively firm with the market finding support from the strength in gasoline despite a bearish inventory reading. But the API report showing a 1 million barrel rise in distillate stocks leaves heating oil vulnerable to a pull back below the $1.40 price level if today’s EIA data fails to trigger a strong bullish reaction in the rest of the energy complex. The weak action in equity markets is also a caveat for the bull camp. With the internal fundamentals bearish for heating oil, the market could begin to slip back towards the April lows if macroeconomic sentiment starts to turn less positive.

TODAY’S ENERGY MARKET GUIDANCE: The bull camp looks to have a slight early edge, but that could change if equity market losses mount. Even a bullish EIA inventory report may not be enough to support oil prices if macro-economic doubts develop.

This content originated from – The Hightower Report.