CRUDE OIL MARKET FUNDAMENTALS: Crude oil has been able to bounce back after yesterday’s sell off as the market continues to show resiliency to negative news. Certainly part of the recovery in oil is likely tied to the weaker action in the Dollar overnight drawing investors back to energy markets as an inflation hedge. Bernanke’s comments yesterday predicting and end to the US recession this year, but raising concerns over the growing level of US debt seems to have undermined the dollar and raised the appeal of physical commodities such as oil. The oil market also seems to be getting a lift from a major investment bank raising their price target in oil to $85 per barrel this year and $95 in 2010. But with US equity markets also trading higher overnight, it seems that macro economic optimism is the primary factor continuing to underpinning oil prices.The oil market maybe seeing residual support from news of a monthly rise in Euro-zone retail sales which would seem to provide another green shoot that macro economic conditions are starting to improve. It’s been impressive to see the oil market focus on macro economic optimism and the hope that energy demand will recover even through yesterday’s EIA report showed a 7.7% decline in fuel demand and a 2.8 million barrel jump in oil supplies leaving stocks over 61 million barrels above year ago. With oil imports rising, it could mean that the large supply of oil being stored off shore is starting to make its way into the US market which may continue to raise oil stocks in weeks ahead. With the trend up and July crude oil holding around the $65 support level on yesterday’s break and the market trading back above the 200 day moving average ($65.91), leaves the technical action positive with the bull camp seeming to have recaptured control in the early going. But economic headwinds could test the bull camp’s resolve with jobless claims, retailers reporting earning today and the May employment data due out on Friday. Since the economic news could trigger more volatile price action we suggest long position holders have training stops or option profit protection in place. But if the data continues to suggest the worse of the recession has passed, it may be enough to lift July crude oil above the $70 resistance level.
GASOLINE: The price action in July gasoline is impressive as the market has bounced back in the overnight trade seeming to reject the lower levels seen in yesterday’s action. While price corrections in this market have been short lived, we are a bit surprised gasoline has been able to quickly shrug off the EIA report showing a jump in refinery operations and a sizable weekly decline in fuel demand, especially since it includes the Memorial Day holiday weekend. Still, the 215,000 barrel decline in stocks leaves the gasoline market with the best fundamental setup of the complex and if macro economic optimism holds, a rally back over the $2 per gallon price level is certainly within reach. But in order to lift July gasoline above strong overhead resistance at $1.95 we suspect US equity markets will need to build on overnight gains this session which may prove difficult unless the economic news comes in better than expected. With the market still overbought, long position holders may want to have training profit stops in place, since trading may become more volatile and two sided over the balance of the week. But given the market’s strong uptrend, price corrections still look like buying opportunities.
HEATING OIL: The heating oil market has also traded higher overnight, but a rally back above this week’s highs may prove difficult unless the economic news and outside market action can build macro economic optimism for a recovery in global fuel demand. July heating oil still looks to be technically overbought and if doubts over an economic recovery are raised, focus could shift back to the market’s bearish fundamental setup with distillate stocks at 38 million barrels above year ago and demand still down 8.8% over the past four weeks compared to year earlier levels. So far July heating oil has traded within yesterday’s range, but a move under Wednesday’s low could trigger more aggressive chart based selling with support under there at $1.6705. Close in resistance comes in between $1.80 and $1.8125. The bull camp is likely to be challenged today.
MARKET GUIDANCE: The bull camp has the early edge. But with economic headwinds ahead bullish control could slip away if outside market support begins to fade. We suspect more green economic shoots will need to be seen in order to lift July crude oil above psychological resistance at $70 per barrel.