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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has fallen sharply in the overnight trade with sentiment turning bearish after last week’s economic news suggests a global recovery in fuel demand could be a slow drawn out process. This view is being reflected in the decline in global equity markets with macro economic optimism seeming to evaporate after reports last week showed high unemployment rates in the US and Euro-zone and a sharp contraction in UK 1st quarter GDP leaving the fundamental outlook for oil bearish. Crude oil stocks have dropped consistently over the last four weeks as refiners boost output in anticipation of higher summer fuel demand. But with economic conditions weak and summer fuel demand thought to have peaked, oil prices are also being undermined by concerns that industry demand for oil could start to decline since high product stocks and weak profit margins could lead to refiners cutting back fuel production. It is a bit surprising that another attack by militants on a Nigerian oil facility hasn’t provided any measurable price support to crude oil. But with crude oil stocks over 54 million barrels above year ago, apparently the market thinks less supplies from Nigeria won’t have a measurable impact since the demand outlook remains weak. Seeing Saudi Arabia cut prices for its Arab light crude to US customers in August could also be reflecting weak global fuel demand conditions. In fact, the slide in crude oil seems to be part of a broad based decline in physical commodities also tied to gains in the Dollar as well as a less optimistic economic outlook which is diminishing oil’s appeal as an inflation hedge and may even be rekindling some deflation sentiment. Given the sharp price slide over the last four sessions, Aug crude oil may be able to bounce a bit if today’s ISM-service sector reading comes in better than expected. But based on oil’s fundamental setup, prices above $70 per barrel were clearly too high. And seeing Aug crude oil fall below several key levels including $63.77 leaves the market vulnerable to an eventual pull back to the $62.32 to $60.00 price range this week.
GASOLINE: Given the slide in Aug gasoline prices overnight, the market looks to be in the midst of the next leg down. With gasoline stocks rising sharply in the last three weeks and retail gasoline demand anemic, the fundamentals for this market clearly favor the bear camp. With optimism for a quick economic recovery fading, gasoline continues to retreat from the $2 per gallon price level as both the EIA and AAA auto group are predicting that pump prices in June were likely the summer peak. After a four session price slide, Aug gasoline may be getting a bit short-term oversold. But the break under $1.7327 leaves the chart setup bearish and Aug gasoline vulnerable to an eventual break back towards $1.65 to $1.6334 price range, especially if the macro economic outlook continues to sour.
HEATING OIL: Given the market’s bearish fundamental setup, it’s not too surprising to see Aug heating oil sink in the overnight trade, especially since optimism for a quick recovery in fuel demand has been undermined by last week’s economic news. With distillate stocks over 35 million barrels above year ago and demand still 9.4% below year earlier levels, a downward price adjustment in this market is certainly called for. Some type of recovery bounce may be possible soon since short-term technical indicators suggest Aug heating is becoming a bit oversold. But with the market falling bellow support at $1.6386, the chart setup leaves the market vulnerable to an eventual break back to the mid-May low.
TODAY’S ENERGY MARKET GUIDANCE: The prospects for a slow macro economic recovery is putting sharp downward price pressure on the energy complex as the environment remains bearish for a quick recovery in oil demand. With weak equity markets also reflecting this view and a strong Dollar even reviving some deflation expectations, it’s apparent the oil market is being undermined by a variety of factors.
