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CRUDE OIL MARKET FUNDAMENTALS: Crude oil had traded mostly weaker in the early overnight action as lingering macro economic concerns and doubts about a recovery in oil demand continue to undermine sentiment. But the market has been able to trim losses since holding a test of last Friday’s lows in the early going and given crude oil’s oversold condition, the market may have some limited short covering potential. On a purely technical basis, a bounce in September crude oil back towards $62.09 may be possible as the market is showing some signs of temporarily being sold out. Some better than expected economic news out of Japan, reports of another attack by Nigerian militants on a loading dock for oil takers and a US refinery glitch seem to be providing light price support. But with global equity markets trading weaker overnight and US stocks under some pressure ahead of 2nd quarter corporate earnings results this week, any rally attempt in crude oil is likely to be short lived if macro economic sentiment stays bearish. In fact, with last week’s consumer sentiment reading turning down, today’s reports on US retail sales and inflation will need to come in better than expected to inspire more aggressive short covering. Since September crude oil has seen prices break over $14 in the past two weeks, it certainly raises the odds for a recovery bounce in oil and therefore, short position holders may want to have training profit stops in place. But with supply/demand conditions for the oil market still favoring the bear camp and with government officials pushing for tighter futures market regulation, we suspect rally attempts in crude oil will also attract fresh selling interest limiting gains. In fact, the COT report with options for crude oil shows fund traders lowered their net long position by over 19,000 contracts in the week through July 7th. But with funds still net long 81,852 contracts as of early last week, this market still appears to have ample selling capacity. Therefore, with a variety of negative factors stacking up against the crude oil market, short covering rally attempts aren’t likely to hold and should be considered selling opportunities.
GASOLINE: Although September gasoline has traded generally weaker overnight, short-term technical indicators have fallen to extremely oversold levels and that also raises the risk for a temporary recovery bounce to occur. Given the steep price break just over the last two weeks, short position holders may want to have trailing profit stops in place since the market could be capable of some near-term gains before starting the next leg down. Today’s economic reports may provide a short covering incentive if the data comes in above expectations and if equity markets stage a recovery. With September gasoline finding support in the $1.62 to $1.63 price range, a bounce back to $1.70 to $1.71 price range may be possible. But the fundamental setup for gasoline is becoming increasingly negative since summer fuel demand may have peaked and since supplies are beginning to build again. The July 7th COT report with options for gasoline also shows fund traders reducing their net long position with part of the selling coming from concerns over tighter government trading regulations. Since non-commercial traders were still holding a sizable net long position in gasoline as of early last week, we also suspect that technically rally attempts will attract fresh selling by the funds. Therefore, traders should consider a technical bounce in September gasoline early in the week as the next selling opportunity since an eventual break to $1.50 seems possible. Close in resistance comes in at $1.67.39 with critical support at $1.6061 (the 200 day moving average).
HEATING OIL: September heating oil’s extremely oversold technical condition leaves the market vulnerable to a temporary price bounce before making the next push lower. But with distillate stocks at 25 year highs and demand still sinking, even a move back towards the $1.60 price level may be hard to achieve. The July 7th COT report with options for heating oil shows the combined fund and spec net long position being reduced. With the government targeting tighter position limits for funds and funds still net long 28,580 contracts as of early last week, we suspect rally attempts in heating oil will also be limited by fresh fund selling. Therefore, we suspect only a minor price bounce may be possible before September heating oil is eventually pressured below the $1.50 price level.
TODAY’S ENERGY MARKET GUIDANCE: With the energy complex becoming very oversold after sharp price breaks over the last two weeks, oil markets may have some capacity to short cover. But with fuel demand weak and if doubts about the macro economic recovery continue to rise, expect any rally attempts in energy markets to be short lived.
