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CRUDE OIL MARKET FUNDAMENTALS: Oct crude oil has added solid gains in the overnight trade following yesterday’s sharp upward price reversal after holding a test of key support near $70. While it was clear that the oil market ran into a wall of resistance at the $75 price level earlier in the week, seeing equity markets stall out near 10 month highs also seemed to shake the confidence of the bull camp and had traders questioning the fundamental value of crude oil in light of the market’s ample supply/weak demand setup. Yesterday’s sell off in crude oil looked to be tied to a general commodity liquidation wave triggered by the early weakness in equities rather than a major turn in sentiment. In fact, with oil’s price direction still highly linked to equity market trends, it wasn’t too surprising to see Oct crude oil vault higher as upside momentum in the stock market started to build. It also looks like part of the sharp recovery in oil is technically based since Oct crude oil basically held a test of the $70 support level and that seems to have triggered a fresh wave of speculative buying. The free fall in the Dollar yesterday has likely been another factor raising investor risk appetite for crude oil as an inflation hedge. With generally better than expected economic news seen so far this week and more importantly with equities back near 10 month highs, this situation would seem to give the bull camp in oil the edge again. It is also possible that news of some refinery issues and a forecast for OPEC exports to decline into early September may be providing some additional price support to crude oil. The sharp reversal action amid overnight price gains leaves Oct crude oil in a good technical position to retest the Aug highs. But the move to higher price levels will certainly require strong upward leadership in equities, a generally weaker Dollar and a flow of news that continues to build macro economic optimism. Otherwise, without a strong equity market raising hopes for a recovery in fuel demand, the oil market’s bearish fundamental setup including offshore oil supplies estimated at around 80 million barrels, hardly justifies prices up at these high levels. Look for the bull camp in oil to get a fresh resolve as long as equities can rally as that has the potential to lift oil back to test $75. Resistance for Oct crude oil comes in at $73.57 then around $74 and above there near $74.51 with support at near $72.49 then $72.10 and below there near $71.21.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: Oct gasoline has also been able to follow through higher overnight after yesterday’s impressive price recovery leaving the market in a stronger technical position. Despite the sharp price swings this week Oct gasoline remains confined within a well defined trading range. However, seeing the market hold critical support at the $1.80 level in yesterday’s trade again puts gasoline in a position to retest this week’s highs. Generally bullish economic news this week and more importantly, the gains in equity markets have been the main factors behind the price recovery in gasoline giving the market renewed hope for a revival in fuel demand. But on a fundamental basis there is a good chance for gasoline demand to weaken this fall. In fact, Labor Day holiday driving is expected to be down by more than 13% compared to year ago. Therefore, the low refinery operating rate may not significantly tighten fuel supplies which are currently at a comfortable level. If the fundamentals for gasoline fail to improve, we suspect the market will need a steady stream of good economic news and equity market gains to build strong enough optimism toward fuel demand in order to lift Oct gasoline back into the upper end of the consolidation range between $1.9381 and $1.9520. Support for Oct gasoline comes in near $1.8850 then $1.8687 with resistance at $1.9255.

HEATING OIL: The higher price action in Oct heating oil overnight after the market was basically able to hold a test of support around $1.84 leaves the market in a position to migrate back towards the upper end of the consolidation range near $1.96. With the dollar still near recent lows and if equities can make another thrust higher the path of least resistance for heating oil should remain up even though the supply/demand setup remains quite bearish. In fact, the heating oil market has been mostly able to push aside the fact that distillate supplies are near 25 year highs while industrial demand continues to slide and instead focus on an improving macro economic picture. Therefore, if equities continue to gain upside traction and today’s economic reports promote more optimism toward a recovery in fuel demand, it should feed the speculative buying interest in heating oil.

TODAY’S ENERGY MARKET GUIDANCE: It is clear that oil market direction remains closely tied to the ebb and flow of equities. If equities gain upside traction this session and the S&P is lifted to a new high for the move, there is likely to be a strong bullish response in the oil markets.

This content originated from – The Hightower Report.