Crude oil has seen a two-sided trade overnight and in the early going, the market seems to have a bit of a weaker price bias. In fact, we would have expected a more positive reaction in crude oil considering the sharp decline in US stock levels, the IEA’s improved demand outlook along with a variety of bullish economic and oil demand news out of China overnight. Seeing a 12.3% annual rise in China’s August industrial production and continued growth in investment and credit should feed into bullish macro economic optimism that global conditions are improving and that view should brighten the outlook for oil demand. In fact, China reported an 18% rise in August oil imports compared to a year ago and we are surprised this news hasn’t provided more support to oil prices. There seem to be a couple factors holding the market back. While EIA crude oil stocks fell nearly 6 million barrels last week, sharp gains in product stocks are certainly a negative, especially since distillate stocks are already at an extremely high level. It was certainly encouraging to see total product demand up 2% over the past four weeks compared to year ago. But expectations for oil demand to weaken as refineries head into fall maintenance may also be keeping bullish sentiment in check. And although crude oil stocks fell sharply, supplies are still nearly 35 million barrels above year ago levels. October crude oil has also run into tough overhead resistance at $72.50, a level that has capped the market’s rally attempts over the last two sessions. A move over $72.50 would put October crude oil back into the upper end of the market’s $67.00 to $75.00 trading range seen over the last month. But in order for that to happen, the market may require more outside market support to inspire fresh speculative buying up at these price levels. The Dollar was pushed to a new low for the move overnight and global equity markets generally climbed and if those market trends continue into the US session that could spark a rally in crude oil, especially if a bullish surprise is seen in today’s consumer sentiment reading. Although crude oil may start the session out on weak footing, it won’t be surprising to see the market push higher this session given the variety of positive factors that seem to be in place today.
GASOLINE: After yesterday’s sell off tied to a bearish inventory report the gasoline market has also seen a two-sided trade in the overnight action. While the EIA report did show a 2.2% rise in gasoline demand, the 2.1 million barrel jump in fuel stocks clearly indicates that supply continues to overwhelm consumption. That’s likely to remain an obstacle for the bull camp, especially since gasoline demand tends to soften into the fall. However, outside markets also remain highly influential on gasoline’s price direction and we suspect the market will be able to push aside bearish internal fundamentals if outside markets turn more supportive. Given the bullish demand news from China, it won’t be surprising to see Oct gasoline pull higher this session if US equities continue to gain upside traction and the Dollar remains weak. In fact, if today’s consumer sentiment reading adds to macro economic optimism, we suspect October gasoline could retest yesterday’s highs.
HEATING OIL: Heating oil has traded mostly weaker overnight as the market has certainly been undermined by the EIA inventory report showing a nearly 2 million barrel rise in distillate stocks raising the year ago surplus to over 33 million barrels. Seeing distillate demand fall by 5.6% over the past four weeks compared to year ago clearly leaves the fundamentals supporting the bear case. However, we suspect there is the potential for heating oil to trade higher this session if the outside market action turns more supportive. Gains in equities overnight, firmer gold prices and another slide in the Dollar leave the trade environment positive and if investor risk appetite continues to grow, inflation based buying is likely to give heating oil at least a temporary lift, despite the market’s bearish fundamentals. Support for Oct heating oil comes in at $1.7670 (yesterday’s low) with resistance at $1.8148.
TODAY’S ENERGY MARKET GUIDANCE: There is the potential for oil to make another upside run if macro economic optimism and commodity inflation sentiment is fanned by further gains in equities & gold this session along with a continued slide in the Dollar.
