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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has fallen back overnight weighed down by bearish outside market influences amid doubts that the global economic recovery will result in stronger oil demand. It’s not too surprising to see equities pull back overnight and the Dollar follow through higher from last Friday’s gains since both markets seemed to reach technical extremes last week and that action has inspired more aggressive profit taking in oil. With the stronger Dollar lowering investor risk appetite and a general feeling that global equity markets have run up too far to fast, under these conditions November crude oil above $73 per barrel also looks fundamentally over priced. The demand outlook for oil is likely to weaken in coming weeks due to seasonal refinery maintenance and that could build up oil stocks which already sit 29.7 million barrels above year ago levels. Weak industrial fuel demand and the glut in US distillate stocks is another major negative for the market. In fact, doubts about global fuel demand were escalated overnight by the head of China’s major oil company saying diesel demand remains weak which has undermined market expectations that rising fuel demand in China will lead a global fuel recovery.
The trade also seems to be jittery ahead of this week’s FOMC meeting on concern the Fed will begin to hint at a stimulus exit strategy as that could threaten a recovery in oil demand. It also looks as if part of the selling in crude oil is technically based since the September 15th Commitment of Traders report with Options for crude oil showed the market to be overbought with the “combined” spec and fund net long position at 143,033 contracts as of early last week which is understated since the market rallied another $2.28 per barrel from when the report was measured. Since the rally in crude oil last week had been based on macro economic optimism tied to financial market trends rather than internal supply/demand improvements, November crude oil has the potential to fall back under $70 if the weak action in equities and the recovery bounce in the Dollar gain more traction. We have doubts that today’s leading indicators data will carry enough economic clout to significantly influence oil trading. With price corrections being seen in a variety of markets and November crude oil pushing below several layers of support, it looks as if the market is set to see some additional downside traction if outside market influences remain bearish this session. Look for more aggressive chart based selling in November crude oil if $70.44 fails to hold. A close under $70 will set the market up for a retest of last week’s lows. However, if the Dollar starts to give up early price gains, Nov crude oil is also likely to cut losses with close in resistance at $71.64.
GASOLINE: November gasoline has also fallen sharply in the overnight trade as a lack of outside market support and surfacing macro economic doubts have thrown into focus the prospect of rising gasoline supplies and weakening retail gasoline demand into the fall. High unemployment rates suggest gasoline demand could stay weak for some time and could result in rising gasoline stock levels despite refinery maintenance. The September 15th COT report with options for gasoline showed the combined fund and spec net long position at 36,994 contracts which is understated given the rally in gasoline since the report was measured. With November gasoline falling below $1.80, it puts the market at risk to test support at $1.7856. Failure to hold that retracement level will leave Nov gasoline vulnerable to a break back to last week’s lows. Without outside markets providing a bullish macro economic environment, the path of least resistance for gasoline will remain down.
HEATING OIL: November heating oil has fallen back sharply overnight along with the rest of the energy complex and without bullish outside market support, last week’s rally certainly appears overdone considering the market’s bearish fundamental setup. With US distillate stocks at 26 year highs and industrial fuel demand continuing to slide, the market seemed to be counting on fuel demand in Asia to lead a global recovery. But that outlook has been undermined by China’s bearish assessment of domestic diesel demand suggesting China is likely to export large amounts of distillate fuel adding to the global supply glut. It also looks like part of the selling in heating oil is technically based as the September 15th COT report with options for heating oil showed the market becoming a bit overbought last week with the fund and spec net long position reaching 33,490 contracts as of early last week which is understated considering the rally in heating oil from when the report was measured. If equities stay weak and especially if the Dollar gains more upside traction, the market’s fundamentals look bearish enough to push November heating oil back below $1.80.
TODAY’S ENERGY MARKET GUIDANCE: The bear camp clearly has the edge this morning, but the extent of the sell off in the oil complex will be highly dependent on how extreme the technical corrections in equities and the Dollar turn out to be. If the Dollar starts to back peddle and equities stage a recovery bounce, oil markets are also likely to trim losses.
