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CRUDE OIL MARKET FUNDAMENTALS: While crude oil has traded higher in the overnight action, we would have expected a stronger positive reaction to yesterday afternoon’s bullish API report. API showed crude oil stocks falling by 254,000 barrels when most traders were looking for over a 2 million barrel gain and the surprise decline was likely due to an unexpected jump in refinery operations. We also thought the oil market would have been cheered more by the unexpected decline in distillate stocks since it could suggest improving fuel demand. But perhaps the market is a bit hesitant to take prices up too far until the EIA’s more complete inventory reading is seen since these two reports at times can show significantly different results. But overall market sentiment has improved as this week’s economic news and rate hike by Australia has raised macro economic optimism for a recovery in oil demand. In fact, a better oil demand outlook was further supported by the EIA raising their forecast for US and global oil demand in the 4th quarter of this year and in 2010. But since the current fundamental condition for oil is still bearish with stocks at a 38 million barrel annual surplus, it seems as if the outside market action has been the primary driver behind the price gains this week. With the Dollar nearing contract lows and low US rates likely keeping the currency on a downward track, rising investor risk appetite certainly has the potential to lift the oil market higher. With gold also on an upward course, some inflation based buying seems to be coming into the energy markets. While there may be the potential for the oil market to be undermined by today’s EIA report if a bearish surprise is seen, we suspect the direction in equities could ultimately have a bigger impact. The oil market has seen a strong recovery move off of last week’s low as the market has been pulled higher by the strength in equity markets throwing off a bullish macro economic view. But we suspect a big potential stumbling block for the oil market is whether the US equity market can rally through the 3rd quarter corporate earnings reports that begin today and avoid a significant setback. Since the fundamentals for the oil market are still bearish, we suspect a steady build in economic optimism will need to be seen along with a down trending Dollar in order for oil to push aside the supply glut and trade higher off the bigger macro economic picture. Otherwise, crude oil up these price levels will be vulnerable to a setback if outside market support starts to erode. The bull camp has the early edge, but November crude oil will need to push through overhead resistance at $71.85 to gain upside traction with the next target above there at $72.50. If the market starts to back track, support comes in at $70.47 then near $70.00.
GASOLINE: November gasoline has also seen a higher trade overnight although not the type of gains we would have expected given the bullish API news. The market continues to run into strong overhead resistance near the $1.80 price level which is a bit surprising since the API report showed only a 544,000 barrel gain in gasoline stocks compared to most traders expecting over a 1 million barrel stock rise. But the market seems to be recapturing upward price momentum and sentiment has likely been improved by yesterday’s report on retail gasoline pump demand which rose 2.2% on a 4 week moving average basis compared to year ago and up.6% compared to the previous week. The early outside market action is also providing a measure of price support to gasoline, but the start of the US corporate earnings season could be a potential hazard for the bull camp if disappointing results pressure the equity markets. We also suspect the gasoline market will need to see a bullish reading in today’s EIA report before attempting to push above the key $1.80 level. The market bias remains up, but to lift gasoline back toward the September higher a better macro economic view may need to take hold.
HEATING OIL: November heating oil has traded higher overnight off the API new, but so far hasn’t been able to push through tough overhead resistance in the $1.8424 to $1.85 price range. In fact, it’s a bit surprising the market hasn’t seen a stronger bullish reaction to the unexpected 2.9 million barrel drop in distillate stocks despite the jump in refinery operations as this data could clearly rekindle hopes for a recovery in fuel demand. But with distillate stocks still at a 43.2 million barrel annual surplus, perhaps the market needs to see the improvement in stock levels being confirmed in today’s EIA report before the bull camp cam reclaim more control. Outside market influences have been generally supportive in the early going. But the bull camp in heating oil could lose their grip if outside market support starts to fade if the Dollar bounces and equities lose their footing perhaps in reaction to today’s corporate earnings news. Therefore, in order for November heating oil to trade beyond the $1.85 price hurtle may require both outside market support and a bullish EIA stock reading. Otherwise, the market could side back to test support at $1.80.
TODAY’S ENERGY MARKET GUIDANCE: The bull camp looks to have an edge in the early going, but good corporate earnings news and a bullish EIA report may need to be seen to lift markets above critical overhead resistance. Otherwise, all markets will be vulnerable to a pull back.
