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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has pulled back from overnight highs after making an initial push above $80. Some of the profit taking in oil is likely tied to a steady Dollar/weaker equity trade overnight while lingering demand doubts could also be holding the market back. To a certain extent, the 3.5% gain in 3rd quarter GDP with the economy growing at the fastest pace in two years has helped to revive macro economic optimism that had been undermined earlier in the week by the soft readings in consumer sentiment and new home sales. Seeing US jobless claims fall has also helped to ease macro economic doubts and improve oil market sentiment a bit. But this week’s EIA report did show builds in gasoline and crude oil stocks and continuing evidence of weak fuel demand seems to have left the bull camp’s confidence a bit shaky. In fact, the global oil demand outlook may have been undermined by news that Japan’s oil product sales fell 5.9% last month due to weak industrial fuel use and low gas sales raising doubts that the strength in China’s oil demand can lead to global oil growth. Major oil companies have also reported poor corporate results due to weak fuel demand and that has also been creating some doubt among oil traders. Since pulling back from the high reached earlier in the month, December crude oil has had a hard time recapturing price levels above $80. But in order for the oil market to completely push aside internal supply/demand concerns and further raise macro economic expectations for a recovery in oil demand will likely require seeing good readings in today’s reports on consumer sentiment and Chicago PMI. A good portion of yesterday’s gains were also tied to the sell off in the Dollar which creates a bullish environment for commodities and raises the investment appeal of oil as an inflation hedge. After failing at a key chart level in yesterday’s trade, we suspect the Dollar could soon start a new leg down. But given the weak early price action in crude oil, the Dollar will need to build on yesterday’s losses in order for the oil market to regain its footing. Yesterday’s rally in crude oil was impressive, but technical indicators still show the market to be overbought and that could be another factor weighing on prices this morning. Therefore, in order for the oil market to completely shake off oil demand doubts and overcome its technical condition we suspect a very bullish outcome will need to be seen in today’s economic reports that triggers a strong positive reaction in equities and a break in the Dollar. End of the month position adjustments and the expiration of the November product contracts could also play a role in today’s trade that adds volatility in the session.
GASOLINE: December gasoline has started to pull back in the early overnight action as apparently the trade may want to see more evidence of a macro economic recovery before pushing the market to higher price levels. The rise in gasoline stocks and generally weak oil demand data have pulled the rug from under the bull camp this week. Yesterday’s strong GDP reading helped to restore some of the macro economic optimism that has faded this week, but we suspect stronger than expected readings in today’s scheduled reports will be necessary to further convince the trade that the economic momentum seen in the 3rd quarter is continuing in this quarter. Despite the sell off this week, December gasoline still looks a bit short-term overbought and for the market to overcome its technical condition will also likely require price support from bullish outside market influences. The technical action in the Dollar yesterday looked as if the recent corrective bounce in the currency had been completed and Dollar ready to resume its downtrend. But the Dollar has held fairly steady overnight and unless the currency starts to back peddle, we suspect gasoline could give back a portion of yesterday’s gains. Support for December gasoline comes in between $2.01 and $2.00 and below there at $1.9690, with resistance at $2.0441 then $2.085. A volatile trade could be seen due to end of the month profit taking and the expiration of the November gasoline contract.
HEATING OIL: December heating oil has backed away from yesterday’s highs in the overnight trade as a lack of follow through weakness in the Dollar and a soft equity market trade seems to have inspired some traders to book profits following yesterday’s price gains. While the GDP reading seemed to restore some macro economic optimism that had been lost earlier in the week, apparently the trade needs more economic convincing before lifting December heating oil back over the $2.10 resistance level. Certainly the fundamentals for this market remain bearish with distillate stocks high, a mild temperature outlook keeping heating demand low and industrial fuel use still weak. Technical indicators still show heating oil to be overbought and that condition is likely another factor weighing on the market. Therefore, the trade will need to see a combination of strong economic news and a sell off in the Dollar in order for the bull camp to reclaim control and make a run at yesterday’s highs. Otherwise, December heating oil could end up giving back a good portion of yesterday’s gains.
TODAY’S ENERGY MARKET GUIDANCE: Bearish outside market influences and some lingering fuel demand doubts are giving the bear camp the early edge. Therefore, in order to shift control back to the bull camp today’s economic reports will need to trigger a sharp sell off in the Dollar.
