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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has snapped back in the overnight trade with price support coming from a sharply weaker Dollar and firmer equity market trade while the market also looks to be getting weather related support from a hurricane in the Gulf. Hurricane Ida moved into the Gulf of Mexico over the weekend and has forced the LOOP to stop taking tanker deliveries and some off shore oil production to be shut down which has partly been responsible for the short covering move in the oil futures markets overnight. Also, the strength in oil prices can certainly be tied to fresh speculative buying in connection with the slide in the Dollar raising investor risk appetite and the appeal of oil as an inflation hedge, especially with gold being propelled to a new all time high. Oil has gained as the weekend G20 meeting failed to provide any Dollar supportive commentary with the currency also under pressure after last week’s bearish employment news will likely ensure a loose Fed policy for some time. We also suspect some of the oil strength may be technical buying since the market held above key support last week despite last Friday’s sell off. The bull camp has certainly gained the early edge and supportive outside markets along with storm fears may be enough to lift January crude oil back above $80. But we are skeptical price gains into the upper end of the range will hold. The Gulf storm has been downgraded to a category 1 hurricane and if it continues to lose strength and become less of a supply threat, oil prices could start to back peddle later in the session. With oil supplies high, there will need to be structural damage done to off shore facilities in order to have more of a lasting impact on oil prices and hurricane Ida would likely have to pick up strength for this to occur. While oil is being swept higher by the general strength in commodities this morning, we are skeptical the market will be able to hold at higher price levels since the demand outlook has certainly been undercut by last week’s jump in the US unemployment rate. The Nov 3rd COT report with options for crude oil clearly shows the market to be overbought with the combined fund and spec net long position climbing to a record level as of early last week and money managers holding the highest net long position in crude oil in over three years. Therefore, outside market support may not be enough to thrust the market beyond the October highs unless macro economic optimism is also revived. Since we don’t see the supply/demand situation for crude oil improving in the near-term, we suspect fresh fundamental doubts will be stirred up on a rally back into the $80 to $82 range to prevent a move into a new higher price zone. The bull camp has the early edge but don’t be surprised if the rally in crude oil stalls out near $80.
GASOLINE: December gasoline has bounced in the overnight trade and has been able to retrace a good portion of last Friday’s losses with both technical and Dollar related action providing firm price support. Part of the buying in December gasoline looks to be chart based after the market was able to bounce off the $1.90 level last Friday and also held a.618 retracement of the October range. The weak Dollar may also be drawing some fresh speculative and fund buying interest back to gasoline since the outside market action including higher gold & equity prices is creating a bullish environment for commodities. News that China’s passenger car sales jumped sharply last month may be easing some demand side concerns. But last week’s inventory data left the supply/demand setup for gasoline bearish and the weak US employment report raises doubts that the pace of the economic recovery is strong enough to significantly lift fuel demand. The November 3rd COT report with options for gasoline shows the net long position of the funds close to a record level and money managers also holding a net long position in gasoline close to three year highs. Therefore, despite the support coming from the weak Dollar we are skeptical the market will be able to add enough additional length to drive December gasoline back over the $2.00 resistance level unless the fundamental outlook can improve.
HEATING OIL: December heating oil has also been able to snap back in the overnight trade on weather related jitters and buying tied to the weak action in the Dollar. The market has moved back above the critical $2.00 support level and that may be encourage some additional short covering. But with the fundamentals for this market decidedly bearish, a lack of cold temperatures in the forecast and if the Gulf hurricane continues to lose strength we suspect the rally in heating oil will stall below the $2.10 resistance level. With last week’s bearish employment news suggesting industrial fuel demand could stay week for some time, we have doubts that bullish outside market influences will be enough to lift December heating oil too much higher. Also the traders positioning in the Nov 3rd COT report with options for heating oil may make it difficult for the market to gain much upside traction since funds held a record net long position as of early last week and money managers were also closing in on the highest net long position in three years. While the bull camp has regained early control, we can’t get too positive on this market until a close back over $2.10 is seen while a break back under $2.00 should trigger more chart based selling.
TODAY’S ENERGY MARKET GUIDANCE: The bull camp has the early edge as hurricane related supply jitters and outside market influences paint a bullish environment for commodities. But with the COT report showing oil markets remain overbought we suspect this rally will eventually stall out unless macro economic optimism for a recovery in oil demand can be revived.
