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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has seen a firmer trade in the overnight action with price support coming from bullish outside market influences, positive economic news out of Japan and perhaps some chart based technical strength. With the Dollar under pressure due partly to a lack of supportive currency comments coming from US and Asian leaders at a weekend meeting along with a new all time high in gold rising investor risk appetite certainly seem to be the key factors providing a lift to oil prices in the early going. Last week’s bearish sentiment toward oil demand inspired by a drop in US consumer confidence and weak readings in the inventory report may have also been tempered by a report showing Japan’s economy grew by 1.2% in the 3rd quarter which comes on the heels of Europe also reporting positive 3rd quarter growth. The oil market may be finding some additional support from news that China’s two major oil companies reported a 5% monthly decline in October fuel stocks and a rise in fuel sales and that could be improving sentiment toward the macro economic environment for oil. But while the bull camp clearly has the edge in the early overnight action, we suspect the market will need to see a combination of supportive factors in order to lift January oil back towards the upper end of the range near the $80 to $81 price levels. While the Nov 9th COT report with options showed money managers reducing their net long position in crude oil by 24,348 contracts as of early last week, the combined fund and spec net long position stood at 199,779 contracts and still close to the record net long level. Since this traders’ setup suggests the oil market likely remains overbought, this condition may continue to be a limiting factor for the bull camp. Last week’s inventory report clearly showed both the supply and demand situation for crude oil worsening. Therefore, in order to provide an additional buying incentive in today’s oil market trade we suspect better than expected results will need to be seen in the scheduled reports on retail sales and NY regional manufacturing in order to raise optimism for a recovery in oil demand. It also looks as if a sharper break in the December Dollar index back below 75 may be needed to push January crude oil above overhead resistance that comes in near $78.37 and $78.52. January crude oil may be in the midst of a technical bounce after holding a test of a key retracement level of the September low to October high range in last Friday’s trade. But with the market’s fundamentals stacking up in the bear camp’s favor, we suspect it will take very supportive economic news and strong bullish outside market support in order to inspire speculative traders to add to long positions that are already near record high levels. Given the market’s fundamental setup, we still have doubts that January crude oil will be able to hold a rally attempt above the $80 level even if the Dollar plunges lower.
GASOLINE: January gasoline has snapped back in the early overnight trade. It looks as if gasoline is finding price support from a weaker Dollar/firmer gold trade raising gasoline’s appeal as an inflation hedge while some positive macro economic and fuel news out of Japan and China may be improving global sentiment toward fuel demand. With the market seeming to reject a price dip into the lower end of the range last Friday, a rally back toward the $2.00 price level may be seen. The Nov 9th COT report with options showed money managers reducing their net long position in gasoline by 7,471 contracts as of early last week. But since this reading is likely overstated given the price break in gasoline since the report was measured, the market may be less constrained by its technical setup. But in order for the market to push aside its own increasingly bearish fundamental situation will likely require stronger Dollar related support and a more optimistic macro economic view from today’s scheduled news that can improve the outlook for oil demand. Otherwise, we suspect the bull camp could quickly lose their edge.
HEATING OIL: January heating oil has also managed a recover bounce from last Friday’s weak close and part of the strength looks to be technical as the market for now appears to be rejecting price dips under the $2.00 level. Certainly a potion of the price support in heating oil is coming from a weak Dollar/firm gold & equity trade providing a bullish environment for physical commodities. Some of the negative demand side sentiment may have been eased by the news out of Japan and China. Seeing a bullish reading in today’s economic reports and additional weakness in the Dollar may be enough to provide more of a temporarily lift in January heating oil this session. But we still see this market being burdened by a weak demand/over supplied setup that is likely to cap the market below the $2.10 price level while leaving downside price risk in place. The Nov 9th COT report with options for heating oil also shows funds holding a record net long position as of early last week and this setup could be another limiting factor for the bull camp. Overhead resistance for January heating oil comes in near $2.0410 then near $2.05 and above there near $2.0645 with support near $1.9936, the 50% retracement of the Oct high/low range.
TODAY’S ENERGY MARKET GUIDANCE: The bull camp has the early edge, but to support higher oil prices under increasingly bearish fundamental conditions will likely require a sharper break in the Dollar and a more positive macro economic view provided by today’s scheduled reports. Otherwise, we suspect the bull camp could lose its grip.
