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CRUDE OIL MARKET FUNDAMENTALS: After last Friday’s sharp losses, crude oil has attempted to trade firmer overnight with the market at times finding some support from a weaker Dollar amid easing concerns over Dubai’s debt problems and ideas the impact on the global economy will be limited. The oil market may also be seeing some support from escalating geopolitical tensions between the US and Iran over Iran pushing ahead with its nuclear program and announcing plans to build several new uranium enrichment plants. But so far there doesn’t seem to be a strong buying conviction in the market perhaps since European & US equity markets haven’t staged a strong recovery bounce overnight suggesting confidence remains an issue. And unless the US equity market can stage a strong recovery this session, we suspect the early relief rally being seen in oil could be cut short. But even if crude oil can follow through higher this session, we remain skeptical of the market’s upside potential or the market’s ability to hold at higher price levels give that crude oil remains burdened by high supplies and weak demand. In fact, an oil official from Iran is predicting global demand for OPEC oil in the first quarter of next year will fall below the cartel’s current output level while non-OPEC production was expected to increase. Despite some signs economic conditions are starting to improve, growth hasn’t been strong enough to provide a recovery in fuel demand which is still down 3% compare to year ago. A low refinery operating rate also raises the odds for oil supplies to continue to build in the weeks ahead. Technically, January crude oil has been in a declining price pattern since the October high and unless the fundamentals for the oil market begin to improve, we suspect the $80 price level will remain the upper ceiling for January crude oil right now. While crude oil may find some additional price support from the weak action in the Dollar, we are skeptical the market will be able to stage a rally back towards last Wednesday’s highs near $78 unless equities can register strong gains and provide a fresh dose of macro economic optimism. But even that may not be enough to support January crude oil back above $80 right now unless the supply/demand situation for crude oil shows actual signs of improving. With funds still likely holding a large net long position in crude oil, we also suspect the market will be vulnerable to month end and end of the year profit taking which could make for a volatile trade this session. Resistance for January crude oil comes in near $77.00 then near $77.50 with support at $75.75 then near $75.50.
GASOLINE: January gasoline has been able to bounce a bit in the overnight trade following last week’s sell off. Gasoline has been able to gain on the back of a weaker Dollar reflecting to some extent an easing in concerns that the Dubai problems will spill over into the broader economy. The expiration of the December futures contract may add to market volatility this session. But with equities seeing a somewhat softer trade in the early going, we suspect the upside in gasoline will end up being very limited unless the stock market can reverse course. The latest inventory report showed gasoline stocks rising and fuel demand anemic and given the market’s weak fundamental setup, a rally back towards last week’s highs will likely prove to be difficult while leaving downside price risk in place. Although gasoline appears to have a slight upward bias in place this morning, we are skeptical early gains will hold unless strong outside market support is seen. Resistance levels for January gasoline come in at $2.00 then $2.0150 and above there at $2.0255 with support at $1.9550 then near $1.9426.
HEATING OIL: January heating oil has attempted a recovery bounce in the early overnight trade but despite a weaker dollar raising investor risk appetite, heating oil hasn’t been able to garner much upside traction. The market still looks to be a bit jittery over the Dubai debt situation given the choppy to lower trade in equities and this certainly has been a limiting factor for heating oil. The weather outlook isn’t particularly cold for the Northeast over the next two weeks and that could also hinder rally attempts in heating oil since frigid temperatures are needed to work down the glut in supplies. Trading may be volatile due to the expiration of the December heating oil contract today. But while there may be some short-term potential to trade higher on outside market support, we don’t expect price gains in heating oil to hold given that distillate supplies are at 26 year highs and fuel demand still remains very weak. January heating oil has been in a clear down trending price pattern since the October high and unless the fundamental backdrop for this market can begin to improve we suspect January heating oil will eventually make another test of the $1.90 price level. Resistance for January heating oil comes in at $2.0355 then near $2.0457 and above there at $2.0568 with support near $2.00 then near $1.9718.
TODAY’S ENERGY MARKET GUIDANCE: Unless equity markets can stage a recovery bounce along with additional losses in the Dollar this session, we suspect overnight rally attempts by oil markets will quickly fade and leave downside price risk in place.
