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CRUDE OIL MARKET FUNDAMENTALS: February crude oil has snapped back higher in the overnight trade after the API late yesterday reported a shockingly large decline in oil stocks. February crude oil has fallen by over $5 in the last three sessions partly on escalating concerns over rising supplies. Therefore, seeing the API inventory reading showing a 5.8 million barrel decline in oil stocks when a 500,000 barrel rise was expected certainly begins to ease some of those supply side concerns. A 1.3% jump in the refinery operating rate was the principal reason behind the stock decline but it was also bullish to see such a sharp dive in oil stocks even though oil imports were nearly 1.1 million barrels higher than the previous week. Rising investor risk appetite connected to a sizable break in the dollar and firmer equities this morning is also raising the appeal of oil as an alternative asset and inflation hedge. But there were still bearish elements to the API report including a 1.5 million barrel rise in oil stocks at the Cushing, OK location and a 1 million barrel rise in distillate stocks when most traders were expecting a decline. Therefore, in order for the crude oil market to build on overnight gains we suspect it will be critical for today’s EIA report to also show a sizable fall in oil stocks. Otherwise, if the EIA report comes in bearish, we suspect oil markets could quickly reverse to the downside. Even if the EIA report does come in positive, we are still skeptical of the upside potential in crude oil since overall fuel supplies remain high, OPEC compliance is low and since economic conditions haven’t been strong enough to support a recovery in fuel demand. In fact, the widening contango price structure is clearly reflecting the current overhang of oil supplies in the marketplace. The demand outlook for oil has also been undermined by the EIA yesterday trimming back their forecast for a recovery in world and US oil consumption next year. It won’t be too surprising to see some upward price correction in crude oil after such a steep price break this month. But a rally in February crude oil may be limited to the $77.50 to $78.10 price range unless a much more optimistic view for a recovery in the economy and fuel demand can take hold. The bull camp has the early advantage, but the EIA report will be the key driver in today’s market direction.
GASOLINE: February gasoline has also seen a sizable bounce in the overnight trade with price support coming from an unexpected decline in fuel stocks reported by API yesterday as well as a weaker Dollar. Gasoline inventories fell 753,000 barrels compared to a 1.5 million barrel build expected by most traders and that certainly seems to be easing concerns over rising supplies, which has been a major weight on the market since prices topped in October. It was also positive to see gasoline stocks fall despite a rise in production and a jump in the refinery operating rate. The outside market action has also provided a measure of price support to gasoline, now that currency connected selling pressure in gasoline has been lifted with the Dollar falling back in the overnight trade. But in order for upside traction to take hold in gasoline we suspect the EIA report will also need to show as similar reading. But we also suspect a recovery in February gasoline could be limited to the $2.00 to $2.03 price range since growth conditions in the economy don’t appear to be strong enough to support a significant recovery in fuel demand. In fact, the latest retail pump survey shows the four week moving average of gasoline demand last week rose.5% compared to year ago. The bulls have the early edge, but a positive EIA report may be essential to maintain the upside momentum being seen in gasoline in the morning trade. Look for more aggressive chart based buying in February gasoline on a move above $1.9827 with resistance above there at $1.9950 with support near $1.95.
HEATING OIL: February heating oil has also seen a firmer trade overnight with the market swept higher by the gains in oil and gasoline, despite a bearish reading in the API inventory report. Gains in heating oil have been tempered since it was surprising to a 1 million barrel rise in distillate stocks compared to expectations for a 300,000 barrel decline. The rise in stocks leave distillate supplies near 26 year highs and this glut has weighed on heating oil prices despite forecast of frigid temperatures in key US heating regions over the next two weeks. There would seem to be some rally potential for February heating oil given the sharp break in prices this month. But it is apparent that if refiners marginally raise operating rates fuel demand remains too slack to soak up the extra supply. Therefore, the supply/demand outlook still looks unfavorable and that’s likely to limit the upside potential in heating oil for now. Overhead resistance for February heating oil comes in near $2.0537 then $2.0675 with support in the $2.0090 to $2.0000 price range. On a bearish EIA reading, heating oil may lead on the downside.
TODAY’S ENERGY MARKET GUIDANCE: A positive API report gives the bull camp the early edge. But in order to build on gains, oil markets will likely need to see an improvement in the supply side be confirmed in today’s EIA reading. Otherwise, the bull camp is likely to lose their grip, especially if the dollar starts to recover from overnight lows.
