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CRUDE OIL MARKET FUNDAMENTALS: The crude oil market has given back a portion of yesterday’s gains in the overnight trade under pressure from a sharp rally in the dollar while the market may be rethinking yesterday’s bullish reaction to the inventory data. Crude oil fell back as the Dollar gained diminishing the appeal of oil as an alternative investment and inflation hedge. Year end positioning and safe haven buying tied to a credit downgrade for Greece seems to be behind the dollar’s rally and crude oil is under pressure as investors scale back risk. But we also suspect the oil market may be undermined by expectations for the Fed to start tightening rates sooner than expected since the FOMC statement acknowledged that economic conditions show signs of improving while reiterating the Fed’s plan to withdraw its special lending programs early next year which suggests tightening liquidity conditions. But it’s also likely that the oil market is under pressure since taking a second look at the inventory report reveals several bearish indicators. While the market rallied yesterday off the headline that oil stocks fell 3.6 million barrels, a portion of the decline is likely due to refiners making inventory adjustments for year end tax reasons. In fact, with the refinery operating rate dipping below 80% and oil imports down sharply, this setup clearly shows oil demand remains weak which is confirmed by the EIA reporting total product demand over the past four weeks was down 1.7% compared to year ago. The low US refinery operating rate also suggests oil stocks could start building again in the New Year. News that Japan’s second largest refinery may close and idle facilities may be further undermining the global demand outlook for oil. While the fundamental setup for oil still isn’t particularly strong, the market still shows signs of being technically oversold after breaking sharply from the early December high. Therefore, we suspect more intense pressure from outside markets may be necessary to pressure February crude oil back below chart support at $73.07. Seeing good readings on jobless claims and leading indicators today is more likely to pressure oil than be supportive if the Dollar strengthens off the news. On the other hand, if the dollar starts to give up its early gains, there may still be enough short covering potential for February crude oil to make another run at the $75 resistance level. Escalating geopolitical tensions with Iran is another wild card that could potentially add risk premium support to oil prices. The bears have the early edge, but follow selling will likely key off the Dollar’s direction.
GASOLINE: February gasoline is also under pressure from the dollar rally and given yesterday’s inventory readings, the fundamental setup for gasoline still favors the bear camp. Yesterday’s rally may have been a bit overdone considering gasoline stock rose by 900,000 barrels despite a 1.1% decline in refinery operation which suggests fuel demand remains weak. But on the other hand, the market has become quite oversold on the sell off seen earlier this month and so more dollar strength may be needed to push February gasoline back below support at $1.86. A forecast by AAA auto club for holiday travel to be up 3.8% this year may also help to help to limit losses. While the market has an early selling bias in place, trading may be confined to the $1.9124 to $1.86 price range today with bearish fundamental and the Dollar influences working against an oversold technical condition.
HEATING OIL: It certainly must be disappointing to the bull camp to see February heating oil give back a good portion of yesterday’s gains overnight. The market appears to be a bit skeptical that the cold weather will be enough to significantly reduce distillate supplies, especially since fuel demand was still down 6.6% compared to year ago. It also looks as if the market ran into tough resistance at the $2.00 price level. The dollar seems to be having the most influence on heating oil in the overnight trade. But we suspect additional outside market pressure will likely be needed to push February heating oil back below support at $1.9779 considering the market still appears to be very oversold. Also, the cold temperature forecast and low refinery operating rate should provide a measure of support to heating oil since higher heating demand will help trim the supply glut in coming weeks. Therefore, given the mix of factors we suspect February heating oil may be confined to a $2.00 to $1.9780 trading range this session.
TODAY’S ENERGY MARKET GUIDANCE: A sharp rally in the dollar gives the bear camp in oil the edge this morning. But with energy markets still very oversold there may not be a lot of downside follow through unless the Dollar builds on overnight gains or a more extensive break in equities is seen.
