At least in the early going there is a tamping down of the EU crisis with the favorable vote from the Germany. The trade may be thinking, however, that the damage has already been done. Markets may turn now to the US situation and the struggles the Debt Committee is having achieving its goals.
Physical commodities may get a slight lift today with a weaker Dollar and reduced uncertainty out of Europe. There doesn’t seem to be much conviction and a return to September lows is a possibility.
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CRUDE OIL MARKET FUNDAMENTALS: November crude oil made an overnight drive below the $80 level and has since rallied nearly $3.00. It appears that the upside reversal action was fueled by a rally in global equity markets and gains in the Euro currency. The German parliament approved power changes in the Eurozone bailout fund, and that is seen as a positive step toward resolving the European debt crisis. This progress has boosted risk appetites and provided a level of support for risk assets like crude oil, and with the tight correlation between crude and equities, it is possible to see more upside follow through this morning. November crude oil has recouped some of the disappointment from yesterday’s larger than expected EIA inventory build. EIA crude stocks rose 1.915 million barrels, but they remain 16.897 million barrels below year ago levels. Also, crude stocks stand 12.842 million barrels above the five year average. Crude oil imports for the week stood at 9.702 million barrels per day compared to 8.351 million barrels the previous week. The refinery operating rate slipped 0.5% to 87.8%, which compares to 85.8% last year and the five year average of 84.01%. There were reports earlier this morning indicating that a key Singapore refinery has experienced another fire, and that has reduced capacity around 350,000 barrels per day. This could be a factor that tightens up the market in the region and provide an added level of support this morning. Talk of a potential strike at a French refinery appears to have been resolved overnight and production has returned back to normal levels. The technical action in November crude oil turned negative with yesterday’s action, but appears to be stabilizing. We see an upside pivot level for November crude oil at yesterday’s midpoint of $82.56. A further advance above that level this morning would set the stage for a further push toward $83.80.
PRODUCT MARKET FUNDAMENTALS: GASOLINE: November RBOB prices broke down below yesterday’s inside day trading range last night but has since turned back into positive territory. A rebound in crude oil prices, weakness in the US dollar and improvement in risk attitudes this morning have helped inspire the turn higher. Yesterday’s EIA weekly gasoline stock report showed an increase of 791,000 barrels, which was slightly below expectations. Meanwhile, current inventories are 7.723 million barrels below last year, but 10.854 million above the five year average. Average total gasoline demand for the past four weeks was down 2.43% compared to last year. Gasoline imports came in at 541,000 barrels per day compared to 692,000 barrels the previous week. Upside reversal action in November RBOB this morning favors the bull camp for a further advance to $2.6450. There is downside support at the September 27th gap of $2.5441 to $2.5284.
HEATING OIL: November heating oil prices broke down to a new three session low overnight that challenged Tuesday’s gap support at $2.8025. The market was able to rebound from that level, helped in part by a positive turn in risk sentiment and US Dollar weakness. Another positive force offering support in the distillate market comes from an increase in diesel demand from the agricultural sector. Wednesday’s EIA report showed distillate stocks rose 72,000 barrels, which was quite a bit less than expected. This brought current inventory levels to 15.911 million barrels below last year, but 6.656 million above the five year average. Distillate imports came in at 150,000 barrels per day compared to 158,000 barrels the previous week. Average total distillate demand for the past four weeks was down 1.04% compared to last year. EIA heating oil stocks fell 770,000 barrels and are 11.555 million barrels below last year. The upside reversal action this morning favors the bull camp and points to a test of yesterday’s high at $2.8970.
TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex extended yesterday’s late day sell-off into the overnight session, but has reversed those losses this morning. The crude oil complex faces a number of catalysts this morning, including a decision by European auditors to approve another round of aid for Greece and a final reading on US Q2 GDP. The complex remains vulnerable to headline risk. A weaker than expected read on this morning’s GDP number has the potential to ignite global recession concerns and pressure energy markets down toward last week’s low.
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CRUDE OIL MARKET FUNDAMENTALS: Private industry data Tuesday afternoon showed a much larger than expected fall in US crude inventories last week, and that provided an early lift to October crude oil pries. However, the gains were short lived, pressured by early strength in the US Dollar and fears that the European debt crisis will further limit demand prospects. Risk attitudes flip-flopped overnight, initially under pressure on resistance from Chinese officials regarding a Eurozone bailout but turned friendly earlier this morning on hopes for a euro bond. October crude oil rallied to its highest level since August 4 yesterday, and that seemed to encourage a level of profit-taking overnight. That coupled with ongoing concerns over a potential Greek debt default continue to weigh on demand prospects for crude oil. This was partially seen in yesterday’s Brent crude oil trade, which spent most of the session in negative territory. The October Brent versus WTI crude oil spread narrowed by $2.38 to $21.70. Meanwhile, North Sea Brent crude oil market remains concerned over a tightening supply backdrop, with output expected to fall by nearly 3% in October resulting from oilfield problems. These concerns are reflected in widening contango between the October and November contracts (October at $2.70 premium to November). Looking ahead, the crude oil market faces the latest US Producer Price Index reading, which is expected to slip from July’s level. The market will also react to the latest EIA inventory data, which is forecasted to show a draw of around 3.0 million barrels as a result of Hurricane Irene and tropical Storm Lee. While yesterday’s above average volume breakout was a positive technical development, the lack of follow-through this morning is a concern. In fact, aggressive bears may consider selling strength today near $90.75, risking a move above a 61.8% fib level of the August downdraft at $91.51.
PRODUCT MARKET FUNDAMENTALS: GASOLINE: October RBOB prices established a lower low during the initial morning hours. The brunt of the weakness in prices came from industry data late-Tuesday that showed an unexpected build in gasoline stocks last week. Street estimates for today’s EIA stocks report are for a draw in the range of 750,000 barrels. The demand outlook remains under pressure for the gasoline market, which was highlighted by reports that showed the level of US trucking activity in August falling. Slumping demand concerns intensified, with retail data from SpendingPulse that showed US summer gasoline demand at the near the 2009 lows. The data seemed to indicate a fall in demand during the Labor Day Holiday period, which is normally a strong seasonal period. The early tone in October RBOB favors the bear camp, with support below coming in at the 200 day moving average at $2.7094.
HEATING OIL: October heating oil registered a lower low during in early morning action, as it continues to grapple with waning future demand prospects. While last nights inventory data showed a smaller than expected inventory build, concerns over slowing growth on the back of the European debt crisis continues to dominate the focus. In fact, European distillates have come under pressure in recent sessions on concerns that demand will slip further. That appeared to have a negative impact on heating oil prices during Tuesday’s action, as prices seemed to disregard the positive price action in WTI crude oil. Cash markets in the US also highlight sluggish demand, with narrowing differentials. October heating oil could also be reacting to the conclusion of supply disruptions from Hurricane Irene and Tropical Storm Lee. October heating oil prices slipped down to their lowest level since August 23rd this morning, and that keeps the bear camp in charge. Short term resistance comes in at $2.9834.
TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex is off to a sluggish start this morning, despite private industry data that showed a much larger than expected crude stocks decline. The crude oil market has priced in a hefty draw for today’s EIA data and anything short of 3.5 million barrels probably weighs over the market. We think that these expectations were a key factor in the relative gains in October crude oil yesterday. While the upside breakout above $90.50 is a positive technical development, but it has failed to extend those gains this morning. The product markets appear to be coming to grips with a weak demand backdrop, and could come under added pressure should this morning’s EIA data fall short of expectations.
Energy markets had a volatile period last week, but looking for a corrective period unless the economic outlook improves. Grains remain strong as demand concerns are overshadowed by new private survey showing corn crop below USDA estimates.
Commodity markets start the day on a positive note. Durable Goods number from yesterday is joined by a move down in Continuing Unemployment Claims. Crude oil continues be buffeted in both directions. A high refinery operating rate and high margin could indicate a build in products into the fall.
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CRUDE OIL MARKET FUNDAMENTALS: The crude oil market extended yesterday’s declines overnight with a move to its lowest level since putting in its low on August 9th. Growing concerns that the US is slipping into another recession and anxiety over bank troubles in Europe sparked a steep sell-off in global equity markets yesterday, and this continued in the overnight session, pressuring economically sensitive commodity markets like crude oil. It appears that the economic news will be the dominant force on the energy markets again today, particularly if stock market sell-off builds into a full-fledged rout today. The EIA report from earlier this week showed a larger-than-expected build in crude oil stocks, so the supply stats are running bearish as well. President Obama’s announcement yesterday of additional sanctions against the Syrian oil industry is not expected to have a significant effect on the energy market because the US does very little business with that country anyway. The question is whether Europe will toughen its sanctions, and the EU is supposed to be considering that today. Libyan rebels have reportedly seized the last refinery that was held by pro-Gadhafi forces without damaging the refinery at all and that is bearish to prices. This news is probably a little bearish, especially to Brent crude, because it could ease some anxiety over Libyan oil supplies to Europe. After the sharp break yesterday and overnight, October crude oil is coming close to testing the August 9th spike bottom. Key support comes in at the August 9th close of 79.67 (which it already tested overnight) and at the low of 76.15 from that same day.
GASOLINE: The gasoline market is also feeling the pressure from outside market forces, but not quite as severely as crude oil, perhaps because of the supportive EIA stocks data earlier this week, which appears to leave a fundamental underpin to the market. Like crude oil, gasoline continued yesterday’s sell off overnight as global economic concerns put pressure on a wide range of “risky” assets like equities and energies. But the break so far has been mild relative to crude oil, as October RBOB was still more than 17 cents per gallon above the August 9th spike low overnight. This week’s EIA data showed a much larger than expected inventory draw for gasoline, with stocks falling 3.510 million barrels to 13.263 million barrels below year ago levels. Retracement support for October RBOB at $2.6103 and $2.5722 could be tested if equity markets continue to sell off today.
HEATING OIL: October heating oil was also under pressure from outside market forces overnight, as sharply lower equity markets in Asia and Europe put pressure on the energy complex as a whole. Still, the heating oil/distillate end of the complex appears to be holding up better than crude oil, perhaps because the market is in a stocks-building phase ahead of the heating season, which is keeping a fundamental underpin to prices. This week’s EIA data showed distillate stocks rising more than expected, with a build of 2.449 million barrels, but again, that is not too concerning to the market because one would expect them to be increasing at this time of year anyway. Average total distillate demand for the past four weeks was up 5.80% compared to last year. EIA heating oil stocks rose 651,000 barrels and are 11.219 million barrels below last year. Like RBOB, October heating oil has a way to go before it tests the August 9th spike low at $2.7154. Retracement support comes in at $2.6268, with additional support down at $2.7763. Trend line resistance is back up at $2.9423.
TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex will start today’s session under pressure from a diminished economic outlook and other outside market pressure which is raising concerns over future energy demand and is also contributing to a sell-off in risky assets. If the outside market pressure continues today, look for October crude oil to test the August spike lows and for the products to fall under pressure as well.
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Part of the market’s malaise since August 1st came as a result of bickering in Washington over whether to raise the US debt ceiling, but it also came from the European debt debacle, the S&P downgrade of the US credit rating and the cycle of poor economic data from around the globe. However, it is possible that the 17.5% plunge in the September S&P 500, the $23 decline in crude oil prices, the 37 basis point drop in 10-Year Note yields and the 16% drop in copper prices in just 7 trading sessions could have been an overreaction.
True, many players are disgusted with gridlock in Washington over raising the US debt ceiling, a primary factor behind the downgrade of the coveted triple-A rating. Many have lost trust in Congress and in turn have voted by selling the market. This sell-off, which has occurred across most markets, reflects concerns over an economic slowdown, but certain commodities market might have already factored in sustained slowing and the lack of clarity about the US and Euro zone debt problems.
In our opinion, commodities are and will continue to be less responsive to the downturn in the economy than other instruments. We also think that certain commodity markets will be able to turn back up with only minimal evidence of an economic recovery and certainly in the event that spending cuts are found by the Super Committee.
Therefore, the markets are in need of a catalyst, a measure of support or surprise to help shift sentiment from the “sky is falling” view to one of “hope”. Factors that could turn the tide include:
No Sign of a Fundamental Bottom Yet – Look to the Technicals for Timing
In looking at a chart of the speculator positioning in a composite of a physical commodity markets, it is clear that a significant portion of the net long position in non financial commodities was liquidated in the April through July decline. Our estimate is that the close on August 10th put the net spec and fund long of non financial commodities at 1.2 million contracts, which closely equates to the reading that was posted the week of July 5th. The current positioning also appears to relate fairly well to the reading that was posted on July 27th of 2010. Therefore, we see the commodity markets sitting at a fairly critical pivot point or value zone. To see even lower prices ahead might require a broader acceptance of a “return to recession” mentality in the US.
With the Continuous Commodity Index having fallen to a fresh new low for the move as of August 10th and reaching its lowest level since early January, we suggest that traders remain negative towards those markets that have classically bearish fundamentals, like sugar, cattle and soybeans. At the same time they should wait until the fundamentally bullish markets like copper, corn, crude oil, hogs and platinum reach down to solid chart support levels before establishing long positions in them.
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CRUDE OIL MARKET FUNDAMENTALS: A weak outside market tone and stronger US Dollar weigh on the crude oil prices to start this morning. The Bank of Japan intervened into the currency markets last night by selling nearly $13 billion in Yen, and that has sparked a sharp upside reversal in the US dollar. Growing concerns about slowing economic growth in the US present the crude oil market with another negative. Another major global bank lowered their world oil demand figures due to the current economic slowdown in the US. This particular company lowered their 2011 increase in demand by about 30.0% to a rate of 88.7 million barrels per day. What is important about their downward revision is that it is likely to follow more downward revisions by other forecasters and government agencies. Yesterday’s EIA inventory data showed US crude stocks rose 950,000 barrels last week, which was in line with expectations. Some traders viewed the minimal build in the wake of a 4.5 million barrel draw in SPR supplies as a slight positive. EIA crude stocks are 3.005 million barrels below year ago levels, but 19.504 million barrels above the five year average. There was a rather notable decline in crude oil imports of more than 7.0% to 9.134 million barrels per day. The refinery operating rate was 89.3%, up 1.0% from last week, and compares to 91.2% last year and the five year average of 89.12%. September crude oil established a new low for the decline in the early morning hours and is on track to challenge the June lows of $90.17. At the same time, this week’s nearly $8.00 slide has created a short term oversold condition, vulnerable to a short covering rally. Short term resistance comes in for September Crude oil at $92.05.
GASOLINE: September RBOB prices are off more than 8.0% from this week’s high to this morning’s low. Prices plunged out of the recent four week trading to the downside yesterday, and they have extended their decline during the early morning hours. September RBOB finished Wednesday’s session down by more than 3.5% after EIA inventory data showed a larger than expected weekly increase of 1.701 million barrels. EIA gasoline stocks are 7.795 million barrels below last year, but 4.038 million above the five year average. Average total gasoline demand for the past four weeks was down 3.63% compared to last year, and it is the lowest reading for the summer season. The weakness in gasoline demand was seen as a primary catalyst for the downdraft. Gasoline imports came in at 845,000 barrels per day compared to 662,000 barrels the previous week. The higher refinery capacity rate seen last week was also viewed as another negative headwind for the gasoline market that is likely to keep the market well supplied. The edge goes to the bear camp, with the next downside support coming in at the July 1st low of $2.8675.
HEATING OIL: September heating oil prices continued their slide overnight, falling to their lowest level since July 7th. Yesterday’s price action confirmed a breakdown out of recent congestion and puts the edge in favor of the bears. The heating oil market sold-off sharply in the wake of yesterday’s EIA inventory data that showed a rise in distillate supplies of 409,000 barrels. EIA distillate stocks stand at 17.432 million barrels below last year, but 7.364 million above the five year average. Distillate imports came in at 205,000 barrels per day compared to 161,000 barrels the previous week. Average total distillate demand for the past four weeks was up 1.69% compared to last year. The soft demand reading in distillates was seen as a key factor behind breakdown. EIA heating oil stocks rose 896,000 barrels and are 12.770 million barrels below last year and 7.584 million below the five year average. September heating oil has gap support below at $2.9926 to $2.9791, with targeting below at $2.96.
TODAY’S ENERGY MARKET GUIDANCE: A rally in the US Dollar, economic growth concerns and sluggish demand readings continue to weigh over the crude oil complex. September crude oil appears to be looking for a new value range as it challenges its June lows of $90.17. It is possible that the decline has run ahead of itself in the short term and vulnerable to a technical rebound. The bears are in charge in the product markets and have finally confirmed a breakdown out of the very tight coiling range.
Energy: Technicals Positive but Overbought
by Dave Hightower on October 7, 2011
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CRUDE OIL MARKET FUNDAMENTALS: November crude oil established a higher high during the early morning hours and climbed back above the $83.00 level. However, a slight pullback in risk appetites, modest profit-taking ahead of today’s September US jobs data and concerns whether this week’s $8.00 rally might be over extended weigh over the market. The price action in November crude oil this week seems to reflect a pullback in fears that the global economy would fall back into a recession, and that leaves this morning’s jobs data as a factor that needs to meet or beat expectations to drive the market higher. Confirmation of US jobs added above the 75,000 level is likely to open the door for November crude oil toward the $85.00 to $87.00 area. In the meantime, there was more chatter out of Iran this morning indicating that most OPEC members would likely leave OPEC production targets unchanged at their December meeting. There were also reports out of Russia overnight indicating that oil refiners in the region might not be able to survive export duty reforms “if” they do not modernize. That is a longer term factor for the market, but something that could gain more traction in the weeks ahead. There has also been talk that index fund rebalancing for 2012 could see weightings on US WTI crude oil to fall and increase for Brent crude oil. While this is a factor that could put downside pressure on US crude prices, a lot can happen in the current environment in 2.5 months. The short-term trend in November crude oil has turned in favor of the bull camp with yesterday’s gains, leaving support at $80.51. Upside resistance comes in at $83.98, then $84.77.
GASOLINE: November RBOB prices have taken a lower track this morning, as they retraced a portion of yesterday’s explosive rally. It seemed that the combination of European financial leaders trying to come to a resolution for struggling regional banks, as well as a risk-on appetite supported the early gains. It also seemed that the relative outperformance of RBOB to its peers in the crude oil complex reflected something more fundamental taking place. Cash gasoline markets in the Northeast yesterday traded higher, bolstered by fears of tightening supply from recent refinery outages and slight uptick in demand. This is expected to continue over the short-term, as a couple of Pennsylvania refineries remain offline. The technical action in November RBOB closed above its late-September swing high of $2.4669, and that provides the bull camp with an intermediate term edge. Short-term support ratchets up to $2.5645.
HEATING OIL: November heating oil prices established a higher high this morning, marking a $0.17 rally from this week’s low of $2.6975. The gains in heating oil appear to be the result of an improving outside market tone, rally in global equity markets and ideas that the global economy might be on a recovery track. It’s possible that the US heating oil market drafted a level of support following inventory data from the Amsterdam-Rotterdam-Antwerp (ARA) storage hub that showed gasoil inventories plunging to their lowest level in 18 months. The short-term price action in November heating oil turned positive during yesterday’s rally and satisfied near-term technical targets at $2.8648. The next level of resistance comes in at last week’s highs of $2.8970. Short-term support this morning comes in at $2.8350, then this week’s swing low at $2.7530.
TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex has taken a lower track heading into this morning’s key economic data on the US labor market. A portion of this week’s explosive rally have come as the market has begun to price in a modest rebound in economic conditions, which leaves this morning’s report as a key determining factor. Market expectations are for September US Nonfarm Payrolls to have increased somewhere in the range of 50,000 to 75,000, and the market probably needs to see something north of 75,000 to extend this week’s gains. Markets across the crude oil complex have become short-term overbought and vulnerable to disappointment.