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Energy: Crude Complex Remains Vulnerable to Headline Risk

by Dave Hightower on September 29, 2011

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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.

Energy: Crude Products Under Pressure from Weak Demand Prospects

by Dave Hightower on September 14, 2011

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: If Outside Pressure Continues, Look for Oct to Test August Lows

by Dave Hightower on August 19, 2011

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.

Energy: Crude Is Looking For a Value Range; Bears Appear To Control Products

by Dave Hightower on August 4, 2011

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: Looking to US Numbers for Demand Signals

by Dave Hightower on June 27, 2011

CRUDE OIL MARKET FUNDAMENTALS: August crude oil challenged last week’s low during the early morning hours, which was able to contain early weakness. Concerns over slowing economic growth in the US and China along with the potential of the IEA releasing more supplies on to the market continue to weigh on prices. Brent crude oil prices have led to the downside in recent sessions, and that appears to be the case again this morning. The market seems concerned over the upcoming Greek austerity vote, and some traders suggest that Brent could slip further toward the $100 level. August Brent crude oil slipped into new low ground this morning and challenged its 200 day moving average of $102.25 before rebounding. The weakness in Brent crude oil tightened the differential to WTI back below $13.00. Meanwhile, Iran’s oil minister noted concern over the IEA’s decision to release supplies and added that supply and demand fundamentals in the crude oil market were functioning correctly. It also seems that Libyan rebels are making progress against Gaddafi forces, and prospects that the leader could be overthrown and oil production restored could present the market with even more supply. The Commitments of Traders Futures and Options report as of June 21st showed non-commercial traders were net long 199,077 contracts, a decrease of 22,649. Non-commercial and nonreportable traders combined held a net long position of 229,876 contracts, a decrease of 24,408 on the week. This long liquidation trend by the speculators has taken their net long position to the levels not seen since the 4th quarter of 2010. Money managers cut their long positions to the lowest level since December. It is possible that crude oil could face added liquidation pressure if economic conditions continue to deteriorate. The bear camp has the early morning advantage, but its inability to break below Friday’s low of $89.82 might open the door for a corrective rebound. The bulls need to at least overcome the $91.20 level to turn the tide in their favor.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: August RBOB established a new low for the move overnight and closed in on its 200-day moving average of $2.66. Prices managed to rebound during the early morning hours, helped by weakness in the US Dollar and rebound in global equity markets. The weakness in Brent crude oil relative to WTI crude oil continues to offer RBOB prices another negative headwind to work through. August RBOB prices finished the week with a plunge down to their lowest level since February 18th. However, weekend reports of a refinery flaring at a 360,000 barrel per day operation in Illinois could be a supportive feature situation during today’s session on reports that it could be down for a longer period of time. The Commitments of Traders Futures and Options report as of June 21st showed non-commercial traders were net long 54,161 contracts, a decrease of 7,284. The Commercial traders were net short 58,603 contracts, a decrease of 10,279. The Nonreportable traders were net long 4,443 contracts, a decrease of 2,993. Non-commercial and nonreportable traders combined held a net long position of 58,604 contracts, for a decrease of 10,277 in their net long positioning. The long position remains at relatively lofty levels, which leaves potential for more long-liquidation. The bear camp has the edge to start this morning, with resistance above at $2.7370 and support below at $2.66.

HEATING OIL: August heating oil prices slid down to their 200-day moving average during the early morning hours, but so far it has been able to rebound. This took the August contract down to its lowest level since February 8th. The Commitments of Traders Futures and Options report as of June 21st showed non-commercial traders were net long 25,258 contracts, a decrease of 10,642. The Commercial traders were net short 37,607 contracts, a decrease of 12,431. The nonreportable traders were net long 12,349 contracts, a decrease of 1,790. Non-commercial and nonreportable traders combined held a net long position of 37,607 contracts, a decrease of 12,432 during the week. The bears maintain the early advantage, but that would begin to change on a move above $2.7850. The short term down trend pattern remains intact till prices can overtake $2.8340 today.

TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex has been able to rebound from its worst overnight levels, but remain in negative territory. Markets are keying in on this morning’s flow of US economic data on Consumer Spending and Chicago Manufacturing for demand clues. Further disappointment in this morning’s number could prompt some economists to ratchet down their growth outlooks. Meanwhile, the short term trends across the complex favor the bears.

Energy: Short-Term Price Trend Points Lower

by Dave Hightower on June 16, 2011

CRUDE OIL MARKET FUNDAMENTALS: July crude oil prices traded in a sideways fashion during the overnight and initial morning hours, following yesterday’s wide-range bearish reversal. The plunge in prices down to the lowest level since February 18th has begun to usher in more concerns over demand. The outside market tone is slightly negative, with weaker global equity markets and a rally in the US dollar to a new 3-week high. It also seems that the crude oil’s price direction is highly dependent to risk appetites and the unfolding Greek debt situation. The IEA made the news wires early this morning indicating that they were prepared to release strategic reserves of crude oil to support the global economy if needed. While they raised their demand forecasts for the next 5-years by an annual rate of 1.3%, they continue to monitor Saudi Arabia’s contribution of added supplies to satisfy current demand levels. For now, July crude oil is trying to consolidate recent losses, while it measures whether current economic slowdown fears will impact demand in the second half of 2011 and whether prices should be at a lower level. Yesterday’s EIA report showed a larger than expected decline of 3.406 million barrels. Perhaps a portion of the unexpectedly larger draw came from the closed Keystone Pipeline last week, which helped draw 1.0 million barrels out of Cushing. EIA crude stocks stand 2.45 million barrels above year ago levels and 21.923 million barrels above the five year average. Crude oil imports for the week stood at 8.638 million barrels per day, compared to 8.600 million barrels the previous week. The refinery operating rate was 86.1%, down 1.1% from last week. There was heavy volume during Wednesday’s down draft that rivaled levels seen during the early May slide, suggesting that the crude oil market could be fishing for a near term bottom. The short term trend in July crude oil favors the bear camp, with downside support below at $94.45, then the February low of $93.10.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: July RBOB traded higher during the early morning hours after a negative wide-range reversal Wednesday. Yesterday’s action shifts sentiment back in favor of the bear camp after prices plunged to its lowest level since May 24th. Yesterday’s EIA gasoline stocks report showed a build of 573,000 barrels, which was slightly under consensus estimates. Gasoline stocks are 3.275 million barrels below last year, but 5.254 million above the five year average. Average total gasoline demand for the past four weeks was up 0.50% compared to last year. Gasoline imports came in at 1.115 million barrels per day compared to 1.158 million barrels the previous week. While there was talk of tightening supplies in the cash market due to the slide in imports, the weak outside market tone seemed to prevail. The bear camp has the edge after Wednesday’s negative trade, with support today coming in at $2.9235.

HEATING OIL: July heating oil began the overnight trade with a higher open, but has since leaked most of those gains. Wednesday’s EIA distillate stocks report showed a 105,000 barrels draw, instead of an expected build. The report showed a rather large decline in Midwest supplies, which was attributed to a boost in agricultural demand after a delayed start to planting. EIA distillate stocks stand at 15.801 million barrels below last year, but 6.737 million above the five year average. Distillate imports came in at 125,000 barrels per day compared to 155,000 barrels the previous week. Average total distillate demand for the past four weeks was down 3.57% compared to last year. EIA heating oil stocks rose 1.317 million barrels. Weak distillate demand highlighted in the EIA report is a concern that might not justify prices above the $3.00 level. Wednesday’s downdraft leaves the bear camp with the short term advantage. Near term support stands at yesterday’s low of $2.9702, then the $2.9500 level.

TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex is off to a positive start after suffering major declines during yesterday’s session. The short-term price trend across the complex favor lower pricing ahead. While there appears minor evidence of bargain hunting this morning, the risk to the market is if higher demand levels are not seen later in the year. This is a factor that would support $85 to $90 per barrel crude oil. There is an active flow of US economic data this morning and there will be a great deal of attention paid to the Greek debt situation.

Economic Slowing Fears Persist; US Jobs Data the Main Focus

by Dave Hightower on June 3, 2011

Path of least resistance seems to be downward today for most physical commodities. Non-Farm payroll estimates have been revised lower over the past couple days. Significant declines in Registered COMEX Silver warehouse stocks.

Energy: Bulls Have Edge from Internal and External Developments

by Dave Hightower on May 31, 2011

Energy prices were up sharply overnight primarily on the weaker Dollar, but also because of reports of fresh tensions in Yemen and perhaps because of improved global macro economic psychology. Apparently global equity markets were lifted sharply off ideas that some Japanese manufacturing might be restarted soon and that might in turn alleviate some of the knock on slowing seen in the rest of the world, as a result of the Japanese disaster. On the other hand, the Dollar was lower against the Euro after on improved prospects for a Greece bailout, or perhaps even from news that Greece might be allowed to cut its value added tax in an effort to stimulate its troubled economy. In the end, news that Al Queda had captured a town in Yemen has raised concerns over a rise in overall Middle East tensions. On another front, up to 120 Libyan military officers have defected in recent days and that could increase uncertainty toward the Libyan oil situation. In the end, a favorable macro economic track and a weaker Dollar would seem to give the bull camp an edge, especially if there is a small measure of Middle East supply uncertainty off events in Yemen and Libya mixed into the equation. Perhaps the most supportive news overnight is the prospect that favorable Japanese manufacturing talk was joined by oil market talk, that the Chinese were set to expand energy import activity again. The Commitments of Traders Futures and Options report as of May 24th for Crude Oil showed Non-Commercial traders were net long 254,314 contracts, a decrease of 991 contracts. The Commercial traders were net short 282,615 contracts, a decrease of 2,721 contracts. The Non-reportable traders were net long 28,302 contracts, a decrease of 1,729 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 282,616 contracts. This represents a decrease of 2,720 contracts in the net long position held by these traders. With the highest level in July crude oil since May 11th, it is possible that some of the initial buying this morning is technically related buying.

GASOLINE: The gasoline market was able to extend last week’s rally through the holiday weekend, although prices are almost sure to end May with their first monthly loss since August of last year. While the traditional start of the US summer “driving” season may be lending some support to prices this morning, a weaker Dollar coming out of the holiday weekend and an improved overall macro economic outlook may be the main focal point of this morning’s gasoline trade. On the other hand, it may take several weeks to see if US drivers are going to respond to the May pullback in retail prices with improved demand. The Commitments of Traders Futures and Options report as of May 24th for Gasoline (RBOB) showed Non-Commercial traders were net long 49,288 contracts, a decrease of 3,515 contracts. The Commercial traders were net short 53,172 contracts, a decrease of 4,946 contracts. The Non-reportable traders were net long 3,885 contracts, a decrease of 1,430 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 53,173 contracts. This represents a decrease of 4,945 contracts in the net long position held by these traders. With the highest level in July RBOB since May 12th seen overnight it is possible that the market is seeing some technically related buying interest, especially if a down trend channel line from a series of May highs is taken out.

HEATING OIL: The heating oil market has also found benefit from a weaker Dollar this morning and was able to reach the highest prices levels since May 5th. A pipeline closure out of Alberta has added to the recent transportation issues on the Mississippi river and in general that has kept some concern of tight US product supplies in the headlines. With heating oil stocks already at very low levels, the talk of improved demand and lingering supply chain problems in the US would seem to give the bull camp an internal and external edge. The Commitments of Traders Futures and Options report as of May 24th for Heating Oil showed Non-Commercial traders were net long 19,190 contracts, a decrease of 795 contracts. The Commercial traders were net short 30,568 contracts, a decrease of 2,411 contracts. The Non-reportable traders were net long 11,378 contracts, a decrease of 1,616 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 30,568 contracts. This represents a decrease of 2,411 contracts in the net long position held by these traders. Perhaps the July heating oil contract is poised to return to the 50 day moving average, which today is pegged up at $3.1020.

TODAY’S ENERGY MARKET GUIDANCE: The bulls have the edge from both internal and external developments. With the energy complex fresh off a sustained May correction on its charts, an improvement in macro economic views and a weaker Dollar could give rise to some rather impressive short covering buying. In fact, if there is an improved demand track that could in turn result in a series of noted gains in energy prices into the US Friday payroll readings.

Energy: Positive Track This Morning; Higher Target by Major Institution

by Dave Hightower on May 24, 2011

CRUDE OIL MARKET FUNDAMENTALS: July crude oil traded higher during the early morning hours, helped by general strength in most risk-assets and upwardly revised price target on crude oil from a major Wall Street firm. Another factor that could be providing a level of support comes from recent NATO attacks on Tripoli, which are reported to be the largest ever. Reports overnight from a well-respected Wall Street firm cited growing emerging market demand as a factor cutting into supplies, as well as compromised OPEC spare capacity limiting supplies. There also seemed to be talk regarding the Euro zone debt crisis and that the recent plunge in commodities like crude oil could be overdone. Countering that view were warnings overnight from Moody’s Ratings, suggesting that a Greek debt default could negatively impact other European countries. The other focus in the crude oil market is the June 8th OPEC meeting, and whether the cartel decides to increase production quotas. There were reports overnight that the Saudi’s state run oil firm was considering tapping back into their first oil find that represents about 500 million barrels of the countries proven reserves. This could be taken as a sign that the country is looking for ways to boost production and capitalize on higher crude oil prices. In the meantime, open interest in WTI crude oil continued to decline and fell for the 7th session Friday. This decline has trimmed nearly 135,000 contracts (8.1%) since reaching record extremes on May 11th. Meanwhile, crude oil prices have hovered around those same levels indicating that the recent trade is one of distribution. July crude oil continues to consolidate the early May breakdown, with resistance above at the $101.00 area and support below at 96.00. The early advantage goes to the bull camp this morning, with the next resistance coming in at $100.42.

GASOLINE: July RBOB prices broke out to a new 3 session high during the initial morning hours and seemed to embrace forecasts for higher crude oil prices ahead. That optimism follows the latest government report on pump prices, which recorded their largest weekly decline since the financial crisis. While prices fell over $0.11 last week, they remain more than a $1.00 above year ago levels. It is possible that a portion of Monday’s late day gains came in response to the closure of a major gasoline refinery in Canada, and that could be lending a level of support again this morning. The refinery glitch, along with problems at an Illinois refinery fueled sizeable gains in the Chicago cash gasoline market. The bulls have the edge to start with the next upside hurdle standing at $2.97.

HEATING OIL: July heating oil prices took a brief turn below Monday’s inside day range overnight but has since reversed higher. This reflects a level of bullishness for July heating oil and favors more near term upside toward $2.9280. It appears that heating oil prices have found support on the back of an optimistic forward outlook for crude oil as well as a modest rebound in a number of physical commodity markets. It is also possible that heating oil has drafted upside momentum on the potential for greater diesel imports to India this year, as the country makes a switch from fuel oil to subsidized diesel. Meanwhile, the price action in July heating oil remains range-bound inside a triangle, with resistance at $2.9534 and $2.8395 below. The bulls have the early edge this morning, with the next upside resistance at $2.9534.

TODAY’S GUIDANCE: July crude oil is on a positive track this morning, perhaps from an upgraded price target from a major bank and a lack of fresh negatives on the Euro zone debt situation. The analyst upgrade could gain further attraction as the day unfolds, as it was the same firm that advised clients to take profits in crude oil near the April peak. July gasoline showed some resilience during Monday’s downdraft, and that could be a factor that reasserts itself in today’s session.

Energy: Downside Pressure; Funds Selling; Demand Destruction; Soft US Numbers

by Dave Hightower on May 5, 2011

June crude oil turned sharply lower during the early morning hours and broke down to its lowest level since April 19th. This follows recent weakness in crude oil that has come under growing pressure from soft US economic data and a larger than expected EIA inventory build. This morning, it appears that active fund selling has entered the fray on fears that higher prices have begun to take their toll on demand. Perhaps that was one of the factors behind yesterday’s larger than expected increase in US crude supplies. EIA crude stocks rose 3.421 million barrels to 366.546 million. That represents a 5.971 million barrel inventory surplus compared to year ago levels. The larger than expected jump in stocks came despite a 4.2% decline in weekly imports to a rate of 8.877 million barrels per day. The refinery operating rate was 82.8%, up 0.1% from last week, but down from 89.59% last year. Meanwhile, news out of China this morning indicated that they were considering a resource tax on domestic crude sales in their tax reform proposal and as another vehicle to manage growing inflation. The price action in June crude oil has turned quite negative and appears to be gearing up for a challenge of the April low at $106.00. This comes after 3 consecutive down days that have taken June crude oil down over $8.50 from Monday’s high to this morning’s low. While the short term technicals have reached oversold levels, it is possible that the extremely large net long spec positioning could be reaching a capitulation stage. The bears have the early advantage, but probably need more negative input to drive trade below the $106.00 level.

GASOLINE: June RBOB prices took on a lower tact this morning and seemed to follow weakness in the crude oil market. There are also signs that gasoline demand has begun to slack-off as a result of the recent surge in prices. This was highlighted in the Wednesday’s EIA statistics that showed implied demand falling by 205,000 barrels per day during report week. This decline in demand comes despite EIA gasoline stocks falling for the 11th week in a row, falling by 1.046 million barrels during the report window. This represents a 9.0% deficit compared to year ago inventory levels and is the lowest inventory level since June 2009. Average total gasoline demand for the past four weeks was down 1.92% compared to last year. Gasoline imports came in at 1.106 million barrels per day compared to 1.050 million barrels the previous week. There were reports overnight that indicated that Russia was considering alternatives to limit the upside trajectory on gasoline prices by shifting focus to crude oil, and that could be another negative force for June RBOB prices. This morning’s plunge in June RBOB below Wednesday’s low of $3.2774 puts the bears in control, with the potential for a further slide down toward $3.2200.

HEATING OIL: June heating oil prices broke down below the recent trading range, and they have gone on to reach their lowest level since March 31st. In the early morning trade, heating oil prices appear to be suffering from the prospect of demand destruction as a result of higher pricing as well as broad weakness in the commodity sector. This comes despite yesterday’s EIA data that showed US distillate supplies falling for the 4th consecutive week. EIA distillate stocks fell 1.398 million barrels during the report week. This pushed current supplies to a 7.261 million barrel deficit compared to year ago levels but 17.509 million above the five year average. Distillate imports came in at 197,000 barrels per day compared to 121,000 barrels the previous week. Average total distillate demand for the past four weeks was up 6.91% compared to last year. EIA heating oil stocks rose 342,000 barrels and are 11.926 million barrels below last year and 3.367 million below the five year average. This morning’s rout has taken prices down toward initial downside targets of 3.0870, and that coupled with extremely oversold short term technicals might make further declines a challenge in the day ahead.

TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex enters Thursday’s session under extreme downside pressure, which appears to be the result of long liquidation from fund traders. Ideas of demand destruction resulting from higher prices and a cycle of soft US economic data have also contributed to the downside. While there is a chance for more longs to come out of the crude oil market given the near record positioning, it is possible that the near term decline maybe overextended and due for a bounce. We maintain the view that crude oil supplies remain more than ample and that much of the recent gains have been the result of geopolitical risks and fear premium baked into the market. June crude oil has support below at $106.00, and a close below that level would open the door for deeper break targeting $97.20.

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