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Natural Gas – 2010.11.08

by Dave Hightower on November 8, 2010

Below is an excerpt from The Hightower Report’s most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

By most classic, fundamental arguments the downtrend pattern in natural gas looks like it can continue. The lack of a weather threat, abundant US storage levels and a no imminent change seen in US energy policy suggests that the bear camp could retain control over prices for a while longer. However, with the spec and fund position in natural gas having recently moved to more than 92,000 contracts net short and some commodity funds reportedly moving to increase their allocation into natural gas, it could be a signal of an end to the downside pattern. While it might require some forward movement on tax credits for diesel engine conversions or news of a genuine effort to bring about a new energy program that would force the increased use of natural gas, the pressure to consider natural gas as a supplemental source of energy could be set to increase directly ahead, as nearby crude oil prices last week managed to climb back above $85.00 per barrel for the first time since May 13th. With the change in the Congress from the recent election and a temporary call for bipartisan action, it is possible that the tea leaves might be starting to line up for the bull camp in natural gas. Some will suggest that supply is so burdensome that Washington will have to play a role in any bottoming of natural gas prices. On the other hand, on the day of the big spike down low on October 25th, the natural gas market finally saw volume and open interest fail to confirm that new low move, and subsequently the market was able to climb back above a series of key downtrend channel resistance points. This could be the start of a technical bottom. If nearby crude oil prices were to rise back toward $90.00 a barrel or Congress were to toss around ideas of changing the energy policy, it could be enough to invoke a rather significant short covering rally.

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Energy Market Commentary – 2010.11.02

by Dave Hightower on November 2, 2010

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CRUDE OIL MARKET FUNDAMENTALS: December crude oil sits in the middle of the overnight range as it digests central bank rate hikes from Australia and India and a weaker US Dollar. The reserve Bank of Australia surprised the markets overnight with a 0.25% hike in their interest rates to 4.75%, and that was seen as a key factor that drove the US Dollar to its lows of the session. Meanwhile, there are a number of key market-moving events in the US that are likely to keep crude oil prices confined inside a trading range. As far as crude oil supply is concerned, October Russian crude oil output was up 4.0% on the month and reached a new record high of 10.26 million barrels per day. This makes Russia the world’s largest oil producer in the world and outpaces Saudi Arabia by over 2 million barrels per day. Petrobras noted September oil production in Brazil was down 3.9% on the month due to maintenance work on three platforms. Despite the ample crude oil production, the market remains focused on external factors for more demand clues. Onto the demand side, there were comments from the IEA overnight that seemed to echo those from Saudi’s oil minister yesterday that crude oil prices between $70 and $90 per barrel was a “happy range” and were needed to stimulate investment in unconventional oil resources. While there is a lot of talk about where prices should be, the key wild-card remains demand and whether it justifies prices within their current range. Meanwhile, the government in the North Sea is calling for tax breaks to help support more oil extraction, and that nearly 75% of oil is at risk and likely to remain untapped. Back in the US, early estimates for this week’s crude oil inventory report are for a build in the range of 1.25 to 1.50 million barrels. Monday’s price action in December crude oil was bullish with a positive wide range reversal. The bulls have a slight edge this morning with key overhead resistance that lies at $83.95 to $83.25.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: December RBOB prices traded higher during the overnight session and seemed to retrace ground lost Monday afternoon. Perhaps providing some underlying support to RBOB prices were comments from a noted global analyst that forecasted French product inventories with a large deficit, and that is likely to require higher imports, lower exports and increasing refinery runs in coming months to overcome. Meanwhile, the US Department of Energy posted average gasoline price in the US on Monday that marked their second weekly decline to $2.81 per gallon. Early expectations for this week’s inventory report are for a minor build of 100,000 to 250,000 barrels after last week’s unexpectedly large draw of 4.4 million barrels. It appears that December RBOB prices are carving out a bear flag pattern on the daily charts that are also working on their 10th day of correcting the mid-October plunge. While it could take more time for this pattern to materialize, it is likely that today’s early morning trade could see prices climb back up for another test of $2.1250 to $2.130 resistance.

HEATING OIL: December heating oil traded higher during the initial morning hours, supported by a weaker US dollar and a slight improvement in risk attitudes. There is also some support coming into this portion of the product market on firm spot demand for European distillates, as France replenishes inventories. Meanwhile, there is a great deal of uncertainty in the outside markets with US midterm elections today, as well as the start of the two day FOMC meeting. Early estimates for this week’s distillate inventory data point to a sixth consecutive draw in the range of 1.0 to 1.3 million barrels. December heating oil had a wide range day on Monday that came on below average trading volume, and that seems to call into question to the early attack of $2.30 resistance. It appears that December heating oil is locked within a large trading range with topside resistance at the $2.30 area and downside support at $2.220. Forced into a position this morning, we would look to sell on strength up into $2.30 resistance, looking for a downside retest of $2.220.

TODAY’S ENERGY MARKET GUIDANCE: The question for the markets is whether or not early strength can be sustained.

Energy Market Commentary – 2010.09.29

by Dave Hightower on September 29, 2010

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CRUDE OIL MARKET FUNDAMENTALS: November crude oil prices rebounded from Tuesday’s late day sell-off, but once again fell short of upside resistance at $77.17. Crude oil received an early boost from a weaker U.S. Dollar, a jump in Chinese Purchasing Managers’ data to new five month highs and a surprisingly large draw in private crude oil inventory figures Tuesday afternoon. It seems that the crude oil support of late comes from growing expectations that the U.S. Fed will move to shore up the U.S. economy, which in turn has also hammered the U.S. dollar to new eight month lows overnight. Crude inventory data released Tuesday afternoon showed a much larger than expected decline in stocks of 2.415 million barrels, which compares to the latest expectations of a 500,000 to 600,000 barrel draw. It appears that the crude oil market is somewhat suspect of that number and is awaiting confirmation from today’s EIA data. In the meantime, inventory data out of Japan indicated that crude oil inventory levels declined by over 200,000 barrels in the latest week, and that marked the fifth weekly decline. As a point of reference, Japan’s refinery utilization rates are estimated just below 74%, which compares to 87.8% in the U.S. There also seemed to be optimistic comments from the IEA overnight, that forecasted crude oil prices to rise above $80 per barrel “if” global growth rates run above 3.0% to 3.5%. November crude oil posted an inside day range Tuesday that seemed to disappoint traders with its failure to overcome Monday’s price high of $77.17. So far this morning, prices have once again challenged that upside resistance area and have been unable to overcome it. The bulls have a slight advantage to start, but are in a must perform situation, where a decline below $75.50 would reinvigorate the bear camp and create downside potential towards $74.00.

GASOLINE: November RBOB prices managed to breakout into new six day highs during Tuesday’s session, but reversed and closed down on the session. The afternoon weakness has spilled over into this morning’s trade and that provides a mixed trade to start. Part of the late day weakness stems from concerns over increasing gasoline supplies into the mid-western U.S., which was highlighted by Explorer Pipeline Co.’s decision to reroute gasoline north of Tulsa Oklahoma. This comes in response to a supply glut created in response to the Enbridge pipeline closure earlier this month. Meanwhile, gasoline inventory data released Tuesday afternoon showed a shockingly large build of 3.18 million barrels, which compares to expectations for only a 600,000 to 800,000 barrel build. Despite the bearish number, it seems the market is awaiting this morning’s EIA report for confirmation. SpendingPulse released their latest weekly survey that pegged average retail gasoline demand at 8.978 million barrels per day. This demand figure is down 0.3% compared to the previous week and compares to last week’s EIA gasoline demand figure of 8.847 million barrels. Technically, November RBOB is flirting with Tuesday’s late day lows near the $1.9350 area. The tone seems somewhat negative and a move below this short term support shelf, would put the bears in the driver’s seat, with the potential for a further slide down toward $1.9220. However, a rally in prices back above the $1.9540 area has the potential to usher in a push toward $1.9700.

HEATING OIL: November heating oil had a gap higher open which provided a higher price high overnight. The combination of a plunging U.S. Dollar and industry statistics released Tuesday afternoon that showed an unexpected draw in distillate stocks are providing some underlying support this morning. While some estimates suggest that weekly distillate inventories declined by 2.814 million barrels, expectations for this morning’s EIA data call for a build of 300,000 to 500,000 barrels. There also seems to be support coming from the European middle distillate market, which firmed up Tuesday on talk that Asian imports to the region were smaller than originally expected. As a result of the reduced short term supply outlook, various spread relationships have rebounded from their lows of the week. Technically, November heating oil prices are coming off from a positive technical pattern (double bottom) that targets a further upside push toward $2.1700. Positive price action so far this morning has carried prices out above a technical pattern on the daily charts and clearance of $2.1660 opens the door for a run toward $2.20.

TODAY’S ENERGY MARKET GUIDANCE: A slight bullish bias off the Dollar and marginally supportive fundamental developments.

Natural Gas – 2010.08.23

by Dave Hightower on August 22, 2010

Below is an excerpt from our most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

Natural gas prices continue to decline and so far have been down about 16.5% in August alone. This has now pushed prices back down to the bottom of a four and a half month base at 4.25 to 4.140. Coincidentally, these low levels have served as a quasi-deflationary price low throughout the year as economic slowdown fears reach a fever pitch. Short term supply is high, as storage levels stand 219 bcf above their five year average and continue to build. Elevated levels of natural gas production are expected to continue, as producers exploit prolific onshore fields (shale). Additionally, the latest Baker Hughes data pegged the U.S. natural gas rig count at 992, just below the psychological 1,000 mark.

The latest EIA Short-Term Energy Outlook estimated 2010 production to grow by 1.9% to 61.1 bcf per day. Increased production in the face of sluggish demand has served to hammer natural gas prices by more than 30% since the start of the year.

We believe there will be one more push down in natural gas prices to come, and that should take prices down to new lows for the year.

Despite the bountiful supplies, there are signs of life on the demand front. The EIA forecasted overall natural gas consumption to increase 3.8% from 2009 levels to 64.9 bcf per day, which provides a 3.80 bcf per day shortfall to help sop up excess supply.

At current price valuations, it would appear that natural gas has virtually no weather premium priced in, and with peak hurricane season now upon us, prices could jump in a hurry. While inventories remain well above their five year average, that gap has contracted for eight straight weeks and is now just under 8.0%. This tightening has narrowed various spread relationships, which has greatly reduced the incentive to build inventories.

The steep decline in prices has also attracted speculator selling and has pushed the spec net short position to extreme levels. If we discount the 2008 financial meltdown, the current position is nearing the 2007 extreme that occurred when natural gas was trading at around $6.000.

As mentioned earlier, we expect the slide in natural gas to continue and post new lows on the year to $3.800-$3.850. This has the potential to trap shorts into the market at a time of “cheap” valuations.

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Natrual Gas Special Report – 2010.06.17

by Dave Hightower on June 18, 2010

Below is an excerpt from our most recent Special Report. To receive access the full story, with trade strategies, along with our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

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With crude oil prices rising back toward the $80.00 per barrel level in the face of an uncertain global economic track, it would appear that the world’s “petroleum oil supply and demand balance” is tighter than most pundits would like to admit. Arguments that US oil prices are too high because of burdensome domestic crude supply would carry some weight if it weren’t for significant increases in oil use from developing countries like China. In other words, the world oil supply and demand balance has remained tight through a severe global recession and looks to be on a track to tighten even more significantly in the face of a recovery.

However, in the wake of the Gulf oil disaster, it would seem like petroleum supply has received another black eye, and that has opened up the door for a historic change in US energy policy. While few expect the 6-month moratorium on deep water activity to be extended permanently, the severity of the environmental damage taking place could prompt an aggressive stance by the Administration, especially as we go into a national election. And with a daily operating cost for deep water rigs in some cases exceeding $1 million dollars per day, it is possible that many operators will pull up anchor and move to less certain production areas outside the dictate of the US government.

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Energy Market Commentary – 2010.05.10

by Dave Hightower on May 10, 2010

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil exploded during the overnight session helped by a series of favorable weekend developments that countered the extreme flight to quality play from last week. Global finance leaders including the Fed, increased swap lines to the European Central Banks to boost liquidity along with the passage of a massive European debt stabilization fund (of close to 1 trillion $). However, an OPEC official speaking at energy gathering in DOHA, commented on the new Euro financial aid package, saying that it would lift crude back above $80 but cautioned over the prospect for extreme volatility as the global recovery will still need to eat through excess physical supplies. In addition, the OPEC secretary added that there remained abundant supplies of crude oil urging more compliance among members to come into line with 2008 production guidelines. Fresh trade data out of China overnight also bodes well for the demand side of the equation for crude oil, as does the US Non farm payroll reading from last Friday. In fact, Chinese crude imports were seen up 30.9% compared to this time during 2009 and they set a new record high level for daily consumption (5.15 mln bpd). Also stoking the “risk-on” attitude were results that Germany’s exports expanded by 10.7% to 79.0 billion, a bullish number supporting the recovering economic backdrop and the fastest rate of growth in that reading in about 18-years. The Commitments of Traders Futures and Options report as of May 4th for Crude Oil showed Non-Commercial traders were net long 190,691 contracts, an increase of 928 contracts. The Commercial traders were net short 213,372 contracts, a decrease of 7,057 contracts. The Non-reportable traders were net long 22,680 contracts, a decrease of 7,985 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 213,371 contracts. The primary weekly trend in crude oil should be up now, with support coming at the first retracement off the May slide seen at $82.35 in the July contract. The new Euro area aid package is a game changer for today’s trade and has provided the bulls with a clear edge. It is possible for prices to revisit pre-panic price levels up above $84 to $86 basis July Crude oil. BP made its first attempt to install a massive 98-ton containment apparatus over the oil leakage areas in the Gulf but the build up of ice crystals thwarted the original plan leaving engineers seeking alternative ways to stop the leaks.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: July RBOB posts a gap higher open in response to a weekend financial aid package designed to stem the run on Euro area sovereign debt markets. The US dollar has erased over 61% of last weeks gains so far today and that cheapens gas prices on the world market and helped RBOB rebound over $0.07. On the retail level, the Lundberg survey showed average gas prices in the US rose during the last 2-weeks to $2.92 per gallon but those prices are expected to fall back because of last week’s action. The Commitments of Traders Futures and Options report as of May 4th for Gasoline (RBOB) showed Non-Commercial traders were net long 80,867 contracts, an increase of 6,322 contracts. The Commercial traders were net short 93,188 contracts, an increase of 8,636 contracts. The Non-reportable traders were net long 12,321 contracts, an increase of 2,313 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 93,188 contracts. This represents an increase of 8,635 contracts in the net long position held by these traders. A normal retracement of the May slide could allow the June RBOB contract to rise back to the $2.2274 level and perhaps even back to the 50% retracement level of $2.2682 level.

HEATING OIL: After the massive early May washout of 30 cents a gallon the partial all clear from the Euro zone should foster in a series of short covering rallies. A normal retracement off the May slide would seem to allow a recovery to the 1st retracement level of $2.1716 and perhaps even the 50% retracement level of $2.2070. The Commitments of Traders Futures and Options report as of May 4th for Heating Oil showed Non-Commercial traders were net long 34,705 contracts, a decrease of 52 contracts. The Commercial traders were net short 56,577 contracts, an increase of 854 contracts. The Non-reportable traders were net long 21,873 contracts, an increase of 906 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 56,578 contracts.

TODAY’S ENERGY MARKET GUIDANCE: Short covering and perhaps some fresh spec long interest should leave the bull camp with the edge today.

Energy Prices Should Not Be This High – Or Should They?

by Dave Hightower on April 29, 2010

The build in distillate stocks in the EIA numbers this week is keeping storage levels at record high levels for this time of the year. With June heating oil prices trading close to the highs for the year in the wake of these bearish numbers, Congress and those pushing for speculative limits on futures trading will probably think they have found another “smoking gun.”

But these higher prices are really signaling the threat of even tighter energy supplies ahead and the inability of the world to meet its growing demand for energy “products.” This comes from growing individual transportation needs, particularly in the developing world, and the lack of expansion in global refining capacity. In other words, the market is sending a message that some don’t want to hear!

As we point out in our recent special report Natural Gas: Positioning for a Major Bottom, the market will soon be forced to turn to natural gas for individual transportation needs, and that will more than likely result in natural gas prices finally joining the historical commodity price explosion.

The pundits are sure to doubt the validity of the natural gas price rally, as supplies are also flush. But world needs more energy output, and all sources are destined to become more expensive.

Natural Gas – 2010.04.12

by Dave Hightower on April 11, 2010

The natural gas market is finally beginning to show fundamental and technical signs of a major bottoming. While it might be folly to rely on swift enactment of policy by the U.S. government that would serve to expand the use of natural gas in the energy supply chain, the relative price advantage of natural gas versus many petroleum inputs looks to facilitate an increase in demand. Recently the BTU price of natural gas reached 16 month lows versus crude oil, and that should begin to get the attention of users and maybe even someone in Washington who is willing to look beyond the tip of their nose.

Clearly, the natural gas market is being weighed down by supply, but a bull market has to begin somewhere, and seeing the EIA revise its 2010 US electricity demand upward by 1.9% is certainly a start. Throughout most of the declines in natural gas prices from early 2008 to the 2009 low, the trade was seemingly factoring in a sustained lull in industrial usage. The slide from the 2008 high price of $13.69 per MMbtu to the 2009 low of $2.40 was blamed on fears of a recession or even a depression. Now that a depression has been averted and the recession is seemingly lifting, we suspect that the trade will have to move to reinsert some premium back into natural gas prices.

The latest weekly EIA report indicated that natural gas in storage was below to year ago levels, and the recent Commitments of Traders report showed speculators holding a net short position of 50,365 contracts. While US natural gas rigs in operation have risen off the 2009 low levels, they are still running at nearly half of their peak levels. Therefore, while natural gas stock levels are to be considered flush, it is possible that increased cyclical demand could be joined by “new” demand from petroleum users who are looking for a cheaper fuel alternative.

Colorado State University’s hurricane forecast team is calling for four of the expected eight hurricanes this coming season to be classified as “major” storms, which could serve to spook out some position shorts. With hurricane threats tamped down over the last two seasons, the energy markets might not be overly concerned with the “potential threat” of weather at this time. However, if there are some signs of storm activity in May, attitudes could begin to change. As the accompanying chart of tropical storm frequency indicates, some minor activity has historically occurred during the month of May. While we are barely half-way through the month of April as if this writing, the natural gas trade has already seen enough fundamental change and enough momentum in the overall economy to begin to have some respect for weather-related threats. In the meantime, we think that corrective action back down to the $4.00 level in the June natural gas contract should be considered a long term buying opportunity, especially if the spec net short positioning expands beyond the 65,000 contract level.

Energy Market Commentary – 2010.04.08

by Dave Hightower on April 8, 2010

Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

May crude oil has come into this morning on the defensive again, extending its sell off from late in yesterday’s session. This week’s storage numbers seem to have removed some of the market’s recent strength, as they indicate fairly high ongoing levels for crude oil stocks, as well as for crude oil imports. A stronger Dollar off of fresh EU debt problems, along lingering weakness in the US stock market have added to the pressure on prices energy prices this morning. Even so, the market still remains within $2.20 of 18-month highs. While prices look to soften off overdone technical considerations and a minor let down in global macro economic optimism, one should not forget the story from yesterday that 12 of the largest Chinese refineries would be running at a record rate of over 2.9 million barrels per day during the month of April, as that clearly points to the prospect of strong demand from that nation. Given the slacken economic views, seeing EIA crude stocks rise by 1.976 million barrels yesterday was seen as a reason to bank profits. However, with crude oil stocks sitting 9.835 million barrels below year ago levels, that would seem to provide some form of eventual underpin for prices. On the other hand, crude stocks do stand 20.725 million barrels above the five year average and that probably serves to embolden the bear camp. Crude oil imports for the week stood at 9.561 million barrels per day compared to 9.060 million barrels the previous week and that is another minor negative for the market to digest. Furthermore the US refinery operating rate was 84.49% up 1.89% from last week compared to 81.84% last year and the five year average of 85.97%. While the market might see increased refinery activity as supportive to crude oil prices, that could lessen the odds of a big tightening of product stocks ahead. In short, the bear camp has control today from a fundamental and technical perspective, as well as from an outside market perspective. Near term corrective targeting in June Crude oil is now seen at $85.00.

GASOLINE: In spite of some large gasoline draws indicated on this week’s storage reports, May RBOB has been caught up in the general oil market weakness and has drifted lower again this morning. While this year’s “driving” season is coming up and there have been fresh expectations of a sharp rise in gasoline prices this summer, this rally may have gotten ahead of itself, and recent market action may be more indicative of needed profit-taking than any sustained change in sentiment. EIA gasoline stocks did fall by 2.498 barrels but they are 5.874 million barrels above last year and 10.480 million above the five year average. Average total gasoline demand for the past four weeks was also down 0.36% compared to last year. Gasoline imports came in at 756,000 barrels per day compared to 710,000 barrels the previous week. In short, supply side news was negative and that was compounded by news that US refinery rates are starting to rise. Near term downside targeting is seen at $2.26.

HEATING OIL: May heating oil has moved lower again overnight as the trade is apparently being pressured by the builds shown in this week’s storage reports. With stocks at historically high levels earlier this year, the recent trend of weekly declines helped to underpin the recent rally but now that sentiment has lost its footing, especially since that trend appears to have ended around the same time as the conclusion of the heating season. Also distillate stocks at 145.68 million barrels are at a record high for this week. Previous record was in 2009. EIA distillate stocks rose 1.074 million barrels and stand at 1.88 million barrels above last year and 28.418 million above the five year average. Distillate imports came in at 153,000 barrels per day compared to 321,000 barrels the previous week. Average total distillate demand for the past four weeks was down 3.36% compared to last year. EIA heating oil stocks rose 576,000 barrels and are 5.311 million barrels above last year and 7.079 million above the five year average. Near term downside targeting is now seen at $2.20 basis June Heating oil.

TODAY’S ENERGY MARKET GUIDANCE: The bears have control and the losses might be somewhat aggressive in the wake of negative outside market factors.

Energy Market Commentary – 2009.12.16

by Dave Hightower on December 17, 2009

Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

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.

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