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CRUDE OIL MARKET FUNDAMENTALS: Crude oil trading has been choppy and two sided overnight as the market continues to weigh the potential impact of China’s move to tighten credit against reports of strong Chinese oil demand and tightening US oil supplies. The economic news from China showed 4th quarter GDP up 10.7% with inflation near 2% and oil market sentiment still seems to be undermined by lingering fears that China could take more aggressive steps to dampen growth. So far the oil market has had a limited positive reaction to news that China’s oil imports saw a sharp jump in December and that China’s refinery crude use reached a record high last month. Crude oil also hasn’t been able to garner significant upside traction yet from yesterday’s API report showing a surprise 1.8 million barrel fall in crude oil stocks and bullish readings for product stocks even though the news should be easing some concerns that oil supplies were starting to rebuild quickly in the New Year. But it is clear oil markets remain somewhat hampered by the fear that China’s credit tightening measures could start to temper their domestic oil demand and generally undercut the global macro economic recovery. China’s tightening action and concerns that Greece’s debt problem will negatively impact the European economy have strengthened the Dollar overnight and there is the risk that currency connected selling could put more pressure on the oil market this session. The stronger dollar trade in the early going suggest investors are continuing to scale back risk and that could diminish the appeal of oil as an inflation hedge. Today’s reports on jobs, leading indicators and regional manufacturing will provide more economic insight that could impact oil trading this session. But the oil market will likely be more focused on today’s EIA inventory report. Most traders are expecting to see more than a 2 million barrel rise in crude oil stocks. However, with the price break from the January high correcting the market’s overbought condition, we suspect a rally attempt in March crude oil will be seen if the EIA data confirms the drop in oil supplies reported by the API. However, traders should be prepared for a possible volatile trade in crude oil today since while the industry news may be supportive, lingering macro economic uncertainty could also have a strong influence, especially if the currency action remains bearish. Therefore, with the oil markets getting some mixed messages, it won’t be surprising to see prices being pushed in both directions this session. Key retracement support for March crude oil is at $77.03 with resistance at $78.45.
GASOLINE: The gasoline market has been able to edge higher in the early going, but trading remains cautious ahead of today’s EIA report. Gasoline seems to be garnering some support from reports of refinery glitches and news of restructuring plans by Chevron that may result in some refinery closings. But it’s a bit surprising that the market hasn’t so far had a more positive reaction to yesterday’s the API report which showed a 667,000 barrel rise in gasoline stocks since most traders were expecting a much higher 2 million barrel build. Given the steep retreat from the January high, we suspect gasoline could have a sizable bullish reaction if a positive surprise is seen in today’s EIA report. However, gasoline may have problems holding on to a rally off the oil inventory news if the dollar gains more upside traction this session or if today’s economic reports add to macro economic concerns that have been triggered by China’s credit tightening. While March gasoline appears to have an early upside bias, the market is likely to encounter overhead resistance near $2.0723 and near yesterday’s high at $2.0775 with support coming in between $2.0157 and $2.0081.
HEATING OIL: March heating oil has seen a choppy two sided trade, but it is disappointing to see such a guarded reaction to yesterday’s bullish API report. API reported a 3.4 million barrel drop in distillate stocks when most traders were expecting a 400,000 barrel rise. But traders may be a bit skeptical of this reading and may need a confirmation from today’s EIA report before a more significant rally attempt is made. The stronger Dollar trade overnight and lingering concerns over the macro economic recovery as China takes steps to tighten credit may be other factors keeping the heating oil market in check. Recent price weakness has also been based on a temperature warm up this week reducing winter fuel demand. But we suspect the market may soon find fresh weather related support since weather forecasters are starting to predict colder temperatures in the late January into early next month. Seeing the market correct its overbought condition on the steep decline from the January high would seem to give heating oil some upside potential if today’s inventory news comes in bullish. But ultimately, macro economic issues and outside markets may end up having a bigger influence. Overhead resistance for March heating oil comes in at $2.0453 then $2.0590 with support at $2.0112.
TODAY’S ENERGY MARKET GUIDANCE: Oil markets appear to have an early upward bias off the bullish API news, but so far the upside has been restrained by lingering macro economic concerns and jitters over global oil demand due to China’s actions to tighten credit. We suspect oil markets will have a bullish reaction to today’s EIA report if the news is bullish, but unless macro economic optimism can return it may be difficult for oil markets to hold onto gains.
