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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has been able to make solid gains in the early overnight trade with part of the price rise coming from currency connected price support, a slightly better macro economic view and perhaps escalating geopolitical concerns. Oil has gained in response to a recovery bounce in the Euro on what looks to be a relief rally from the aggressive selling seen in the currency last week. Gains in global equity markets overnight also seem to be raising investor’s risk appetite for oil. In fact, the February 9th COT report with options for crude oil showed the net long position held by Non-Commercial and Nonreportable fell by 31,682 contracts as of early last week to 139,490 contracts. And with the crude oil no longer overbought, this setup likely gives the the market some additional buying capacity. A better macro economic view has been stoked by a stronger than expected rise in Japan’s 4th quarter GDP which rose 1.1% from the previous quarter and up 4.5% annualized rate and this news may be improving sentiment toward global oil demand a bit. It also looks as if part of the price strength in oil is tied to escalating geopolitical tensions with Iran as the US imposes some unilateral sanctions and as Western powers move towards imposing new UN sanctions as Iran peruses its nuclear agenda. April crude oil push above $75.59 also looks to be providing the market with some technical momentum and a move above last week’s highs will leave little in the way of resistance until the $76.95 to $77.38 price range. With only a housing index and regional manufacturing reading out this session, we suspect oil markets will be closely influenced by the ebb and flow in the equity and currency markets. Given the price action overnight, the bull camp clearly has the upper hand. But it remains to be seen if Greece can impose deeper deficit cuts wanted by European finance ministers before aid is given. And with a variety of issues still unresolved for Greece’s debt problem and the risk of sovereign debt default risk in the Euro-zone still a possibility, we are skeptical that currency based support for oil will hold. In fact, it shouldn’t be surprising to see the oil market’s reverse course to the downside if the Dollar starts to gain upside traction later in the session. We are also suspect of the market’s upside sustainability given last week’s bearish EIA inventory report which showed a 2.4 million barrel rise in oil stocks, a still low refinery operating rate and weak fuel demand. The next EIA report will be delayed until Thursday due to the holiday and therefore, oil markets are likely to be more influenced early in the week by bigger macro economic issues and technical signals than the market’s own internal fundamental setup.
GASOLINE: April gasoline has also traded higher in the early overnight action and a slightly better macro economic view, bullish outside market influence and technical signals have enabled the market to shrug off last week’s bearish inventory report for now. The EIA reported a higher than expected 2.3 million barrel rise in gasoline stocks which jumped as refinery operations rose a bit and that clearly shows that US fuel demand remains very weak. But investor risk appetite seems to have returned for now and gains in equities and stronger than expected Japanese economic growth have traders pushing aside the current bearish fundamental setup for gasoline right now. The market also looks to be in a stronger technical position after April gasoline held several tests of support near the $2.00 price level last week. Also, the February 9th COT report with options for gasoline showed the combined fund and spec net long position had fallen by 7,616 contracts to 55,779 contracts as of early last week and that may give the market some buying capacity. With only minor economic news out today and if outside markets stay supportive, positive technical signals may be able to support a move in April gasoline back towards $2.1089 which is the 100 day moving average. Look for more aggressive chart based buying on a move over $2.0823.
HEATING OIL: Heating oil is also in the midst of a strong upside move this morning on improved macro economic sentiment towards the Greek debt situation in the Euro-zone, geopolitical tensions with Iran and perhaps lingering cold weather in the Midwest. It also looks as if bullish outside market influences and technical signals are helping the market shrug off another weak fuel demand reading in last week’s EIA inventory report. April heating oil was able to hold several tests of the $1.90 price level last week and with the February 9th COT report with options for heating oil showing the combined Non-Commercial and Nonreportable net long position being reduced to 23,736 contracts as of early last week certainly gives the market ample buying capacity if resistance levels fail to hold. Therefore, if outside market influences stay supportive, April heating oil could make a run back towards the $2.00 price level since more aggressive chart based buying is likely to be seen on a move above retracement resistance and the 200 day moving average both coming in around $1.9894.
TODAY’S ENERGY MARKET GUIDANCE: The early price action clearly gives the bull camp in oil control. But since a good portion of the price gains seem to be tied to outside market influences, early trends in equities and the dollar will likely need to hold in order to support further oil price gains on an improving macro economic view. Otherwise, we suspect oil market gaisn will end up being short lived.
