The Hightower Report

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CRUDE OIL MARKET FUNDAMENTALS: October crude oil has taken on a defensive stance ahead of key U.S. GDP figure and comments from Fed Chairman Bernanke. Outside markets appear subdued in anticipation of a reduced U.S. growth forecasts from the previous estimate of +2.4% down towards +1.0% to +1.3%. In fact, that uncertain economic backdrop was echoed by a Barclay’s report released Thursday that lowered their price outlook for crude oil in 2010 by 4.8% and in 2011 by 7.6%. Additionally, markets are anxious and somewhat hopeful ahead of Fed Chairman Bernanke’s speech that he may offer new ways to stimulate demand, and that is a factor that could save October crude oil prices. However, the fundamental picture for crude oil remains flush with ample supplies in the face of slumping demand, and that has some analysts forecasting OPEC shipments of crude oil to slip a fraction in the upcoming month to 23.38 million barrels per day. There was also data released overnight from India that pegged their July crude oil production jumping over 15.5% compared to year ago levels, at the same time refineries boosted output by nearly 14.0% in the same period. Finally, the softening U.S. demand outlook has weighed heavily on WTI crude oil compared to Brent crude oil spread relationships, and that sent the premium for Brent out to new two month highs. Technically, October crude oil is showing signs of further upside potential. Volume has been above average during the recent two day advance, as the market rebounded from severely oversold conditions, and that gives the bulls hope for more. Short term support for October crude oil lies at $72.35 to $72.20, which should contain weakness barring any demand shocks from this morning’s key data flow. The short term trend provides the bulls with the edge but that edge will be erased quickly if the US GDP is below 1%.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: October RBOB prices got off to a shaky start after a gap lower open, but have since recovered to their best levels of the early morning trade. Prices have recovered from severely oversold levels, but now rely on improving demand fundamentals to continue higher. Perhaps a positive result from this morning’s U.S. GDP figures and/or upbeat comments from Fed Chairman Bernanke could provide a bullish catalyst. These two factors will most likely dominate the trade today and for now expectations are set at a very low level. It appears there has been a let up in South African demand overnight, and that pressured European gas crack spreads. There were also comments from cash traders that noted weak U.S. RBOB prices have begun to take their toll on European markets. Technically, October RBOB is trying to make a turn higher and is in the process of building a base. This morning’s early rally has eclipsed Thursday’s price highs, and that now opens the door for a further push toward $1.8820. If prices can hold trade above this level for some time today, there is potential for a further run back to $1.95. The bulls have definitive edge this morning, but have to contend with significant macro developments.

HEATING OIL: October heating oil prices managed to shake off weakness overnight and bounce from $2.01 support. The combination of an extremely oversold market and a rebound from four month lows has sparked the latest rally, and that favors higher prices in the near term. Trading volumes have been running above average levels during Wednesday’s wide range reversal and on Thursday’s move higher. For now, the bulls are closing in on resistance at the $2.04. October heating oil has good upside momentum and clearance of upside resistance levels could provide a further push toward $2.15 in coming sessions. However, this morning’s macro news flow certainly has the potential to extend the upside, but also poses a very significant risk if growth expectations are not met.

TODAY’S ENERGY MARKET GUIDANCE: Without better than expected GDP readings the bear camp might be able to regain control.

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CRUDE OIL MARKET FUNDAMENTALS: Fears over a double-dip recession are having their way with the crude oil market this morning as it looks poised for a further slide toward $72. The initial morning trade for October crude oil is lower after posting fresh lows for the move on the back of a stronger U.S. Dollar. The greenback penetrated upside resistance this morning to trade at the highs of the week, and that is tugging down physical commodities like crude oil. The energy markets continue to grapple with hangover effects of poor U.S. economic data that once again highlighted concerns of a further economic slowdown. The threat of escalating tensions in Iran has provided little support to crude oil recently and that underscores the market’s focus on the slumping demand outlook. Additionally, analyst forecasts for OPEC’s sea bound exports pointed to a 1.0% drop over the previous month to 23.24 million barrels per day. Overnight data from South Korea showed their crude oil imports were up 5.5% in July, but that does not seem to have much bearing on trade this morning. Finally, keeping with the merger and acquisition buzz of late, Korea’s state run oil corporation made a hostile bid for a UK petroleum concern in an attempt to secure additional oil supplies, but that does not appear to be embraced by the market this morning as a supportive element. In short, October crude oil is in the process of pricing in a double dip recession and probably needs an outside catalyst to turn the tape positive. Another factor that could inject further volatility into today’s trade is the expiration of the September crude oil contract, especially after an 11.4% breakdown in prices in August. Technically, the lead October crude oil contract remains in a pattern of lower highs and lower lows and action so far this morning broke down out of recent congestion. While short term momentum is reaching oversold territory, the primary driver behind the trade appears to be slow down fears, and that should provide the market with more negative power. Over the last four months, economic slowdown fears have formed a support zone for October crude oil below and around $72.00, and that looks like the next downside target for crude oil.

GASOLINE: October RBOB traded lower overnight and registered their lowest prices since July 7th. This also marks a breakdown out of the $1.92-$1.86 support zone, which now leaves the market on track to challenge the July lows down at $1.8417. A deteriorating global growth scenario coupled with a stronger U.S. Dollar is seen as the primary culprit to slashing demand expectations and weighing on prices. Storage data released Thursday from the Amsterdam-Rotterdam-Antwerp (ARA) storage hub saw a 4.26% jump in the latest week to 906,000 tonnes in response to slackening demand. Additionally, as a result of the trade sanctions on Iran, their gasoline imports were down about 90% in July compared to year ago levels, but that probably does not carry much weight in the Friday morning trade. The bears have the definitive edge this morning in October RBOB with some minor close in resistance above at $1.8850.

HEATING OIL: October heating oil saw a game changing trade on Thursday after eking out a new five day price high, as that positive action was followed by a negative price reversal on the charts. That shift in tone is being carried out again this morning, and that has pushed heating prices below recent congestion lows and into new six week lows. Obviously heating and distillate stock levels were very burdensome before yesterday, but seeing demand hopes crushed has clearly shifted sentiment in the market to a very negative condition. At least in the early action today, nearby heating oil prices have reached the lowest levels since July 7th.

TODAY’S ENERGY MARKET GUIDANCE: Expectations of rising supply and declining demand leaves the bear camp with the edge again today. In the event that equities weaken traders should expect to see fresh new lows for the move and perhaps a track toward the early July lows. The July lows would seem to equate to double dip pricing!

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil begins the trade today in negative ground in response to an unexpected decline in Chinese economic data, a looming Euro Zone refunding deadline and weak global equity markets. In the face of ample supplies, Crude oil has paid more attention to demand factors for direction since the May lows and that puts the market in a negative position today. The downward revision in China’s Consumer Confidence readings suggests the rate of growth in the region is moderating, and that is seen as a negative for energy demand. Risk aversion has also ratcheted higher ahead of a July 1st deadline for a Euro zone 442-billion euro refinancing operation, which has in turn created liquidity concerns again. While a top global bank mid-year report forecasted crude oil prices to reach $100 in 2011, barring a surge in US dollar, that forecast is simply lost in the negative macro economic headline shuffle. Tropical storm Alex’s track away from key Gulf of Mexico energy operations has also trimmed some risk premium built into crude, while providing more challenges for BP. While two of Mexico’s major terminals have shut down in anticipation of the storm turning to hurricane status, the trade is mostly uninterested in minor supply side snafus. While trading volumes in Crude oil have come in well below average, as prices broke down from the $80 resistance level that positive technical signal needs to be discounted until demand views begin to improve again. The weak economic backdrop, strong dollar action and another move away from risk taking markets, sets August crude oil up for another test of the sub $75.00 support zone.

GASOLINE: A series of negative economic influences seem to be saddling risk attitudes again and that has helped push August RBOB down toward last week’s lows. A downward revision to Chinese Consumer Confidence raises concerns over moderating growth in that region, while liquidity issues have once again taken center stage in the EU ahead of a Euro bank refunding deadline. With the Baltic Freight index also showing a long pattern of weakness recently there doesn’t appear to be much hope that global gasoline demand will be strong enough to tighten current abundant gasoline supply levels. August RBOB opened weak and appears to be poised to at least test the mid June lows of $2.0526.

HEATING OIL: The heating oil market has fallen sharply overnight under the weight of new found demand concerns and a historically high supply function. As suggested a number of times recently, heating oil easily has the worst classic fundamental supply and demand setup and therefore it can’t tolerate a broad based macro economic let down. Near term downside targeting is seen initially at $2.0550 but a return to the even number $2.00 level can’t be ruled out if broad based views of a double dip recession become common place.

TODAY’S ENERGY MARKET GUIDANCE: Long liquidation and fresh macro economic selling looks to put energy prices down hard today.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil prices look to be back under some pressure this morning as demand expectations are pinched due to fresh double-dip recession talk. We also think that demand expectations for physical commodities are reduced by the news of additional austerity measures from Spain and the UK overnight. Furthermore, physical commodity markets seemed to have lost the bullish buzz from the Chinese currency change yesterday and that would seem to leave the outside market influence negative for energy prices into the US Tuesday trade. A tenable physical supply and demand balance in energies was also confirmed by Goldman Sachs as they slashed their 3-month price outlook for crude by 9.0% (from the June 4th forecast). Furthermore, ABARE only expects WTI crude to average $74 in 2010 and with nearby futures prices sitting above that level into the opening today, there would seem to be more bearish views in place than bullish views today. Since the market garnered some support from talk of a sustained ban in deep water drilling earlier this month, it is possible that predictions from BP that deep water drilling can be done safely with improved technology, could be seen as a negative. However, faith and stock in BP is probably running very low and therefore the call for deep water activity is probably discounted. In the end, even technical price action has turned negative for August crude oil after a bearish reversal and the test of $80 yesterday. Monday’s weak close and range down action this morning casts a bearish bias and that could set the stage for a slide down to $78.86 or even lower if equity market losses become more significant.

GASOLINE: The RBOB market is clearly in a slight technical breakdown on the charts this morning and that action is mirrored by a mostly slack macro economic outlook. Talk of government spending cuts slowing global growth and therefore energy consumption is only partially countervailed this morning by talk that the US administration might be considering more aggressive sanctions against Iranian refiners. However, threats against product supply probably aren’t going to be enough counter overall weaker demand expectations today. While the US energy department reported average retail gasoline prices to be up 4.2% in the last week to $2.74/gallon that report might not have much of an impact on gasoline futures prices today. The EPA did delay a decision on implementing more ethanol in the US gas chain and that could eventually be seen as a supportive development for RBOB. In the end, the technical failure this morning looks to push August RBOB temporarily below the $2.10 level.

HEATING OIL: The heating oil market is showing signs of following crude and RBOB prices downward in the early going today, but as of this writing, the August heating oil contract hadn’t really seen much technical damage on its charts. With talk of rising refinery capacity in Brazil out to 2020, seen in the news overnight, the bear camp seems to have the advantage of the headlines. However, increased refinery capacity in Brazil is a long term potential and therefore that story is probably nothing more than negative psychology for the market today. Initial downside targeting is seen at $2.1172 basis the August heating oil contract with the magnitude of the coming break expected to be a function of the negative sentiment being thrown off by the equity markets.

TODAY’S ENERGY MARKET GUIDANCE: Renewed demand fears and an overbought condition leaves the bear camp with the edge today.

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CRUDE OIL MARKET FUNDAMENTALS: Overnight developments create a positive backdrop for Crude oil again today. A combination of a friendly Spanish debt auction and confirmation of better than expected May Chinese export data also appears to be supporting the energy complex. Inside the Chinese export figures, crude oil imports actually declined 15.7% from the record levels seen in April, but they remained up 4.4% from year ago levels. Global oil demand prospects also received another bullish lift yesterday from a upward (+1.98%) revision from the IEA for 2010 energy demand, but those forecasts were made off what they call an improving economic condition. This reasoning seems to run counter to comments from OPEC on Wednesday that suggested global financial uncertainty has continued to be a drag on demand for crude oil. However, in light of the favorable economic headwinds this morning, crude oil closes in on the upper end of the recent trading range at $75.40, which is a level that has been an obstacle during the previous three rally attempts. EIA crude stocks fell 1.829 mln barrels for the second straight week (that has not happened since January) and with inventories coming in much lower than some street estimates, that has also helped to tamp down oversupply fears somewhat. Still, implied demand has not clearly increased yet and that remains a key driver for the energy trade going forward. Crude oil imports for the week stood at 9.535 million barrels per day compared to 9.455 million barrels the previous week. The refinery operating rate was 89.10% up, 1.60% from last week compared to 85.85% last year and is the highest level since July 2008. In short, an improvement in sentiment has bolstered crude, but to extend above the late May and early June highs probably requires very significant equity market gains. The bulls have control to start today, with short term support seen at $73.72; but we also see fundamental headwinds once the July crude contract reaches the late May high of $75.72.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: Positive economic headwinds created by strong Chinese export data boosts sentiment this morning for RBOB. This builds on an impressive performance seen Wednesday that provided July RBOB with a bullish chart tilt. OPEC said in their monthly outlook report that global refinery runs will probably stay low, while activity in the US will increase. While EIA data Wednesday showed gasoline stocks fell only 8,000 barrels the trade was expecting a decline of 400,000 barrels and therefore gasoline stocks are still 17.327 million barrels above last year and 10.543 million above the five year average. Furthermore, total gasoline demand continued to lag and for the past four weeks was down 1.01% compared to last year. Gasoline imports came in at 788,000 barrels per day compared to 954,000 barrels the previous week. However, the short term trend for July RBOB points upward, until the July contract retests resistance up at $2.10. While there might be initial resistance at $2.05 this morning the gasoline market is likely to claw its way even higher.

HEATING OIL: The tone this morning has a friendly slant for heating oil, as the market is being cheered on by positive export data in China and by favorable global demand estimates from the IEA. The trend for July heating oil so far this week is higher, favoring a continued push toward the 2.04 level. Wednesday’s highs of 2.0220 provided only minor resistance overnight. EIA heating oil stocks rose 293,000 barrels and are 4.273 million barrels above last year and 7.691 million above the five year average. Distillate stocks at 154.824 million barrels registers another new record high reading for this week. The previous record was posted in 2009. EIA distillate stocks rose much more than expected by 1.836 million barrels and stand at 5.106 million barrels above last year and 30.988 million above the five year average. Distillate imports came in at 236,000 barrels per day compared to 211,000 barrels the previous week. Average total distillate demand for the past four weeks was up 12.14% compared to last year. Diesel prices slumped for the 4th consecutive week, but prices remain $0.45 above year ago levels

TODAY’S ENERGY MARKET GUIDANCE: For the time being the market is upbeat on demand prospects and that helps the market play down or discount unfavorable crude, gasoline and heating oil stocks evidence.

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CRUDE OIL MARKET FUNDAMENTALS: Advancements on US financial reform overnight might remove some anxiety from the marketplace but apparently euro debt fears are set to captivate markets and weigh further on crude oil prices. In fact, with global equity markets trading lower after a favorable German vote on the $1-Trillion Euro backstop plan, it would not seem like anyone is looking for positives in this market. Crude oil remains in a vulnerable status as it attempts to reconcile future supply and demand. Increased potentials of a further economic slowdown helps explain the massive liquidation seen recently. Open interest in crude oil lost over 100,000 contracts on Tuesday & Wednesday which suggests the reduction in extreme net long spec positions (long 201,286 as of 5/11/2010) is taking place. Late Thursday, the market saw more private forecasts of burdensome US crude inventories at Cushing and that has to give the bear camp confidence to press prices even further. July Crude had an outside day down, with a very weak close yesterday that should leave the market capable of a slide toward the July 2009 lows of $66.11. Intra market spreads have narrowed +$1.50 during the last week indicating the -6.3% plunge in crude prices may have normalized part of the oversupply issue and “eventually” that might pave the way for a good value play to buy crude oil. In short, looming Euro debt uncertainty remains the primary driver of trade and that adds further risk premium selling to the trade. It might take some type of surprise statement from outside of the EU/IMF or a massive coordinated currency intervention to provide any meaningful bounce in crude oil prices

PRODUCT MARKET FUNDAMENTALS: GASOLINE: Negative macro issues continue to hamper RBOB and even with the market closing in on downside technical price targets, there doesn’t seem to be cause to pick a fundamental low yet. For now, the trend remains down in July RBOB, with support seen at 1.8950. While demand hopes might try to gain some traction off news that AAA forecasts US Memorial day travel to increase by +5.4% compared to 2009 levels, the big picture macro economic news is so negative that minor demand side news is going to be largely discounted. AAA pointed to an improving US economic recovery as the motivating factor behind their increased demand forecast but most markets are unwilling to accept ongoing recovery in the face of the European turmoil. European gasoline remains weak on the back of weak crude prices and lack of arbitrage opportunities to export to US, merely serves to slow the washout in US prices.

HEATING OIL: The demand story remains front and center as the Euro area debt fears take their toll on global recovery prospects. July heating oil so far has been unable to take out its February lows at 1.8750, making it the “less bad” leader in the US in the energy complex. The trend remains down with support below at 1.8904. Thursday’s slide satisfied downside price objectives of 1.8890 created by May’s decline but we don’t see a fundamental reason to play for a low yet. Traders need to see some type of major financial market event like coordination to play for a low.

TODAY’S ENERGY MARKET GUIDANCE: Fears of weak demand and burdensome supply evidence leaves the bear camp with all the cards.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil opened steady and then took a negative turn during the overnight and early morning US trade action. Outside market influences take top step again as skepticism rains over the EU stabilization plan. Flight to quality bids resurfaced again and that bolstered the US dollar and US Treasury markets, while equities and most physical commodities like crude oil come under attack again. There were many positive factors that surfaced overnight that would otherwise have provided support to crude prices. First was Chinese inflation data that came in above expectations to post new 18-month highs, but there is concern that this could prompt the Chinese central bank to tighten monetary policy by lifting rates. Secondly, China implied oil demand posted its 8th consecutive monthly double digit growth figure and that trend is expected to continue, as factories return to normal operating levels and the Chinese farming season gets into full swing. Chinese refinery crude throughput up 17.1% year over year to a record high of 8.37 Mln bpd in April and that would ordinarily be seen as a very solid demand reading. Echoing that strong demand stance, was data released out of OPEC this morning, that indicated the 3rd consecutive monthly increase in world oil demand by 950,000 bpd, and that is up 50,000 barrels from previous forecasts. Finally, industrial production figures out of the UK blew past street estimates to +2.0% on the month, which is expected to boost UK GDP growth. This further indicates a recovering global manufacturing sector and possible improvements in demand at home and abroad. However, while internal market fundamentals are positive for crude oil prices today, uncertainty about the implementation of the EU debt program have partially escalated again. July crude oil has initially suffered and made a test of Monday’s low trade of 79.21, leaving the next support area at last week’s lows of 77.74. Therefore, the bears have the edge to begin Tuesday’s trade and they are being helped by weak outside market factors.

GASOLINE: The overnight trade in RBOB was lower as outside markets reassess the effectiveness of the EU/IMF stabilization program. Concerns mount over its execution and potential success of that plan, while the root of the problem, surging debt levels remains intact. The US Dollar continues to build on Monday’s bullish turnaround and has made a run for the 85.00 level and that has undermined many physical commodity markets like RBOB. Trade data out of China would normally have a positive influence on the gasoline trade but that news has taken a back seat to the Euro issue. China’s National Bureau of Statistics released output figures for gasoline, which came in down 2.8% on the month, but up 5.5% on the year. Late Monday, the EIA’s weekly survey showed that US gasoline prices averaged $2.91 per gallon, despite last weeks rout in energy markets and we think that highlights the trend in demand and the eventual trend in gas prices. Trade estimates for this week’s inventory data suggest a continued build in gas stocks near 750,000 barrels and that in conjunction with residual outside market negatives and that leaves the bear camp with the edge. Near term downside targeting is seen at $2.1340 basis the June RBOB contract.

HEATING OIL: While OPEC talked about rising global oil demand that is hardly going to provide support to heating oil in the early Tuesday trade. In fact, OPEC even talked up improving product demand and that seems to be mostly lost on the heating oil market this morning. Expectations for this week’s supplies numbers in heating oil and distillates are calling for an increase of just over 1-million barrels but supply isn’t as important as demand in the current market focus. We see an initial downside target of $2.0851 in the June Heating oil, with even lower support seen down at $2.0795.

TODAY’S ENERGY MARKET GUIDANCE: Back and fill action expected on the downside but not a return of aggressive selling interest.

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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.

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.



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CRUDE OIL MARKET FUNDAMENTALS: June crude oil has found its footing once again as a stronger US equity market and the easing of EU debt tensions have helped energy prices to lift themselves away from this week’s lows. While the EIA storage numbers still indicate high stocks levels for crude oil and near-record stocks levels for the products, it has been strong domestic and overseas demand expectations which have supported prices at these levels. The large jump in the EIA refinery operating rate this week may be a sign that the industry is ramping up for the summer driving season ahead and that could indicate a coming increase in demand for crude oil. However, EIA crude stocks rose 1.963 million barrels and are 11.18 million barrels below year ago levels. Also, crude stocks stand 17.028 million barrels above the five year average. Crude oil imports for the week stood at 9.681 million barrels per day compared to 9.613 million barrels the previous week. The refinery operating rate was 88.95%, up 3.02% from last week and compared to 82.67% last year and the five year average of 87.36%. While the debt crisis isn’t all clear, the energy complex will show its prevailing bullish tilt with its action today. However, to see July crude oil prices rise above the 88.00 level probably requires a putting down of the Euro debt crisis, renewed evidence of Chinese energy demand growth, or a distinct supply side threat. However, we can’t rule out an attempt to return to near term resistance of $87.70 in the July crude oil contract. If the debt crisis really calms down and the US recovery continues crude oil can eventually trade north of $90.00.

GASOLINE: The draw in gasoline stocks this week may be a signal that gasoline prices have some fundamental support. Seeing the witch hunt to impose speculative trading limits means that prices will be restrained by the fear of an “out of left field” bearish event, but the implementation of tighter spec limits will probably caused a sharp set back and then a massive explosion, as the market sends a message that limits aren’t the answer. Higher prices are the answer to speculation and unrelenting demand, but the inability to see prices reach a level that really causes change is allowing the situation to get worse rather than better. Nonetheless, EIA gasoline stocks fell 1.240 barrels, and are 9.985 million barrels above last year and 17.082 million above the five year average. Average total gasoline demand for the past four weeks was up 1.62% compared to last year. Gasoline imports came in at 985,000 barrels per day, compared to 756,000 barrels the previous week. Unlike crude oil prices gasoline prices are much closer to their highs and we aren’t sure that we can justify an upside breakout or even a sharp continued rise in unleaded given the uncertainty on the Euro zone debt front. The market can rally today, but prices are at a precarious junction.

HEATING OIL: The build in distillate stocks shown in the EIA storage numbers has kept storage levels at record high levels for this time of the year, although some of that could be a temporary result of the temporary cut back in demand from Europe and some could be the result of a still sluggish economy. However, Distillate stocks at 151.82 million barrels are at a record high for this week. The previous record was in 2009. EIA distillate stocks rose 2.937 million barrels, and stand at 4.82 million barrels above last year and 35.043 million above the five year average. Distillate imports came in at 252,000 barrels per day compared to 106,000 barrels the previous week. Average total distillate demand for the past four weeks was down 3.01% compared to last year. EIA heating oil stocks rose 1.614 million barrels, and are 7.364 million barrels above last year and 10.257 million above the five year average. With June heating oil prices sitting within close proximity to highs for the year, Congress and those pushing for speculative limits must be very happy, but unfortunately the markets are signaling future tightness and the inability of the world to meet growing product demand that is the result of a ramping up of individual transportation needs and the total lack of expansion in global refining capacity.

TODAY’S ENERGY MARKET GUIDANCE: The path of least resistance is higher but the overall macro economic condition is still highly suspect and any deterioration in the Euro zone debt situation could yank the rug out from under the bull camp.