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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has seen a choppy but mostly lower trade in the early overnight action on lingering concerns tied to yesterday’s bearish reading on consumer sentiment and a report showing a higher than expected jump in fuel stocks. Oil market sentiment has been undermined this week by an unexpected drop in US consumer sentiment which has lowered the prospect for a recovery in fuel demand this year. Indications that German growth may have contracted in the 1st quarter, the possible need for more quantitative easing in the UK and China telling banks to limit loans to local governments has also dented optimism for a global recovery in oil demand. In fact, a weak demand outlook has been further supported by news that Japan’s January crude oil imports fell 3% compared to year ago and confirmation that China’s oil imports fell nearly 20% on the month in January. Crude oil is under pressure despite the API report showing a much larger than expected decline in oil stocks as the market seems to be centered instead on the large build in gasoline supplies which is becoming a key focus as traders start to look beyond the winter season into spring. A portion of the price gains last week were tied to supply side concerns connected to the French refinery strike. So part of the weakness this morning is likely due to news that a resolution of the strike looks to be close at hand. Trading has also turned cautious ahead of today’s EIA inventory report which is expected to show a nearly 2 million build in crude oil stocks and a build in gasoline stocks. The market is also jittery ahead of Fed Chairman Bernanke’s testimony on monetary policy and the state of the economy. Oil markets are concerned that a recovery in fuel demand could be threatened as the Fed starts to tighten liquidity and remove the extra monetary stimulus applied during the financial crisis. Crude oil at this week’s highs certainly seemed expensive considering US fuel supplies remain ample. Now that the fuel demand outlook has started to sour, it will likely take a combination of good news from the EIA report, a strong read on new home sales and markets taking a bullish view of Bernanke’s comments for April crude oil to strongly reverse course to the upside. But we suspect it may be difficult for Bernanke to convince markets that tightening liquidity is just a technical adjustment and therefore, we still see downside price risk in place. We suspect the oil markets may more closely follow the equity market’s move off of Bernanke’s comments perhaps even more than the dollar since the connection between the dollar and oil shows signs of breaking down a bit. But unless the oil demand outlook can make another 180 degree shift back to the bull side, we suspect April crude oil will correct back towards $76.58.

GASOLINE: April gasoline has also made a push lower after an earlier rally attempt overnight failed to hold. Gasoline remains on the defensive amid lingering concerns over the outlook for fuel demand after yesterday’s bearish consumer confidence reading and after API reported a much larger than expected jump in gasoline stocks. It is clear that fuel demand remains weak since a marginal rise in refinery operations and higher fuel imports were enough to raise gasoline supplies three times more than the estimate. The latest pump survey also reported that gasoline consumption over the last four weeks was only.5% higher than a year ago. Gasoline is also giving back a portion of last week’s gains as the French refinery strike looks close to ending. With a lot of impacting news flow this session, gasoline prices could be pushed in both directions. But with the market showing signs of becoming technically overbought at this week’s highs, we suspect there is a good chance for April gasoline to fall back and test retracement support near $2.1249 before making a run at the highs again. Unless Bernanke can shift sentiment back to the bull camp and revive a positive outlook for fuel demand, we just don’t think the fundamentals can sustain a move in gasoline prices above $2.20 level right now.

HEATING OIL: April heating oil has pulled back with the rest of the oil markets pressured by a disappointing API report and concerns that industrial fuel demand will be slow to recover since consumer confidence has weakened and with the Fed starting to tighten liquidity. API reported distillate stocks fell by less than 1 million barrels compared to a 2 million barrel decline expected by most traders. With the temperature expected to turn milder in early March, less heating demand as the season moves into spring could start to build up distillate supplies again since there is little indication that industrial fuel demand has started to recover. Technically, it looks as if April heating oil set a near-term top at the $2.10 key resistance level with daily indicators also showing the market had reached an overbought extreme. Therefore, we suspect today’s industry, economic and Bernanke news will need to shift the outlook back to the bull camp in order to prevent a slide in April heating oil back to test retracement support near the $2.00 price level. Overhead resistance is at $2.0586 which is the 100 day moving average while more chart based selling is likely on a move below $2.0279.

TODAY’S ENERGY MARKET GUIDANCE: With a variety of industry, economic and monetary news out today oil market trading could turn more volatile with prices being pushed in both directions. But unless today’s inventory report or Bernanke’s comments can somehow revive strong bullish oil demand sentiment, a less optimistic macro economic view that surfaced yesterday along with oil markets becoming technically overbought at this week’s highs will leave downside price risk in place.

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While we cannot rule out ongoing gains in crude oil directly ahead, we have to believe that prices have recently gotten a little rich relative to what near term supply and demand fundamentals would indicate. From a technical perspective, crude oil has also been showing signs of being technically overbought, with open interest consistently posting readings above 1.32 million contracts and the recent COT positioning report showing a combined Non-Commercial/Non-reportable net long reading of 139,000 contracts. In fact, if one were consider that since the report’s mark-off date May crude managed to extend the rally by another $4.00 per barrel, crude oil has likely seen its spec long position grow even larger and is probably close to a moderately overbought standing. Even though we expect to eventually see nearby crude oil prices in 2010 reach highs in excess of $90 and perhaps even $100 per barrel, we currently see a slower than expected US recovery pace, residual Euro zone debt issues, periodic tightening threats by China and persistent strength in the Dollar as problematic to energy prices gains.

However, our biggest concerns are weak gasoline demand readings and burdensome supplies. Despite seeing very low US refinery operating activity, US gasoline stocks have not shown any sign of tightening. One might explain away the burdensome stocks situation as being a result of the slack seasonal demand window that will be rectified as we progress toward the summer driving season. In the meantime, we suggest that traders look to implement short futures and long multiple call strategies in an effort to capitalize on a potential corrective slide in the near term but ultimately in the hopes of catching the next wave higher in energy prices off the combination of growth and seasonal demand. We currently see May Crude oil prices as being prematurely strong and in need of a correction back down to levels below $75.00.

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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.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has at times attempted to edge a bit higher in the early overnight trade amid some optimism that today’s scheduled reports could help improve the demand outlook for oil. March crude oil has seen a nearly $12 price break from the January high on concerns the global economic recovery won’t be strong enough to revive oil demand this year, especially since China has started to tighten bank credit. Given the variety of negative factors, we do see the potential for March crude oil to eventually break below the December low. But it also looks as if the market may have become sufficiently oversold for March crude oil stage a recovery bounce if today’s reports on 4th quarter growth, Chicago PMI and consumer sentiment come in better than expected as that could give traders an end of the week and more importantly, and end of the month incentive to short cover. But while a rally back to the $75.00 to $75.40 price range in March crude oil may be possible, we have doubts that seeing a strong gain in the GDP data, expected to be up 4.6%, will be a major trend changer for oil. While today’s GDP reading may show the economy grew at the fastest pace in nearly four years in the 4th quarter, that growth clearly isn’t translating into higher fuel demand given that the unemployment rate remains near 10%. Most of the US economic reports have been disappointing this month and there are escalating fears that China will take more aggressive monetary tightening steps this year that could significantly dampen China’s demand for oil. This week’s inventory report clearly showed US oil demand remains ultra week, falling 2% over the last four weeks compared to year ago which was at the depth of the recession and financial crisis. There is also clear evidence that global oil demand remains weak since data from Japan, the world’s third largest oil consumer and 2nd largest oil importer, showed oil product sales fell nearly 7% last year with consumption falling to a 24 year low for the month in December with oil imports falling 2.6% last month. Escalating debt problems in Europe also threaten economic recovery prospects in both the Euro-zone and the UK as rating agencies continue to warn Greece, Spain, Portugal and even Britain of sovereign credit downgrades. Adding to the longer-term bearish view is an IEA prediction this week that oil demand in developed countries has likely peaked and isn’t likely to reach the high levels seen in 2006 and 2007. We also suspect the harsh political regulatory climate amid the push for position limits and restrictions on bank trading will continue to be an obstacle for the bull camp to fully overcome. But in the short run it won’t be surprising to see March crude oil stage a recovery bounce since technical indicators suggest a temporary low may have been set. March crude oil saw an inside day yesterday and it was impressive to see the market hold up in the face of another sell off in equities and the Dollar reaching a six month high. This price action hints that the liquidation seen recently in this market may have ebbed. Given the oil market’s oversold condition, it may not take too much in the way of good news today to inspire month end short covering to book profits. Therefore, short position holders may want to have some profit protection in place. However, if a technical rally is seen it should be considered a fresh opportunity to sell the market at a better level since we suspect the variety of bearish factors that have been weighing on oil, particularly weak US demand, will eventually pressure the market below the December low.

GASOLINE: The gasoline market has also at times attempted to edged higher in the early overnight trade and as is the case in crude oil, this market also seems to be oversold enough to stage a recovery bounce this session if today’s economic news can provide a short covering incentive. After breaking nearly 29 cents from the January high daily technical indicators for March gasoline have fallen to an oversold extreme and with this being the last trading day of the month, seeing a good GDP reading may be enough of an excuse for traders to book profits. March gasoline may be sufficiently oversold for a technical bounce back towards $1.9850 over the next couple of sessions. But since we still see the demand situation for gasoline remaining weak, we suspect a rally in gasoline will be short lived and give traders a fresh selling opportunity. Eventually, we see March gasoline retesting the December low. The trade action in gasoline could turn volatile today since the February product contracts expire.

HEATING OIL: March heating oil has seen a choppy sideways trade overnight, but like the rest of the complex, short-term technical signals hint that a short covering bounce is possible. While the trend is clearly down in heating oil with the market taking out the December low last week, daily indicators have fallen to an oversold extreme. March heating oil also looks to have found some tentative chart support near the $1.90 price level and if today’s economic news comes in on the strong side it’s likely to inspire some month end short covering. However, a rally in March heating oil is likely to end up being short lived since supplies are ample while industrial fuel demand remains ultra weak and the warm-up in the weather forecast over the next two weeks will also likely reduce winter heating use. A technical recovery bounce back to the $1.9650 to $1.9750 range may be possible in March heating oil. But we suspect a much stronger optimistic view for a recovery in fuel demand will need to take hold again in order to support a rally back above the $2.00 price level. A short covering bounce today will likely hinge on the economic news. But if bearish sentiment remains in place then $1.90 becomes the next target while an eventual break in March heating oil back to $1.8150 can’t be ruled out.

TODAY’S ENERGY MARKET GUIDANCE: After reaching a technically oversold extreme, there is the potential to see an end of the month short covering in oil markets today if the economic news and outside market influence can provide a buying incentive.

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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.

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CRUDE OIL MARKET FUNDAMENTALS: While crude oil has traded a bit softer overnight, so far there hasn’t been too much conviction behind the selling as the price action remains choppy ahead of today’s critical employment report. Indications that the CFTC next week will propose limits on futures positions in energy may be undermining sentiment a bit. Crude oil has become technically overbought on the steep rally from the December lows and the market still looks to be under the profit taking influence inspired by yesterday’s news that China raised rates leaving the global oil demand outlook a bit uncertain. China has been a major consumer of oil last year leading the global recovery and there are now some concerns that tightening liquidity could dent oil demand growth. But fears over China’s oil demand should be tempered on news that Chinese refineries will be running at a record operating rate partly due to expectation of rising gasoline demand since auto sales are expected to remain robust this year. Frigid temperatures blanketing a good portion of the US have also supported the rally in oil over the last month on expectations of rising winter heating fuel demand. But with temperatures expected to moderate next week, that outlook has also given traders a reason to book profits. But the majority of gains in the oil markets from the December low have been based on signs that macro economic conditions are improving which is raising optimism for a strong recovery in oil demand. Most of the economic news over the last month has come in better than expected which has revived bullish sentiment and is attracting an influx of fund money back into the oil markets. Therefore, today’s employment report has the potential to be a big market mover. Given the improvements in a variety of economic data last month and since jobless claims have declined considerably, some traders seem to be expecting a small rise in payrolls which would be the first gain in about two years. While the bull camp has the oil market’s overbought status working against it, we don’t think it will be enough of a limitation to prevent a strong upward move in crude oil on good economic news, especially if the employment data reveals a positive surprise. However, since the oil market is overbought, there is also a good chance that disappointing payroll news could inspire more extensive profit taking. After the initial reaction to the jobs report, outside market influences could also add to oil market volatility. Today’s economic news has the potential to push crude oil in either direction, and traders may get a chance to buy March crude oil closer to $80 per barrel price. But we also suspect a price brake in crude oil off of a disappointing jobs report will end up being short lived given the firm bullish undertone the market seems to possess.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: February gasoline has been waffling around unchanged levels in the early overnight trade as the market appears to be in a holding pattern ahead of today’s critical employment news. But it’s been impressive that gasoline has only seen a limited pull back from this week’s highs despite a large jump in EIA fuel stocks and the market reaching a technically overbought extreme up at these price levels. However, there seems to be concern surfacing that the low refinery operating rate which dropped below 80% last week along with scheduled and unscheduled maintenance could create a tight supply situation in gasoline this spring, especially if economic conditions continue to show signs of improvement. Therefore, today’s employment report could be a major catalyst for this market and a bullish outcome may have the potential to eventually lift gasoline back towards the $2.20 price level. But on the other hand, gasoline appears to be sufficiently overbought that a bearish jobs report reading could also temporarily pressure the market back below $2.10. We still see upside potential for gasoline and given the market’s technical condition and the possibility of volatile trade action off today’s economic news, there is also a chance traders will be able to buy the market at lower levels.

HEATING OIL: February heating oil has edged lower in the early overnight action as traders brace for today’s key employment report and on some pressure tied to a less supportive weather outlook. Heating oil has seen a steep rally from the December low as cold temperatures over the last month and frigid conditions this week have boosted winter fuel demand helping to trim the supply glut in distillate stocks. But with technical indicators at an overbought extreme and most weather forecasters predicting temperatures to warm up a bit next week certainly leaves heating oil vulnerable to more extensive profit taking, especially since fund have likely built a record net long position in this market. Therefore, unless today’s critical read on employment can reveal a bullish surprise, we suspect February heating oilcould give back a sizable portion of this week’s gains.

TODAY’S ENERGY MARKET GUIDANCE: Today’s employment report will likely set the early tone. Traders should be prepared for a possible surge in volatility if the payroll number is surprising since a bigger than expected gain or loss could result in sharp price move.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has seen a choppy to lower trade overnight as the market weighs a sharp decline in product stocks against a jump in oil supplies. February crude oil is starting to slip back after the API inventory report showed an unexpected 1.7 million barrel rise in crude oil stocks, which was particularly bearish since imports fell sharply while refinery operations edged only slightly lower. But a weaker trade in crude oil has been somewhat limited by a much sharper than expected declines in both gasoline and distillate stocks which to a certain extent is raising optimism that fuel demand is starting to recover. The cold temperature forecast has certainly been a key element driving the whole oil complex higher over the past two weeks as rising winter heating demand is clearly cutting through heating fuel supplies. With most economic reports generally stronger this month, including yesterday’s reading on consumer sentiment, the oil markets seems to have regained a more optimistic view for fuel demand to improve given the signs that economic conditions are starting to strengthen. Certainly news that China has agreed to raise oil imports from Kuwait by 50% next year after also lifting import contracts with Saudi Arabia and Iraq supports the view that global oil demand is starting to recover. Escalating geopolitical tensions with Iran along with the latest terrorist attempt also has oil markets skittish over supply. However, in today’s trade the EIA inventory report will likely set the early tone with most traders expecting a nearly 2 million barrel decline in crude oil stocks. But seeing API report an unexpected rise in crude oil stocks may be a sign of things to come since we suspect oil supplies could quickly rebuild again early in the New Year given the low refinery operating rate and after refiners have completed year end oil stock reductions for tax reasons. While February crude oil may still have the capacity to stage a rally towards $80 if today’s EIA report is considered bullish, the market is also showing signs of technically stalling up at these price levels. Therefore, we are a bit concerned that an EIA based rally attempt in oil could be cut short by profit taking, while leaving the market vulnerable to a price slide if the inventory news comes in bearish. We also suspect that weaker global equity markets overnight and a firmer Dollar trade in the early going could also inspire year end profit taking in oil unless the market gets a fresh bullish offset. Close in support for February crude oil comes in at $78.34 then near $78.02 and below there near $77.50 with resistance near $79.20 then around $79.60 and above there at $80.

GASOLINE: February gasoline has seen a firmer trade in the early over night action, but given the bullish surprise seen in yesterday’s API report the market’s reaction has so far been a bit disappointing. API reported a 1.4 million barrel drop in gasoline stocks when most traders were expecting a 1 million barrel rise in supplies. Yet, February gasoline continues to run into strong resistance near the $2.05 price level. A mixed report on retail gasoline sales yesterday may be a factor limiting gains since it showed gasoline pump demand was down over 3% on the week last week although up 1.3% from year ago. But perhaps traders are also a bit hesitant to lift the market up too far ahead of today’s EIA report, since the inventory readings from these two agencies (API & EIA) can be very different. A weaker equity trade may be another limiting factor while the gasoline market is also showing signs of being overbought up at these price levels. In the end, February gasoline may still have the capacity to rally back towards the December high if a bullish surprise is seen in today’s EIA report. But we are afraid the market has become technically vulnerable to profit taking up at these price levels which may cut short a fresh rally attempt or cause a swift price retreat, especially if today’s inventory news is disappointing.

HEATING OIL: It certainly looks as if February heating oil is in the strongest position to trade higher after yesterday’s API report showed a larger than expected 3.4 million barrel decline in distillate stocks when most traders were expecting to a 2.1 million barrel decline. While year ago surpluses are still large, the forecast for temperatures to stay cold at least through mid-January certainly gives the potential for fuel supplies to be significantly trimmed back in the weeks ahead, especially since refinery operations remain so low. But so far gains in heating oil have been limited overnight and we are somewhat concerned that the market is becoming a bit short-term overbought up at these price levels following a 22 cent rally from the December low. Overall, the chart setup for February heating oil remains positive given that the market pushed above the early December high in yesterday’s trade. But February heating oil may need a fresh bullish catalyst to propel prices toward the $2.15 level. But even then we see the market becoming increasingly vulnerable to some year end type profit taking.

TODAY’S ENERGY MARKET GUIDANCE: While the general environment for energy prices remains positive, the rally off the December low leaves markets highly vulnerable to profit taking. Even a rally off a bullish EIA report today may not hold given the market’s short-term technical condition.

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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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In retrospect, 2009 was a very impressive year for the commodity markets. For most of the year commodities were seen as “the” place to be, with many analysts touting them as a new and potentially sustainable investment class. Indeed, certain commodities forged very impressive rallies in the face of highly uncertain economic conditions, with the Continuous Commodity Index forging a gain of more than 30% from the end of 2008 to the October 2009 highs. If one also takes into consideration the low to high rally in crude oil prices of 74% and the 94% run-up in sugar prices, it would seem like certain commodities are well on their way to pricing in a recovery.

With the sharp, surprising run-up in equity prices of 67% off of the March 2009 low, there are a number of analysts who view the equity markets as pricing in positive growth for 2010. While the outlook for the economy remains very suspect as of this writing (and many traders might consider the commodity markets as overstating the recovery potential), a bit of historical perspective will lead one to conclude that many commodity markets still have significant upward potential.

In our opinion, a large portion of the commodity price gains that were forged in 2009 were simply a rejection of severely deflated pricing. In some cases markets fell to (and even below) the cost of production and did so off of sentiment that suggested demand was going to fall to depression type levels and not recover for years.

But as the situation was so extreme (interest rates approaching zero, widely accepted expectations for a continuous deflationary spiral and, for a while, little or no hope of an end to the crisis) the conditions that had sent prices to extreme lows in 2008 and early 2009 may not be repeated very soon. It could be very difficult for markets like natural gas, crude oil, sugar, cotton orange juice, copper, coffee and corn to return to the lows they have forged over the last 18 months. And while markets like cocoa, soybeans, soybean oil and wheat may seem to lack the fundamentals that would allow for strong upside price extensions again in 2010, against a backdrop of a falling Dollar, fairly consistent global demand growth and ongoing investment flows toward commodities, even those “weak horses” could catch some spillover support.

One could say that 2009 was a year to “close your eyes and buy everything physical.” In contrast, 2010 looks like a year to be more selective. To be sure the direction of most commodity prices will still be largely a function of the direction of the economy, but while we have to assume that the US will slowly claw its way out of the sub-prime disaster, we have to be aware that there will likely be periodic setbacks.

However, never in history has the US Federal Reserve been so forced into a position of erring to the side of inflation. Adding into the equation what appears to be a long term devaluation of the Dollar and unprecedented quantitative easing by the most of the world’s central banks, one is presented with a spectacular, classic inflationary setup for commodities.

Picking up Where We Left off Ahead of Sub-Prime

Certain players maintain that steep commodity price gains in the 2000 to 2008 time frame were artificial, or they maintain that many of the highs made during that time were irrational and not really a reflection of fundamental conditions. But even before the new millennium arrived The Hightower Report often warned of an impending wave of “Boom and Bust” pricing in commodities, as we realized that decades of disinvestment would expose the world to periodic instances where demand would overrun supply.

On the other side of the coin, we also recognized that old ways and opinions die slowly and that many commodity producers, traders and even analysts would attempt to apply old, historical pricing to the new commodity era, which in turn would foster a movement to attempt to limit investment in commodities. Those in favor of regulation to limit such investment in commodities suggest that fund buying is exaggerating price levels in many commodities and must be stopped. If we could call an end to globalization, rising global standards of living and improved diets, it would make sense to limit investment toward commodities, but as it stands the markets need more investment and more supply.

Some players point to the late 2009 rally in soybeans as a rally that was unjustified by “the fundamentals” of the soybean market. Perhaps it should be said that soybeans were not following the old soybean market fundamentals but instead soybeans were following the new fundamentals of rampant Chinese demand, probably the biggest inflationary threat seen in the modern era. While soybean prices might be expensive relative to expectations for a big crop from South America, they might not be as expensive in the context of tight world corn supplies and in terms of the deflated Dollar.

Some players now want to call an end to the globalization wave despite, the fact that hundreds of millions of individuals in the developing world are poised to move into the middle class. The sub-prime disaster may have temporarily derailed the stellar growth in developed countries, but the rapid acceleration in standards of living in the rest of the world will not be easily denied. And while the recent price gains have come a long way towards repairing the lack of investment in mining and oil exploration and production, global commodity demand looks to continue to grow, right along with the biggest explosion of capitalism in the history of mankind.

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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: February crude oil has snapped back higher in the overnight trade after the API late yesterday reported a shockingly large decline in oil stocks. February crude oil has fallen by over $5 in the last three sessions partly on escalating concerns over rising supplies. Therefore, seeing the API inventory reading showing a 5.8 million barrel decline in oil stocks when a 500,000 barrel rise was expected certainly begins to ease some of those supply side concerns. A 1.3% jump in the refinery operating rate was the principal reason behind the stock decline but it was also bullish to see such a sharp dive in oil stocks even though oil imports were nearly 1.1 million barrels higher than the previous week. Rising investor risk appetite connected to a sizable break in the dollar and firmer equities this morning is also raising the appeal of oil as an alternative asset and inflation hedge. But there were still bearish elements to the API report including a 1.5 million barrel rise in oil stocks at the Cushing, OK location and a 1 million barrel rise in distillate stocks when most traders were expecting a decline. Therefore, in order for the crude oil market to build on overnight gains we suspect it will be critical for today’s EIA report to also show a sizable fall in oil stocks. Otherwise, if the EIA report comes in bearish, we suspect oil markets could quickly reverse to the downside. Even if the EIA report does come in positive, we are still skeptical of the upside potential in crude oil since overall fuel supplies remain high, OPEC compliance is low and since economic conditions haven’t been strong enough to support a recovery in fuel demand. In fact, the widening contango price structure is clearly reflecting the current overhang of oil supplies in the marketplace. The demand outlook for oil has also been undermined by the EIA yesterday trimming back their forecast for a recovery in world and US oil consumption next year. It won’t be too surprising to see some upward price correction in crude oil after such a steep price break this month. But a rally in February crude oil may be limited to the $77.50 to $78.10 price range unless a much more optimistic view for a recovery in the economy and fuel demand can take hold. The bull camp has the early advantage, but the EIA report will be the key driver in today’s market direction.

GASOLINE: February gasoline has also seen a sizable bounce in the overnight trade with price support coming from an unexpected decline in fuel stocks reported by API yesterday as well as a weaker Dollar. Gasoline inventories fell 753,000 barrels compared to a 1.5 million barrel build expected by most traders and that certainly seems to be easing concerns over rising supplies, which has been a major weight on the market since prices topped in October. It was also positive to see gasoline stocks fall despite a rise in production and a jump in the refinery operating rate. The outside market action has also provided a measure of price support to gasoline, now that currency connected selling pressure in gasoline has been lifted with the Dollar falling back in the overnight trade. But in order for upside traction to take hold in gasoline we suspect the EIA report will also need to show as similar reading. But we also suspect a recovery in February gasoline could be limited to the $2.00 to $2.03 price range since growth conditions in the economy don’t appear to be strong enough to support a significant recovery in fuel demand. In fact, the latest retail pump survey shows the four week moving average of gasoline demand last week rose.5% compared to year ago. The bulls have the early edge, but a positive EIA report may be essential to maintain the upside momentum being seen in gasoline in the morning trade. Look for more aggressive chart based buying in February gasoline on a move above $1.9827 with resistance above there at $1.9950 with support near $1.95.

HEATING OIL: February heating oil has also seen a firmer trade overnight with the market swept higher by the gains in oil and gasoline, despite a bearish reading in the API inventory report. Gains in heating oil have been tempered since it was surprising to a 1 million barrel rise in distillate stocks compared to expectations for a 300,000 barrel decline. The rise in stocks leave distillate supplies near 26 year highs and this glut has weighed on heating oil prices despite forecast of frigid temperatures in key US heating regions over the next two weeks. There would seem to be some rally potential for February heating oil given the sharp break in prices this month. But it is apparent that if refiners marginally raise operating rates fuel demand remains too slack to soak up the extra supply. Therefore, the supply/demand outlook still looks unfavorable and that’s likely to limit the upside potential in heating oil for now. Overhead resistance for February heating oil comes in near $2.0537 then $2.0675 with support in the $2.0090 to $2.0000 price range. On a bearish EIA reading, heating oil may lead on the downside.

TODAY’S ENERGY MARKET GUIDANCE: A positive API report gives the bull camp the early edge. But in order to build on gains, oil markets will likely need to see an improvement in the supply side be confirmed in today’s EIA reading. Otherwise, the bull camp is likely to lose their grip, especially if the dollar starts to recover from overnight lows.