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.

This content originated from - The Hightower Report.

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.



This content originated from - The Hightower Report.

HEATING OIL: March heating oil has fallen off sharply in the overnight trade. The market is being undermined by the global demand outlook turning increasingly bearish now that the Russian gas dispute has been resolved and since China’s economy is showing further signs of weakening. A jump in China’s urban unemployment rate and fears that slower growth will result in greater diesel exports is certainly a concern weighing on heating oil prices. When you combine weakening global demand with US distillate demand sinking to a 5 year low amid a sharp contraction in the shipping and trucking industries, the situation could push March heating oil back to test the December lows. Temperatures in the US heating region are expected to moderate this week from last week’s frigid conditions and that takes away another recent supportive factor from the market. The January 13th Commitment of Traders report with Options for Heating Oil showed the “combined” spec and fund net long position at 21,711 contracts as of early last week. But we don’t think this market will become sufficiently oversold until the combined COT shifts to a net short position.

GASOLINE: With economic conditions clearly sliding, it’s not too surprising to see gasoline being pulled lower by the macroeconomic situation. The recent price support from improving refinery margins and some refinery glitches is starting to fade. With gasoline stocks still rising and demand still sliding it is clear that the supply/demand setup continues to favor the bear camp. A break under the 40 day moving average in March gasoline that comes in today near $1.1175 could inspire more chart based selling. With forecasters pushing an economic recovery back towards late this year or even next year certainly raises the odds for March gasoline to retest the December lows. With the January 13th COT report with options for gasoline showing the combined fund and spec net long position at 56,989 contracts as of early last week also leaves the market with ample selling capacity.

This content originated from - The Hightower Report.

• EIA crude stocks fell 3.101 million barrels and are now 26.488 million barrels above year ago stock levels. Also, EIA crude stocks stand 7.8 million barrels above the 16 year average. Over the last 4 weeks, crude stocks are down a combined 2.640 million barrels. Crude oil imports for the week stood at 9.118 million barrels per day compared to 9.673 million barrels per day the previous week.
• The refinery operating rate stood at 84.68% up 0.56 from last week and compared to last year’s rate of 88.09% and the 5yr average rate of 90.6%.
• EIA gasoline stocks rose 3.3 million barrels and are now 2.656 million barrels above the 16 year average. Compared to year ago levels, gasoline stocks are at a 5.205 million barrel deficit. The net change in gas stocks over the last 4 weeks has been a rise of 6.82 million barrels.
• Gas demand stood at 8.867 million barrels per day which is 579,000 barrels per day below year ago. Gasoline imports came in at 1.254 million barrels per day compared to 802,000 barrels per day the previous week.
• EIA distillate stocks rose 1.814 million barrels and stand at 1.0 million barrels above last year’s level. Distillate demand stood at 4.102 million barrels per day compared to 4.09 million barrels per day the previous week and 550,000 barrels per day below year ago.
• Heating oil stocks fell 687,000 barrels and stand at 41.165 million barrels, which leaves stocks 735,000 barrels below year ago.

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This content originated from - The Hightower Report.

Ultimately we see a slide to the vicinity of $40 crude oil as removing a series of alternative energy sources from the world equation. In fact, seeing crude prices fall below $38 would mostly leave classic oil fields as the only viable source of supply.

Hydrocarbon Cost of Production

See the chart as a PDF.

This content originated from - The Hightower Report.