The Hightower Report

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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.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has seen a firmer trade in the overnight action with price support coming from bullish outside market influences, positive economic news out of Japan and perhaps some chart based technical strength. With the Dollar under pressure due partly to a lack of supportive currency comments coming from US and Asian leaders at a weekend meeting along with a new all time high in gold rising investor risk appetite certainly seem to be the key factors providing a lift to oil prices in the early going. Last week’s bearish sentiment toward oil demand inspired by a drop in US consumer confidence and weak readings in the inventory report may have also been tempered by a report showing Japan’s economy grew by 1.2% in the 3rd quarter which comes on the heels of Europe also reporting positive 3rd quarter growth. The oil market may be finding some additional support from news that China’s two major oil companies reported a 5% monthly decline in October fuel stocks and a rise in fuel sales and that could be improving sentiment toward the macro economic environment for oil. But while the bull camp clearly has the edge in the early overnight action, we suspect the market will need to see a combination of supportive factors in order to lift January oil back towards the upper end of the range near the $80 to $81 price levels. While the Nov 9th COT report with options showed money managers reducing their net long position in crude oil by 24,348 contracts as of early last week, the combined fund and spec net long position stood at 199,779 contracts and still close to the record net long level. Since this traders’ setup suggests the oil market likely remains overbought, this condition may continue to be a limiting factor for the bull camp. Last week’s inventory report clearly showed both the supply and demand situation for crude oil worsening. Therefore, in order to provide an additional buying incentive in today’s oil market trade we suspect better than expected results will need to be seen in the scheduled reports on retail sales and NY regional manufacturing in order to raise optimism for a recovery in oil demand. It also looks as if a sharper break in the December Dollar index back below 75 may be needed to push January crude oil above overhead resistance that comes in near $78.37 and $78.52. January crude oil may be in the midst of a technical bounce after holding a test of a key retracement level of the September low to October high range in last Friday’s trade. But with the market’s fundamentals stacking up in the bear camp’s favor, we suspect it will take very supportive economic news and strong bullish outside market support in order to inspire speculative traders to add to long positions that are already near record high levels. Given the market’s fundamental setup, we still have doubts that January crude oil will be able to hold a rally attempt above the $80 level even if the Dollar plunges lower.

GASOLINE: January gasoline has snapped back in the early overnight trade. It looks as if gasoline is finding price support from a weaker Dollar/firmer gold trade raising gasoline’s appeal as an inflation hedge while some positive macro economic and fuel news out of Japan and China may be improving global sentiment toward fuel demand. With the market seeming to reject a price dip into the lower end of the range last Friday, a rally back toward the $2.00 price level may be seen. The Nov 9th COT report with options showed money managers reducing their net long position in gasoline by 7,471 contracts as of early last week. But since this reading is likely overstated given the price break in gasoline since the report was measured, the market may be less constrained by its technical setup. But in order for the market to push aside its own increasingly bearish fundamental situation will likely require stronger Dollar related support and a more optimistic macro economic view from today’s scheduled news that can improve the outlook for oil demand. Otherwise, we suspect the bull camp could quickly lose their edge.

HEATING OIL: January heating oil has also managed a recover bounce from last Friday’s weak close and part of the strength looks to be technical as the market for now appears to be rejecting price dips under the $2.00 level. Certainly a potion of the price support in heating oil is coming from a weak Dollar/firm gold & equity trade providing a bullish environment for physical commodities. Some of the negative demand side sentiment may have been eased by the news out of Japan and China. Seeing a bullish reading in today’s economic reports and additional weakness in the Dollar may be enough to provide more of a temporarily lift in January heating oil this session. But we still see this market being burdened by a weak demand/over supplied setup that is likely to cap the market below the $2.10 price level while leaving downside price risk in place. The Nov 9th COT report with options for heating oil also shows funds holding a record net long position as of early last week and this setup could be another limiting factor for the bull camp. Overhead resistance for January heating oil comes in near $2.0410 then near $2.05 and above there near $2.0645 with support near $1.9936, the 50% retracement of the Oct high/low range.

TODAY’S ENERGY MARKET GUIDANCE: The bull camp has the early edge, but to support higher oil prices under increasingly bearish fundamental conditions will likely require a sharper break in the Dollar and a more positive macro economic view provided by today’s scheduled reports. Otherwise, we suspect the bull camp could lose its grip.

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CRUDE OIL MARKET FUNDAMENTALS: While crude oil has traded higher in the overnight action, we would have expected a stronger positive reaction to yesterday afternoon’s bullish API report. API showed crude oil stocks falling by 254,000 barrels when most traders were looking for over a 2 million barrel gain and the surprise decline was likely due to an unexpected jump in refinery operations. We also thought the oil market would have been cheered more by the unexpected decline in distillate stocks since it could suggest improving fuel demand. But perhaps the market is a bit hesitant to take prices up too far until the EIA’s more complete inventory reading is seen since these two reports at times can show significantly different results. But overall market sentiment has improved as this week’s economic news and rate hike by Australia has raised macro economic optimism for a recovery in oil demand. In fact, a better oil demand outlook was further supported by the EIA raising their forecast for US and global oil demand in the 4th quarter of this year and in 2010. But since the current fundamental condition for oil is still bearish with stocks at a 38 million barrel annual surplus, it seems as if the outside market action has been the primary driver behind the price gains this week. With the Dollar nearing contract lows and low US rates likely keeping the currency on a downward track, rising investor risk appetite certainly has the potential to lift the oil market higher. With gold also on an upward course, some inflation based buying seems to be coming into the energy markets. While there may be the potential for the oil market to be undermined by today’s EIA report if a bearish surprise is seen, we suspect the direction in equities could ultimately have a bigger impact. The oil market has seen a strong recovery move off of last week’s low as the market has been pulled higher by the strength in equity markets throwing off a bullish macro economic view. But we suspect a big potential stumbling block for the oil market is whether the US equity market can rally through the 3rd quarter corporate earnings reports that begin today and avoid a significant setback. Since the fundamentals for the oil market are still bearish, we suspect a steady build in economic optimism will need to be seen along with a down trending Dollar in order for oil to push aside the supply glut and trade higher off the bigger macro economic picture. Otherwise, crude oil up these price levels will be vulnerable to a setback if outside market support starts to erode. The bull camp has the early edge, but November crude oil will need to push through overhead resistance at $71.85 to gain upside traction with the next target above there at $72.50. If the market starts to back track, support comes in at $70.47 then near $70.00.

GASOLINE: November gasoline has also seen a higher trade overnight although not the type of gains we would have expected given the bullish API news. The market continues to run into strong overhead resistance near the $1.80 price level which is a bit surprising since the API report showed only a 544,000 barrel gain in gasoline stocks compared to most traders expecting over a 1 million barrel stock rise. But the market seems to be recapturing upward price momentum and sentiment has likely been improved by yesterday’s report on retail gasoline pump demand which rose 2.2% on a 4 week moving average basis compared to year ago and up.6% compared to the previous week. The early outside market action is also providing a measure of price support to gasoline, but the start of the US corporate earnings season could be a potential hazard for the bull camp if disappointing results pressure the equity markets. We also suspect the gasoline market will need to see a bullish reading in today’s EIA report before attempting to push above the key $1.80 level. The market bias remains up, but to lift gasoline back toward the September higher a better macro economic view may need to take hold.

HEATING OIL: November heating oil has traded higher overnight off the API new, but so far hasn’t been able to push through tough overhead resistance in the $1.8424 to $1.85 price range. In fact, it’s a bit surprising the market hasn’t seen a stronger bullish reaction to the unexpected 2.9 million barrel drop in distillate stocks despite the jump in refinery operations as this data could clearly rekindle hopes for a recovery in fuel demand. But with distillate stocks still at a 43.2 million barrel annual surplus, perhaps the market needs to see the improvement in stock levels being confirmed in today’s EIA report before the bull camp cam reclaim more control. Outside market influences have been generally supportive in the early going. But the bull camp in heating oil could lose their grip if outside market support starts to fade if the Dollar bounces and equities lose their footing perhaps in reaction to today’s corporate earnings news. Therefore, in order for November heating oil to trade beyond the $1.85 price hurtle may require both outside market support and a bullish EIA stock reading. Otherwise, the market could side back to test support at $1.80.

TODAY’S ENERGY MARKET GUIDANCE: The bull camp looks to have an edge in the early going, but good corporate earnings news and a bullish EIA report may need to be seen to lift markets above critical overhead resistance. Otherwise, all markets will be vulnerable to a pull back.

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: Crude oil had traded mostly weaker in the early overnight action as lingering macro economic concerns and doubts about a recovery in oil demand continue to undermine sentiment. But the market has been able to trim losses since holding a test of last Friday’s lows in the early going and given crude oil’s oversold condition, the market may have some limited short covering potential. On a purely technical basis, a bounce in September crude oil back towards $62.09 may be possible as the market is showing some signs of temporarily being sold out. Some better than expected economic news out of Japan, reports of another attack by Nigerian militants on a loading dock for oil takers and a US refinery glitch seem to be providing light price support. But with global equity markets trading weaker overnight and US stocks under some pressure ahead of 2nd quarter corporate earnings results this week, any rally attempt in crude oil is likely to be short lived if macro economic sentiment stays bearish. In fact, with last week’s consumer sentiment reading turning down, today’s reports on US retail sales and inflation will need to come in better than expected to inspire more aggressive short covering. Since September crude oil has seen prices break over $14 in the past two weeks, it certainly raises the odds for a recovery bounce in oil and therefore, short position holders may want to have training profit stops in place. But with supply/demand conditions for the oil market still favoring the bear camp and with government officials pushing for tighter futures market regulation, we suspect rally attempts in crude oil will also attract fresh selling interest limiting gains. In fact, the COT report with options for crude oil shows fund traders lowered their net long position by over 19,000 contracts in the week through July 7th. But with funds still net long 81,852 contracts as of early last week, this market still appears to have ample selling capacity. Therefore, with a variety of negative factors stacking up against the crude oil market, short covering rally attempts aren’t likely to hold and should be considered selling opportunities.

GASOLINE: Although September gasoline has traded generally weaker overnight, short-term technical indicators have fallen to extremely oversold levels and that also raises the risk for a temporary recovery bounce to occur. Given the steep price break just over the last two weeks, short position holders may want to have trailing profit stops in place since the market could be capable of some near-term gains before starting the next leg down. Today’s economic reports may provide a short covering incentive if the data comes in above expectations and if equity markets stage a recovery. With September gasoline finding support in the $1.62 to $1.63 price range, a bounce back to $1.70 to $1.71 price range may be possible. But the fundamental setup for gasoline is becoming increasingly negative since summer fuel demand may have peaked and since supplies are beginning to build again. The July 7th COT report with options for gasoline also shows fund traders reducing their net long position with part of the selling coming from concerns over tighter government trading regulations. Since non-commercial traders were still holding a sizable net long position in gasoline as of early last week, we also suspect that technically rally attempts will attract fresh selling by the funds. Therefore, traders should consider a technical bounce in September gasoline early in the week as the next selling opportunity since an eventual break to $1.50 seems possible. Close in resistance comes in at $1.67.39 with critical support at $1.6061 (the 200 day moving average).

HEATING OIL: September heating oil’s extremely oversold technical condition leaves the market vulnerable to a temporary price bounce before making the next push lower. But with distillate stocks at 25 year highs and demand still sinking, even a move back towards the $1.60 price level may be hard to achieve. The July 7th COT report with options for heating oil shows the combined fund and spec net long position being reduced. With the government targeting tighter position limits for funds and funds still net long 28,580 contracts as of early last week, we suspect rally attempts in heating oil will also be limited by fresh fund selling. Therefore, we suspect only a minor price bounce may be possible before September heating oil is eventually pressured below the $1.50 price level.

TODAY’S ENERGY MARKET GUIDANCE: With the energy complex becoming very oversold after sharp price breaks over the last two weeks, oil markets may have some capacity to short cover. But with fuel demand weak and if doubts about the macro economic recovery continue to rise, expect any rally attempts in energy markets to be short lived.

CRUDE OIL MARKET FUNDAMENTALS: Crude oil fell sharply overnight as there seem to be a number of factors weighing on prices that could eventually pressure the market below the December lows. Bearish outside market action with the Dollar posting strong gains and equity markets sagging is lowering the appeal of physical commodities as an inflation hedge and adding to the selling incentive in crude oil. Geopolitical factors are no longer providing support since the Russian/Ukraine gas dispute has been resolved and Israel/Hamas has apparently agreed to a Gaza ceasefire. But we suspect oil demand destruction fears amid signs of a deepening global economic recession continues to be the main issue driving oil prices lower. Problems in the UK banking sector and weaker than expected economic news from China may have the market thinking that last week’s lower oil demand predictions for this year by the EIA, IEA and OPEC are understated. In fact, market sentiment overnight has been undermined by a major investment bank predicting global oil demand to drop by at least 1.6 million barrels a day this year. It also appears that OPEC hasn’t cut enough to mop up excess world supplies considering the high level of US and OECD oil stocks and rising supplies of oil being stored offshore on supertankers. With oil supplies at the Cushing, OK delivery point at a record level, the expiration of the Feb crude oil contract today is likely adding to market volatility and could exacerbate the selling activity in today’s session. While the fundamental setup clearly favors the bear camp, the technical setup also leaves the market with ample selling capacity. The January 13th Commitment of Traders report with Options for Crude Oil showed the “combined” spec and fund net long position at 115,919 contracts as of early last week. Therefore, if economic conditions continue to worsen and the Dec low fails to hold, an eventual test of the $30 per barrel price level looks possible for March crude oil.

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.