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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Natural gas prices continue to decline and so far have been down about 16.5% in August alone. This has now pushed prices back down to the bottom of a four and a half month base at 4.25 to 4.140. Coincidentally, these low levels have served as a quasi-deflationary price low throughout the year as economic slowdown fears reach a fever pitch. Short term supply is high, as storage levels stand 219 bcf above their five year average and continue to build. Elevated levels of natural gas production are expected to continue, as producers exploit prolific onshore fields (shale). Additionally, the latest Baker Hughes data pegged the U.S. natural gas rig count at 992, just below the psychological 1,000 mark.

The latest EIA Short-Term Energy Outlook estimated 2010 production to grow by 1.9% to 61.1 bcf per day. Increased production in the face of sluggish demand has served to hammer natural gas prices by more than 30% since the start of the year.

We believe there will be one more push down in natural gas prices to come, and that should take prices down to new lows for the year.

Despite the bountiful supplies, there are signs of life on the demand front. The EIA forecasted overall natural gas consumption to increase 3.8% from 2009 levels to 64.9 bcf per day, which provides a 3.80 bcf per day shortfall to help sop up excess supply.

At current price valuations, it would appear that natural gas has virtually no weather premium priced in, and with peak hurricane season now upon us, prices could jump in a hurry. While inventories remain well above their five year average, that gap has contracted for eight straight weeks and is now just under 8.0%. This tightening has narrowed various spread relationships, which has greatly reduced the incentive to build inventories.

The steep decline in prices has also attracted speculator selling and has pushed the spec net short position to extreme levels. If we discount the 2008 financial meltdown, the current position is nearing the 2007 extreme that occurred when natural gas was trading at around $6.000.

As mentioned earlier, we expect the slide in natural gas to continue and post new lows on the year to $3.800-$3.850. This has the potential to trap shorts into the market at a time of “cheap” valuations.

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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: September crude oil had a gap higher open Sunday night, which remains open and gives the bulls a slight advantage this morning. There are a couple of positive factors supporting crude oil this morning including a weaker U.S. dollar and further geopolitical tensions in the Middle East. The overnight trade in the U.S. dollar came under pressure from a rally in the Japanese Yen out to near 15-year highs, while concerns over the pace of U.S. economic recovery are called into question after disappointing jobs data Friday. Middle East tensions have escalated in response to Iran’s new submarines that could be used to defend against those in opposition to its nuclear program, and that is viewed a supportive factor. Additionally, reports earlier this morning confirmed that North Korea fired artillery rounds near its border. An additional positive for crude oil comes from continued interest in out-of-the money September call options as speculators increased their bullish bets on higher crude oil prices. However, Friday’s downdraft flipped the short term trend down in September crude oil, and that leaves the bulls with a formidable challenge above at $82.00, then $82.67 to overcome. The Commitments of Traders Futures and Options report as of August 3rd for Crude Oil showed Non-Commercial traders were net long 145,472 contracts, an increase of 19,607 contracts. The buying trend of the fund traders is sometimes seen as a short-term supportive force. With the added speculative buying and with prices holding trade above $80, the market is geared up for a potential challenge of the mid-May range trade of $84.50. However, a rebound in the U.S. Dollar and any further evidence of a slowing U.S. recovery could weigh on prices.

GASOLINE: September RBOB experienced a gap higher open to start the week, and that provides a bullish tilt in the near term. So far, prices have been able to retrace about 50% of the decline from Friday’s sell off and approach short term resistance at the $2.1520 to $2.16 area. A weaker U.S. dollar is partly responsible for the early gains, as many major currencies traded higher, including the Japanese Yen, which is nearing new 15-year highs against the Dollar. There were reports over the weekend that indicated a key Saudi Arabia refining operation was back up and running after a brief shutdown last week, but that was not expected to disrupt the supply and demand equation after Saudi officials said they had ample supplies to overcome potential shortages. However, there was significant technical damage inflicted Friday that flipped the short term trend for September RBOB negative, and that favors the bears on an intermediate bias up to $2.1825. The Commitments of Traders Futures and Options report as of August 3rd for Gasoline (RBOB) showed Non-Commercial traders were net long 54,613 contracts, an increase of 4,555 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 60,438 contracts. This represents an increase of 8,417 contracts in the net long position held by these traders. The bulls have the edge in the near term but are need of a move back above 2.1825 to decisively turn the trend positive.

HEATING OIL: September heating oil had a gap and go higher Sunday night, which sets the stage for a further upside assault on $2.20. A recovery rally in global equities and a sluggish U.S. dollar has fueled a pickup in risk appetites and benefited many physical markets like heating oil. The technical trend in September heating is up on the daily charts, but the fact that prices have been unable to close above the June highs of $2.2063 may be indicting trader concern over the fundamentals, namely the more than adequate supplies and struggling demand outlook. The Commitments of Traders Futures and Options report as of August 3rd for Heating Oil showed Non-Commercial traders were net long 29,548 contracts, an increase of 15,952 contracts, while non-reportable traders were net long 8,581 contracts, an increase of 2,719 contracts. Non-Commercial and Non-reportable traders combined held a net long position of 38,129 contracts. The big upside price action experienced early last week caused a near doubling of their position, which increased 18,671 contracts. We expect the bulls to have an opportunity to challenge upside resistance but remain cautious over a potential rebound in the U.S. dollar and or a disappointing outcome in the Fed policy meeting Tuesday.

TODAY’S ENERGY MARKET GUIDANCE: The energy complex is higher to start helped by a weaker U.S. Dollar and continued geopolitical tensions. However, after short term technical damage inflicted Friday, it will likely take a significant risk rally or positive catalyst to overcome Friday’s highs.

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CRUDE OIL MARKET FUNDAMENTALS: September crude oil grinded higher overnight and approached yesterday’s highs. A portion of the early strength comes from higher global stock markets and a weaker U.S. dollar that has broken down into new three month lows. Overall, recent economic data has highlighted doubts over a recovering global economy and challenges demand prospects. The latest supply figures out of Nigeria estimated the countries crude oil output to increase 0.96% in September, which easily surpasses OPEC production quota of 1.67 million barrels per day. The abundant supply theme was made more apparent with Wednesday’s EIA data that showed crude stocks rose 7.308 million barrels and are 12.924 million barrels above year ago levels. This provided quite a negative shock to September crude oil as the market was looking for a draw for the week and instead posted the largest weekly increase in inventories since October 2008 (94-weeks). Helping to explain this bearish supply dynamic was the 11.8% surge in weekly imports that approached levels not seen since August 2006. Crude oil imports for the week stood at 11.153 million barrels per day compared to 9.977 million barrels the previous week. The refinery operating rate was 90.60% down, 0.90% from last week compared to 84.57% last year and the five year average of 90.39%. Some analysts viewed the high capacity rates north of 90% indicative of lower crude oil prices ahead. September crude oil had to stretch in order to challenge support levels at $76 and experienced a dramatic reversal higher from those levels shortly after the inventory report. However, the short term trend is negative with resistance above at $77.75, which also represents a 50% retracement of this week’s $3.80 sell off. Negative short term price momentum has diverged from price, which favors the bull camp in the near term for a run back higher toward resistance. Longer term traders could use strength up to resistance as an opportunity to sell crude oil to position for a larger break in prices. While the short term trend points down, the overnight tone favors the bulls with the potential for a rally back toward $77.75.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: September RBOB established a higher price high overnight and tries to correct the $0.12 break experienced over the last four sessions. Stronger outside markets and a much weaker U.S. dollar have helped bolster prices during the initial morning trade. Also providing some support was the favorable supply and demand data provided by the weekly EIA report. EIA gasoline stocks rose 91,000 barrels and are 9.169 million barrels above last year and 12.765 million above the five year average. This minor build compared to earlier estimates for a 300,000 to 500,000 barrel build, coupled with a huge jump in gasoline demand to the highest levels since August 2007 was seen contributing to the turn higher. Average total gasoline demand for the past four weeks was up 2.12% compared to last year. Gasoline imports came in at 1.082 million barrels per day compared to 1.175 million barrels the previous week. September RBOB appears short term oversold and likely to see further price appreciation back up to 2.0820, and perhaps 2.0900.

HEATING OIL: September heating oil tried to make the turn higher overnight and has fallen short of Wednesday’s highs just below 2.04. Heating oil received a boost after the EIA showed that heating oil stocks actually fell 34,000 barrels. However, supplies remain bountiful and stand 2.699 million barrels above last year and 5.008 million above the five year average. Distillate stocks at 167.513 million barrels are at a record high for this week. Previous record was in 2009. EIA distillate stocks rose 938,000 barrels and stand at 4.896 million barrels above last year and 31.614 million above the five year average. Distillate imports came in at 149,000 barrels per day compared to 174,000 barrels the previous week. Average total distillate demand for the past four weeks was up 9.33% compared to last year. September heating oil has upside potential in the day ahead to tackle 2.0475 with the potential of 2.0580. We doubt that September heating oil can overcome range resistance above at 2.0600 up to 2.0900. The short term trend in heating oil points up, and clearance above 2.04 has the potential to invite a quick rally in price to 2.07.

TODAY’S ENERGY MARKET GUIDANCE: Recent price action and a positive tilt overnight favors the bulls to start.

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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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Be Careful Washington,
Your Special Interests are Showing!

With crude oil prices rising back toward the $80.00 per barrel level in the face of an uncertain global economic track, it would appear that the world’s “petroleum oil supply and demand balance” is tighter than most pundits would like to admit. Arguments that US oil prices are too high because of burdensome domestic crude supply would carry some weight if it weren’t for significant increases in oil use from developing countries like China. In other words, the world oil supply and demand balance has remained tight through a severe global recession and looks to be on a track to tighten even more significantly in the face of a recovery.

However, in the wake of the Gulf oil disaster, it would seem like petroleum supply has received another black eye, and that has opened up the door for a historic change in US energy policy. While few expect the 6-month moratorium on deep water activity to be extended permanently, the severity of the environmental damage taking place could prompt an aggressive stance by the Administration, especially as we go into a national election. And with a daily operating cost for deep water rigs in some cases exceeding $1 million dollars per day, it is possible that many operators will pull up anchor and move to less certain production areas outside the dictate of the US government.

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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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The energy complex saw an aggressive liquidation wave in the month of May, and that wasn’t surprising considering that at the May high crude oil was trading $18 per barrel above the February lows. In retrospect, the washout was justified from both fundamental and technical perspectives. In addition to a mountain of physical supply sitting inside the US, the market was picking up on the prospect of reduced global demand. With the COT reports at times this spring showing speculators holding a massive net long position in crude oil, even the technical condition of the market was screaming for a correction. Surprisingly, crude oil market seemed to get around news of a slight slowdown in the Chinese purchasing managers reading, even though the prospect of strong Asian demand was helping to discount the ultra-high level of crude oil supplies on hand in Cushing, Oklahoma. With gasoline stocks failing to continue a pattern of declines seen earlier in the year and demand not ramping up as expected in the wake of positive views on the economy, there were just too many negatives for the market to ignore as it went into the May debacle.

With the probe below $67.50 in July crude oil and in the face of periodic bouts of deflation, we suspect that many US refiners will begin to ratchet down their activity, which could ultimately bring about a very solid low in prices. In the meantime, to avoid a retest of the May lows, it  would probably require evidence of rising weekly gasoline demand and a pattern of falling refinery operating rates. In other words, to see a bull market mentality return to the energy complex, we probably need to see some proof of tightening US gasoline stocks. Last year US gasoline stocks saw a decline of roughly 15 million barrels in the April through June time frame. It could take that size decline and perhaps even more to fully restart the bull market action in the energy complex.

It is possible that RBOB pricing will begin to garner some support from a seasonal pick-up in demand, and that demand pattern might also serve to cushion gasoline prices against the residual slowing fears that look to be propagated by the ongoing travails inside the Euro zone. Still, it might take a temporary return to the late May low of $1.8888 in July RBOB to put gasoline prices back into a deflated/cheap condition. Talk of stronger summer air travel this year and fairly active US trucking activity would seem to suggest that the product markets have a much better fundamental outlook than crude oil, which might see its physical supply condition worsen markedly in the face of scaled back US refinery activity. Therefore, we see RBOB pricing gaining on crude oil, and we see RBOB managing to gain on heating oil toward the end of June. For those that look at spread strategies, we think that RBOB will hold up better than crude oil on any near term weakness, and we expect RBOB to spring higher than crude in the event that the entire energy complex rebounds off of improving global psychology.

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