The Hightower Report

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

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

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

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

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

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

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

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

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

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

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

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

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CRUDE OIL MARKET FUNDAMENTALS: Outside factors seem balanced to begin today, as the US equity market has apparently recovered from late afternoon weakness seen in the US on Tuesday. Central bankers’ comments that they would continue to invest in the Euro currency was also seen as a positive to risk taking sentiment overnight but there continues to be an air of uncertainty in the marketplace. The effects of the BP Gulf oil spill are beginning to spread on other related energy companies, which were the leaders to the downside during Tuesday’s initial equity market sell off and that suggests the oil spill is weighing on investor and consumer sentiment. World markets have begun to highlight China’s footprint on energy demand, with the latest spread between Dubai and Brent crude oil trading at a premium and that could suggest that Asian buying is set to favor Angola and Brazilian crude. This week’s EIA report has been delayed 1-day due to the Memorial Day holiday and that might spare the bull camp another negative reading from the supply front. With crude oil putting in a weak performance Tuesday, after failing to hold early gains and ending quite weak, we have to leave the edge with the bear camp. The intermediate term trend off of the May highs is still down, and it could take very strong US equity market gains to send July crude oil back above the $72.50 level. Key resistance comes in at last weeks highs of $75.72 and that level could become a key lynch pin for any meaningful rally. Trading volumes remain light and below average and that would also seem to favor a continued back and fill type of trade

PRODUCT MARKET FUNDAMENTALS: GASOLINE: EIA’s recent weekly survey on average retail gas prices at the pump fell another $0.058 cents to a 3-month low of $2.73/gallon, but that is mostly catch up action. With the decline in gasoline prices bucking the typical seasonal pattern, it is clear that abundant supplies, weaker crude prices and fear of slowing off the euro zone are still giving the bear camp the edge. US refinery margins are expected to be lower due to a decline in product prices and while that might eventually be bullish for gasoline we don’t see the fundamental case to avoid another return to the $1.90 price level. In fact, RBOB made had a short term breakout to the upside early Tuesday, but was unable to sustain that move and then the market ended quite negative with an outside day down bear reversal.

HEATING OIL: While the July heating oil contract has managed to hold above the prior session’s lows in the early trade today, it is difficult to come away with a positive technical view from the charts. While initially higher US equity market action might lend a hand to the bull camp, this market is still being confronted with a mountain of supply and ongoing concerns of sagging global demand. It does appear as if the $1.95 level offers up some measure of technical support, but it will take a conclusive wave of outside market optimism to see prices return to resistance up at $2.0171.

TODAY’S ENERGY MARKET GUIDANCE: A temporary bounce might be seen off the initial favorable action in the equity markets but we are not sure the market is poised to see an all clear from the macro economic front. In short, we expect minimal short covering action to run its course, with the afternoon equity market action the real focal point of the energy trade.

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

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

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

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

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

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

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

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