The Hightower Report

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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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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: Crude oil exploded during the overnight session helped by a series of favorable weekend developments that countered the extreme flight to quality play from last week. Global finance leaders including the Fed, increased swap lines to the European Central Banks to boost liquidity along with the passage of a massive European debt stabilization fund (of close to 1 trillion $). However, an OPEC official speaking at energy gathering in DOHA, commented on the new Euro financial aid package, saying that it would lift crude back above $80 but cautioned over the prospect for extreme volatility as the global recovery will still need to eat through excess physical supplies. In addition, the OPEC secretary added that there remained abundant supplies of crude oil urging more compliance among members to come into line with 2008 production guidelines. Fresh trade data out of China overnight also bodes well for the demand side of the equation for crude oil, as does the US Non farm payroll reading from last Friday. In fact, Chinese crude imports were seen up 30.9% compared to this time during 2009 and they set a new record high level for daily consumption (5.15 mln bpd). Also stoking the “risk-on” attitude were results that Germany’s exports expanded by 10.7% to 79.0 billion, a bullish number supporting the recovering economic backdrop and the fastest rate of growth in that reading in about 18-years. The Commitments of Traders Futures and Options report as of May 4th for Crude Oil showed Non-Commercial traders were net long 190,691 contracts, an increase of 928 contracts. The Commercial traders were net short 213,372 contracts, a decrease of 7,057 contracts. The Non-reportable traders were net long 22,680 contracts, a decrease of 7,985 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 213,371 contracts. The primary weekly trend in crude oil should be up now, with support coming at the first retracement off the May slide seen at $82.35 in the July contract. The new Euro area aid package is a game changer for today’s trade and has provided the bulls with a clear edge. It is possible for prices to revisit pre-panic price levels up above $84 to $86 basis July Crude oil. BP made its first attempt to install a massive 98-ton containment apparatus over the oil leakage areas in the Gulf but the build up of ice crystals thwarted the original plan leaving engineers seeking alternative ways to stop the leaks.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: July RBOB posts a gap higher open in response to a weekend financial aid package designed to stem the run on Euro area sovereign debt markets. The US dollar has erased over 61% of last weeks gains so far today and that cheapens gas prices on the world market and helped RBOB rebound over $0.07. On the retail level, the Lundberg survey showed average gas prices in the US rose during the last 2-weeks to $2.92 per gallon but those prices are expected to fall back because of last week’s action. The Commitments of Traders Futures and Options report as of May 4th for Gasoline (RBOB) showed Non-Commercial traders were net long 80,867 contracts, an increase of 6,322 contracts. The Commercial traders were net short 93,188 contracts, an increase of 8,636 contracts. The Non-reportable traders were net long 12,321 contracts, an increase of 2,313 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 93,188 contracts. This represents an increase of 8,635 contracts in the net long position held by these traders. A normal retracement of the May slide could allow the June RBOB contract to rise back to the $2.2274 level and perhaps even back to the 50% retracement level of $2.2682 level.

HEATING OIL: After the massive early May washout of 30 cents a gallon the partial all clear from the Euro zone should foster in a series of short covering rallies. A normal retracement off the May slide would seem to allow a recovery to the 1st retracement level of $2.1716 and perhaps even the 50% retracement level of $2.2070. The Commitments of Traders Futures and Options report as of May 4th for Heating Oil showed Non-Commercial traders were net long 34,705 contracts, a decrease of 52 contracts. The Commercial traders were net short 56,577 contracts, an increase of 854 contracts. The Non-reportable traders were net long 21,873 contracts, an increase of 906 contracts. Non-Commercial and Non-reportable combined traders held a net long position of 56,578 contracts.

TODAY’S ENERGY MARKET GUIDANCE: Short covering and perhaps some fresh spec long interest should leave the bull camp with the edge today.

The build in distillate stocks in the EIA numbers this week is keeping storage levels at record high levels for this time of the year. With June heating oil prices trading close to the highs for the year in the wake of these bearish numbers, Congress and those pushing for speculative limits on futures trading will probably think they have found another “smoking gun.”

But these higher prices are really signaling the threat of even tighter energy supplies ahead and the inability of the world to meet its growing demand for energy “products.” This comes from growing individual transportation needs, particularly in the developing world, and the lack of expansion in global refining capacity. In other words, the market is sending a message that some don’t want to hear!

As we point out in our recent special report Natural Gas: Positioning for a Major Bottom, the market will soon be forced to turn to natural gas for individual transportation needs, and that will more than likely result in natural gas prices finally joining the historical commodity price explosion.

The pundits are sure to doubt the validity of the natural gas price rally, as supplies are also flush. But world needs more energy output, and all sources are destined to become more expensive.



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The natural gas market is finally beginning to show fundamental and technical signs of a major bottoming. While it might be folly to rely on swift enactment of policy by the U.S. government that would serve to expand the use of natural gas in the energy supply chain, the relative price advantage of natural gas versus many petroleum inputs looks to facilitate an increase in demand. Recently the BTU price of natural gas reached 16 month lows versus crude oil, and that should begin to get the attention of users and maybe even someone in Washington who is willing to look beyond the tip of their nose.

Clearly, the natural gas market is being weighed down by supply, but a bull market has to begin somewhere, and seeing the EIA revise its 2010 US electricity demand upward by 1.9% is certainly a start. Throughout most of the declines in natural gas prices from early 2008 to the 2009 low, the trade was seemingly factoring in a sustained lull in industrial usage. The slide from the 2008 high price of $13.69 per MMbtu to the 2009 low of $2.40 was blamed on fears of a recession or even a depression. Now that a depression has been averted and the recession is seemingly lifting, we suspect that the trade will have to move to reinsert some premium back into natural gas prices.

The latest weekly EIA report indicated that natural gas in storage was below to year ago levels, and the recent Commitments of Traders report showed speculators holding a net short position of 50,365 contracts. While US natural gas rigs in operation have risen off the 2009 low levels, they are still running at nearly half of their peak levels. Therefore, while natural gas stock levels are to be considered flush, it is possible that increased cyclical demand could be joined by “new” demand from petroleum users who are looking for a cheaper fuel alternative.

Colorado State University’s hurricane forecast team is calling for four of the expected eight hurricanes this coming season to be classified as “major” storms, which could serve to spook out some position shorts. With hurricane threats tamped down over the last two seasons, the energy markets might not be overly concerned with the “potential threat” of weather at this time. However, if there are some signs of storm activity in May, attitudes could begin to change. As the accompanying chart of tropical storm frequency indicates, some minor activity has historically occurred during the month of May. While we are barely half-way through the month of April as if this writing, the natural gas trade has already seen enough fundamental change and enough momentum in the overall economy to begin to have some respect for weather-related threats. In the meantime, we think that corrective action back down to the $4.00 level in the June natural gas contract should be considered a long term buying opportunity, especially if the spec net short positioning expands beyond the 65,000 contract level.

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May crude oil has come into this morning on the defensive again, extending its sell off from late in yesterday’s session. This week’s storage numbers seem to have removed some of the market’s recent strength, as they indicate fairly high ongoing levels for crude oil stocks, as well as for crude oil imports. A stronger Dollar off of fresh EU debt problems, along lingering weakness in the US stock market have added to the pressure on prices energy prices this morning. Even so, the market still remains within $2.20 of 18-month highs. While prices look to soften off overdone technical considerations and a minor let down in global macro economic optimism, one should not forget the story from yesterday that 12 of the largest Chinese refineries would be running at a record rate of over 2.9 million barrels per day during the month of April, as that clearly points to the prospect of strong demand from that nation. Given the slacken economic views, seeing EIA crude stocks rise by 1.976 million barrels yesterday was seen as a reason to bank profits. However, with crude oil stocks sitting 9.835 million barrels below year ago levels, that would seem to provide some form of eventual underpin for prices. On the other hand, crude stocks do stand 20.725 million barrels above the five year average and that probably serves to embolden the bear camp. Crude oil imports for the week stood at 9.561 million barrels per day compared to 9.060 million barrels the previous week and that is another minor negative for the market to digest. Furthermore the US refinery operating rate was 84.49% up 1.89% from last week compared to 81.84% last year and the five year average of 85.97%. While the market might see increased refinery activity as supportive to crude oil prices, that could lessen the odds of a big tightening of product stocks ahead. In short, the bear camp has control today from a fundamental and technical perspective, as well as from an outside market perspective. Near term corrective targeting in June Crude oil is now seen at $85.00.

GASOLINE: In spite of some large gasoline draws indicated on this week’s storage reports, May RBOB has been caught up in the general oil market weakness and has drifted lower again this morning. While this year’s “driving” season is coming up and there have been fresh expectations of a sharp rise in gasoline prices this summer, this rally may have gotten ahead of itself, and recent market action may be more indicative of needed profit-taking than any sustained change in sentiment. EIA gasoline stocks did fall by 2.498 barrels but they are 5.874 million barrels above last year and 10.480 million above the five year average. Average total gasoline demand for the past four weeks was also down 0.36% compared to last year. Gasoline imports came in at 756,000 barrels per day compared to 710,000 barrels the previous week. In short, supply side news was negative and that was compounded by news that US refinery rates are starting to rise. Near term downside targeting is seen at $2.26.

HEATING OIL: May heating oil has moved lower again overnight as the trade is apparently being pressured by the builds shown in this week’s storage reports. With stocks at historically high levels earlier this year, the recent trend of weekly declines helped to underpin the recent rally but now that sentiment has lost its footing, especially since that trend appears to have ended around the same time as the conclusion of the heating season. Also distillate stocks at 145.68 million barrels are at a record high for this week. Previous record was in 2009. EIA distillate stocks rose 1.074 million barrels and stand at 1.88 million barrels above last year and 28.418 million above the five year average. Distillate imports came in at 153,000 barrels per day compared to 321,000 barrels the previous week. Average total distillate demand for the past four weeks was down 3.36% compared to last year. EIA heating oil stocks rose 576,000 barrels and are 5.311 million barrels above last year and 7.079 million above the five year average. Near term downside targeting is now seen at $2.20 basis June Heating oil.

TODAY’S ENERGY MARKET GUIDANCE: The bears have control and the losses might be somewhat aggressive in the wake of negative outside market factors.

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CRUDE OIL MARKET FUNDAMENTALS: The crude oil market has given back a portion of yesterday’s gains in the overnight trade under pressure from a sharp rally in the dollar while the market may be rethinking yesterday’s bullish reaction to the inventory data. Crude oil fell back as the Dollar gained diminishing the appeal of oil as an alternative investment and inflation hedge. Year end positioning and safe haven buying tied to a credit downgrade for Greece seems to be behind the dollar’s rally and crude oil is under pressure as investors scale back risk. But we also suspect the oil market may be undermined by expectations for the Fed to start tightening rates sooner than expected since the FOMC statement acknowledged that economic conditions show signs of improving while reiterating the Fed’s plan to withdraw its special lending programs early next year which suggests tightening liquidity conditions. But it’s also likely that the oil market is under pressure since taking a second look at the inventory report reveals several bearish indicators. While the market rallied yesterday off the headline that oil stocks fell 3.6 million barrels, a portion of the decline is likely due to refiners making inventory adjustments for year end tax reasons. In fact, with the refinery operating rate dipping below 80% and oil imports down sharply, this setup clearly shows oil demand remains weak which is confirmed by the EIA reporting total product demand over the past four weeks was down 1.7% compared to year ago. The low US refinery operating rate also suggests oil stocks could start building again in the New Year. News that Japan’s second largest refinery may close and idle facilities may be further undermining the global demand outlook for oil. While the fundamental setup for oil still isn’t particularly strong, the market still shows signs of being technically oversold after breaking sharply from the early December high. Therefore, we suspect more intense pressure from outside markets may be necessary to pressure February crude oil back below chart support at $73.07. Seeing good readings on jobless claims and leading indicators today is more likely to pressure oil than be supportive if the Dollar strengthens off the news. On the other hand, if the dollar starts to give up its early gains, there may still be enough short covering potential for February crude oil to make another run at the $75 resistance level. Escalating geopolitical tensions with Iran is another wild card that could potentially add risk premium support to oil prices. The bears have the early edge, but follow selling will likely key off the Dollar’s direction.

GASOLINE: February gasoline is also under pressure from the dollar rally and given yesterday’s inventory readings, the fundamental setup for gasoline still favors the bear camp. Yesterday’s rally may have been a bit overdone considering gasoline stock rose by 900,000 barrels despite a 1.1% decline in refinery operation which suggests fuel demand remains weak. But on the other hand, the market has become quite oversold on the sell off seen earlier this month and so more dollar strength may be needed to push February gasoline back below support at $1.86. A forecast by AAA auto club for holiday travel to be up 3.8% this year may also help to help to limit losses. While the market has an early selling bias in place, trading may be confined to the $1.9124 to $1.86 price range today with bearish fundamental and the Dollar influences working against an oversold technical condition.

HEATING OIL: It certainly must be disappointing to the bull camp to see February heating oil give back a good portion of yesterday’s gains overnight. The market appears to be a bit skeptical that the cold weather will be enough to significantly reduce distillate supplies, especially since fuel demand was still down 6.6% compared to year ago. It also looks as if the market ran into tough resistance at the $2.00 price level. The dollar seems to be having the most influence on heating oil in the overnight trade. But we suspect additional outside market pressure will likely be needed to push February heating oil back below support at $1.9779 considering the market still appears to be very oversold. Also, the cold temperature forecast and low refinery operating rate should provide a measure of support to heating oil since higher heating demand will help trim the supply glut in coming weeks. Therefore, given the mix of factors we suspect February heating oil may be confined to a $2.00 to $1.9780 trading range this session.

TODAY’S ENERGY MARKET GUIDANCE: A sharp rally in the dollar gives the bear camp in oil the edge this morning. But with energy markets still very oversold there may not be a lot of downside follow through unless the Dollar builds on overnight gains or a more extensive break in equities is seen.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has pulled back from overnight highs after making an initial push above $80. Some of the profit taking in oil is likely tied to a steady Dollar/weaker equity trade overnight while lingering demand doubts could also be holding the market back. To a certain extent, the 3.5% gain in 3rd quarter GDP with the economy growing at the fastest pace in two years has helped to revive macro economic optimism that had been undermined earlier in the week by the soft readings in consumer sentiment and new home sales. Seeing US jobless claims fall has also helped to ease macro economic doubts and improve oil market sentiment a bit. But this week’s EIA report did show builds in gasoline and crude oil stocks and continuing evidence of weak fuel demand seems to have left the bull camp’s confidence a bit shaky. In fact, the global oil demand outlook may have been undermined by news that Japan’s oil product sales fell 5.9% last month due to weak industrial fuel use and low gas sales raising doubts that the strength in China’s oil demand can lead to global oil growth. Major oil companies have also reported poor corporate results due to weak fuel demand and that has also been creating some doubt among oil traders. Since pulling back from the high reached earlier in the month, December crude oil has had a hard time recapturing price levels above $80. But in order for the oil market to completely push aside internal supply/demand concerns and further raise macro economic expectations for a recovery in oil demand will likely require seeing good readings in today’s reports on consumer sentiment and Chicago PMI. A good portion of yesterday’s gains were also tied to the sell off in the Dollar which creates a bullish environment for commodities and raises the investment appeal of oil as an inflation hedge. After failing at a key chart level in yesterday’s trade, we suspect the Dollar could soon start a new leg down. But given the weak early price action in crude oil, the Dollar will need to build on yesterday’s losses in order for the oil market to regain its footing. Yesterday’s rally in crude oil was impressive, but technical indicators still show the market to be overbought and that could be another factor weighing on prices this morning. Therefore, in order for the oil market to completely shake off oil demand doubts and overcome its technical condition we suspect a very bullish outcome will need to be seen in today’s economic reports that triggers a strong positive reaction in equities and a break in the Dollar. End of the month position adjustments and the expiration of the November product contracts could also play a role in today’s trade that adds volatility in the session.

GASOLINE: December gasoline has started to pull back in the early overnight action as apparently the trade may want to see more evidence of a macro economic recovery before pushing the market to higher price levels. The rise in gasoline stocks and generally weak oil demand data have pulled the rug from under the bull camp this week. Yesterday’s strong GDP reading helped to restore some of the macro economic optimism that has faded this week, but we suspect stronger than expected readings in today’s scheduled reports will be necessary to further convince the trade that the economic momentum seen in the 3rd quarter is continuing in this quarter. Despite the sell off this week, December gasoline still looks a bit short-term overbought and for the market to overcome its technical condition will also likely require price support from bullish outside market influences. The technical action in the Dollar yesterday looked as if the recent corrective bounce in the currency had been completed and Dollar ready to resume its downtrend. But the Dollar has held fairly steady overnight and unless the currency starts to back peddle, we suspect gasoline could give back a portion of yesterday’s gains. Support for December gasoline comes in between $2.01 and $2.00 and below there at $1.9690, with resistance at $2.0441 then $2.085. A volatile trade could be seen due to end of the month profit taking and the expiration of the November gasoline contract.

HEATING OIL: December heating oil has backed away from yesterday’s highs in the overnight trade as a lack of follow through weakness in the Dollar and a soft equity market trade seems to have inspired some traders to book profits following yesterday’s price gains. While the GDP reading seemed to restore some macro economic optimism that had been lost earlier in the week, apparently the trade needs more economic convincing before lifting December heating oil back over the $2.10 resistance level. Certainly the fundamentals for this market remain bearish with distillate stocks high, a mild temperature outlook keeping heating demand low and industrial fuel use still weak. Technical indicators still show heating oil to be overbought and that condition is likely another factor weighing on the market. Therefore, the trade will need to see a combination of strong economic news and a sell off in the Dollar in order for the bull camp to reclaim control and make a run at yesterday’s highs. Otherwise, December heating oil could end up giving back a good portion of yesterday’s gains.

TODAY’S ENERGY MARKET GUIDANCE: Bearish outside market influences and some lingering fuel demand doubts are giving the bear camp the early edge. Therefore, in order to shift control back to the bull camp today’s economic reports will need to trigger a sharp sell off in the Dollar.

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In many ways the natural gas market sits in classically bearish fundamental position. US storage levels are nearly at capacity, industrial demand is expected to remain soft, and the threat against supply from the current hurricane season has so far been the lowest in over five years. However, we would suggest that the natural gas market is fully aware of its bearish fundamentals and that they were already priced into the market when prices fell to the September low of $3.49.

While a number of physical commodities like crude oil, copper, sugar and cocoa have already begun to factor in some form of economic recovery, one could suggest that natural gas prices have no such improvement priced into their equation. And while we still haven’t seen the “seminal” development that would indicate that a change is underway, we do think that the economic process is set to prompt a bottoming in prices. In addition to prices reaching the lowest level in seven years, the differential between natural gas and crude oil is trending back toward the extreme again, and that in conjunction with increased lobbying efforts from the gas industry might result in some governmental favor ahead.

In looking back at the speculator activity over the last year, one sees that a massive net short position was built into natural gas as petroleum prices were making historic highs. That might suggest that players were simply hedging long crude oil plays with short natural gas positions. In fact, in the wake of the major energy top in 2008, open interest in natural gas fell from a peak of 976,609 contracts just after the top to only 619,499 this past March. It should also be noted that the low point in natural gas open interest was seen in relative proximity to the major low in crude oil prices. This all seems to suggest that the trade has consistently used the natural gas market as a hedge against the desire to be long crude oil.

On the other hand, it would appear that a large portion of the sellers in natural gas during the sub-prime crisis were picking natural gas as the market most likely to suffer demand losses due to a sustained recession. As can been seen in a COT positioning chart, speculators built a historic short position in natural gas into the peak of the sub-prime disaster, apparently off of ideas that industrial demand for natural gas was set to decline. Given that demand did decline and storage levels exploded, the march to new lows over the last nine months was clearly justified.

While the jury remains out on the prospect of a recovery in the manufacturing sector, we would suggest that demand shouldn’t be as bad as was assumed into the summer of 2008. Certainly the natural gas market saw the net spec short position eradicated after a depression was avoided. Last March the market was even able to build a net spec long of 27,641 contracts.

In short, we think the market has moved back into a more normal economic and technical posture, with the speculative interest thought to the under scrutiny in the crude oil market, the prospect of gradually improving demand and the potential for political change on the rise. With their net position returning to at net short in excess of 40,000, the specs are leaning heavily to the bear side, but the case lower prices seems to be dissipating. However, because the fundamentals remain questionable, traders need to use strategies that compensate for lingering weakness in prices in the coming weeks. For instance, they could consider credit call spreads or long calendar call plays.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has seen a two-sided trade overnight with the market running into some profit taking on an early attempt to follow through higher after yesterday’s strong gains. But stronger global equity markets and a generally weaker Dollar are starting to provide a lift to oil prices ahead of the US session. But with crude oil back near the price levels reached earlier this month, the market is also looking a bit fundamentally overvalued considering the high level of oil stocks on hand and since a low refinery operating rate is likely to cause a further build in oil stocks in the weeks ahead, especially if imports remain high. A report showing weak oil demand in Japan, the world’s number three oil consumer, may also have some traders questioning the prospects for a recovery in global oil demand. On the other hand, the price direction in crude oil has been mostly influenced by the macro economic outlook being thrown off by the action in equities and the Dollar. Since these outside market influences have been positive in the overnight trade, it has certainly limited the profit taking interest in crude oil. In fact, the revival in macro economic optimism this week tied to better global corporate earnings, growth prospects in China, rising sentiment in Europe and lower US jobless claims has certainly stirred up expectations for a strong recovery in fuel demand. But in reality, overall oil demand remaining weak and the market may need further economic evidence that conditions are improving in order to push oil prices significantly higher. So we suspect today’s reports on 2nd quarter GDP and regional purchasing managers reports from Chicago and NY will be a critical influence on today’s trade. Given the bearish fundamental backdrop for oil, September crude oil could encounter more significant end of the month profit taking unless today’s economic news triggers a strong bullish reaction in equities and raises investor risk appetite enough to inspire fresh buying in oil up at these price levels. Unless a steady flow of news continues to validate the macro economic optimism that has been building this week that also propels equity markets higher, we have doubts that crude oil will be able to hold up at these price levels.

GASOLINE: After an early attempt to follow through higher from yesterday’s sharp move the gasoline market has encountered some light profit taking in the early overnight action. Although gasoline supplies remain ample and fuel demand anemic, ideas that macro economic conditions are set to improve and revive gasoline consumption has been a key factor sweeping the market higher. Optimism for a recovery in fuel demand has also raised speculation that refinery outages and closures could start to tighten gasoline supplies and this outlook has also provided a lift to gasoline prices. But with the current fundamental setup for gasoline not particularly supportive since fuel demand this summer has remained anemic, we suspect it will be critical that macro economic optimism continues to grow in order to support a higher trade in gasoline. Outside market action overnight has remained bullish and so far that has limited the selling interest in gasoline. But in order to prevent more extensive end of the month profit taking and clear the way for September gasoline to retest the June highs, today’s economic news will likely need to support the bullish macro economic view.

HEATING OIL: Heating oil has also seen a choppy trade overnight with the market under a light pressure from profit taking. The heating oil market has been able to recuperate the majority of losses suffered earlier in the week as a revival in macro economic optimism has raised hopes for a quicker recovery in fuel demand. Gains in equity markets overnight along with the weak action in the Dollar could provide heating oil with additional upside capacity even though this market has one of the weakest fundamentals of the energy complex with distillate stocks at 25 year highs and demand readings continuing to slump. But if a bullish fuel demand outlook holds up, speculation that lower refinery operations will help ease the supply glut has also been a supportive factor. Therefore, today’s economic news could be critical in influencing sentiment towards fuel demand and that along with the direction in equities will likely determine in direction in heating oil this session. We suspect this market will need a steady flow of bullish demand side news to support a move back to highs seen earlier in the month. Otherwise, a breakdown in macro economic sentiment could trigger extensive profit taking.

TODAY’S ENERGY MARKET GUIDANCE: With the overnight action indicating energy market maybe a bit vulnerable to month end profit taking, today’s economic reports will be a key influence on market direction as bullish surprises may be necessary for the bull camp to retain control. But if equities manage another upside thrust, oil prices are likely to follow.