Hightower Energies Full CommentaryShareRSS

DAILY ENERGY COMPLEX COMMENTARY
03/08/10

Trend up but overbought technicals leave oil vulnerable to profit taking

OVERNIGHT CHANGES THROUGH 6:05 AM (CT):
CRUDE +27, HEATING +81, UNLEADED +80

CRUDE OIL MARKET FUNDAMENTALS: Crude oil saw a firmer trade in the early overnight action, but the market has backed away from overnight highs. Although the market seems to have embraced a better macro economic view with last week's employment news raising optimism for a recovery in fuel demand, crude oil also looks increasingly vulnerable to profit taking up at these price levels. April crude oil reached the highest price level since January 12th in the overnight trade with the market gaining on residual strength following last week's US employment news showing a smaller than expected decline in payrolls suggesting economic conditions are improving the outlook for a recovery in oil demand. Indications last week that China would maintain an accommodative monetary and fiscal policy and news overnight that China plans to build two more strategic oil reserve bases suggest oil demand from the world's second largest consumer will remain strong. While the uptrend puts April crude oil on course to eventually retest the January high, the market is also running into tough overhead resistance near $82.50. Daily technical indicators have risen to an overbought extreme while the March 2nd COT report with options for crude oil showed funds increased their net long position in crude oil to 171,789 contracts which is under stated since the market has rallied another $2.73 per barrel since the report was measured. As a result, the net long position of the funds is likely a lot closer to the record net long level of 208,733 contracts reached in January of this year. We are also concerned the rally in crude oil could stall since there are no major economic indicators being released today to provide a fresh flow of positive news. In fact, we suspect oil market direction will likely to be closely tied to the ebb and flow in the Dollar today. Oil markets gained as the dollar edged lower overnight after the French President said the European countries would help Greece manage its debt. But oil markets have back peddled from overnight highs in tandem with the dollar recovering from overnight lows and we suspect more aggressive chart based profit taking in April crude oil will be seen if last Friday's close fails to hold. If the Dollar gains upside traction this session, we suspect April crude oil is at risk for a fall back to the $80.78 to $80.47 price range. On the other hand, in order for April crude oil to make a move above $82.50 this session will likely require a sharp break in the dollar and perhaps a strong rally in equities in order to offset the oil market's overbought technical condition and inspire fresh speculative buying up at these high price levels.

PRODUCT MARKET FUNDAMENTALS: GASOLINE: April gasoline has also made a push higher in the overnight trade with the market coming very close to testing the January high, the bull camp's resolve will be tested today. A more optimistic macro economic view has taken hold following last week's payroll news which is improving the outlook for fuel demand during spring and summer driving season. But the market has also become a bit short-term overbought and with April gasoline bumping up against key resistance, we are a bit concerned the market may not have the momentum to make a push above the $2.30 price level right now. The March 2nd COT report with options for gasoline showed the combined fund and spec net long position at 78,806 contracts as of early last week. But this reading is understated given that the market has rallied nearly 10 cents since the report was measured suggesting the combined spec net long in gasoline is closer to the record level of 83,577 contracts reached in January this year. Without any fresh economic news out this session, gasoline's price direction will be highly influenced by outside markets, particularly the Dollar. While we eventually see April gasoline breaking out above the $2.30, we suspect the market's technical condition will leave April gasoline vulnerable to profit taking unless key outside markets provide a fresh buying incentive. The trend in gasoline is up with a strong tendency for prices to trade higher into May. Therefore, technical price correction in April gasoline back to support should be seen as a longer-term buying opportunity.


HEATING OIL: April heating oil has followed the rest of the oil complex higher. But the market may have difficulty holding up at these higher price levels unless oil and gasoline provide strong upside price leadership since heating oil's internal fundamentals remain weak. A mild temperature outlook suggest heating oil stocks, which are already at a record level for this time of year, could start building again since the refinery operating rate is at a 5 month high and winter fuel demand is starting to fade. Therefore, with the fundamental setup bearish and short-term technical indicators overbought, heating oil will need bullish outside market support to entice additional buyers up at these price levels. Otherwise, we suspect April heating oil could slide back towards last Friday's lows.

TODAY'S ENERGY MARKET GUIDANCE: While oil markets appear to be in a well entrenched uptrend, short-term technical indicators have become overbought. Unless outside market influences can provide a fresh buying incentive up at these high price levels that pushes April crude oil and gasoline through key overhead resistance, it won't be surprising to see oil markets give back some of their recent price gains.

NATURAL GAS: Natural gas was pushed to a new low for the move in the overnight trade with a warmer temperature outlook raising supply side concerns since a weak economic recovery suggests industrial fuel demand will likely be slow to return. April natural gas was pushed to a new contract low undermined by some private weather forecasters predicting temperatures to reach into the high 40's and even 50's over the next two weeks raising concerns that winter heating demand will be cut short. Despite signs that economic conditions are improving, the market still lacks confidence that industrial fuel demand will be strong enough to offset rising output this spring since producers have steadily raised the number of drilling rigs in operation, up 21 last week to a new one year high.
The market is in a well entrenched down trend and eventually we see April natural gas falling back to the $4.15 to $4.00 price range. The March 2nd COT report with options also shows a bearish setup for natural gas with funds increasing their net short position to 79,279 contracts while small traders remain net long 31,464 contracts. However, in the near-term there is some technical risk for short position holders since daily indicators show April natural gas has fallen to an oversold extreme leaving the market vulnerable to a short covering bounce. But the fundamental setup suggests technical corrections in natural gas will be short lived. In fact, we suspect trend following funds will be aggressive sellers of natural gas at higher price levels, especially since their current net short position is well below the record net short level held in July 2008 leaving the market with ample selling capacity.

TODAY'S MARKET IDEAS:
The trend remains up, but overbought technicals and resistance at $82.50 leaves April crude oil a bit vulnerable to profit taking if the outside market action turns less supportive.

NEW RECOMMENDATIONS:
None.

PREVIOUS RECOMMENDATIONS:
None

Commitment of Traders - Futures and Options
2/23/2010 - 3/2/2010
                 NON-COMMERCIAL        COMMERCIAL    NON-REPORTABLE
               NET POS   NET CH  NET POS   NET CH  NET POS   NET CH
**Energies
Crude Oil      171,789   11,302 -182,167  -14,159   10,378    2,857
Heating Oil     24,052   -3,984  -43,145    1,786   19,093    2,198
Natural Gas    -79,279     -389   47,815    4,102   31,464   -3,714
Gas (RBOB)      69,335   -4,222  -78,805    1,720    9,471    2,504




***This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness.  Opinions expressed are subject to change without notice.  This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon.  The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.  Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited.