ENERGY: Risk-On, Lower Dollar and Lower Rate Signals Favor the Bull Camp
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CRUDE OIL MARKET FUNDAMENTALS
While crude oil prices at this hour have not posted a higher high, the technical bias from the charts remains up. Certainly, part of recent strength is from the continuation of a broad-based risk on environment. In our opinion, improved market sentiment is largely the result of falling US treasury yields, with the looming OPEC+ meeting in Vienna also adding to the speculative buying trend. Apparently, market sentiment has ratcheted upward the expected amount of production cuts from the cartel on Wednesday, with some analyst suggesting the switch to an in-person meeting is indicative of something significant in the works. As indicated yesterday, a 1 million barrel plus reduction in daily production would be the largest reduction since the initial Covid lockdown and certainly will remove some supply. On the other hand, according to Reuters OPEC+ producers in August were short of their allowable output by 3.58 million barrels per day and that suggests a 1 million barrel plus cut might not immediately result in less supply flow. As of this writing, it is unclear if the Russian oil minister will attend the meeting as sanctions against Russia could lead to the detainment of the Minister. At present it is unclear what the impact of Ukrainian military victories will have on energy prices from a supply perspective, but the prospect of a nearing end to the war would certainly temper demand destruction fear. Limiting the upside in crude oil prices today is a report from Bloomberg pegging OPEC crude oil production up by 230,000 barrels per day last month. While a US treasury official has indicated new sanctions against Russia scheduled for December 5th are specifically focused on crude oil, it is unlikely that all members of the G7 will comply with new sanctions. This week's Reuters poll projects US EIA crude oil stocks to decline by 2 million barrels and expects the US refinery operating rate to decline by 0.4%. Looking ahead we suspect the market will continue to "buy the rumor" of the Wednesday OPEC+ production cut and that combined with the smallest net spec and fund long since 2016 in crude oil temporarily shifts control to the bull camp. On the other hand, downtrend channel selling resistance in November crude oil is $89.83 today, with that downtrend channel resistance line falling to $88.95 on Friday.
PRODUCT MARKET FUNDAMENTALS
Obviously, ongoing risk on optimism throughout the marketplace is contributing to this week's rally in gasoline as that reduces demand concern. In fact, over the last two weeks, global traffic readings have been positive and that combined with yesterday's technical breakout up temporarily gives the bull camp the edge. It should be noted that the French refineries strike at four facilities has extended into an 8th day! However, the gasoline market was not as liquidated in the spec and fund long categories as crude oil and therefore traders should not expect significant short covering follow-through into the end of this week. This week's Reuters poll projects EIA gasoline stocks to decline by 1.1 million barrels and predicts the US refinery operating rate to decline. In our opinion, for gasoline to continue carving out gains again today will require an extension of yesterday's risk on vibe from equities, ideas that the US Fed might be less aggressive, and the dollar must extend on the downside. From a longer-term perspective, the bullish supply argument is very problematic considering signs that China is boosting crude oil imports to ramp up refinery activity and in turn increase its product exports. Yesterday the November gasoline contract broke out above a 3-month-old downtrend channel resistance line at $2.4880 and that price becomes a pivot level later this week. The next higher downtrend channel resistance line at $2.5140 was also violated, projecting the next key point up at $2.61. With the action yesterday the diesel market lagged the rest of the markets and might see some catch up buying today from the extending risk on inspired improvement in diesel demand expectations. This week's Reuters poll projects EIA distillate stocks to decline by 1.8 million barrels which would likely add to the 15.3-million-barrel year-over-year deficit.
TODAY'S MARKET IDEAS
While we will not argue against the potential for further gains today, the actual physical supply impact of a 1 million barrel per day OPEC+ production cut back should ultimately prove minimal as producers have over complied with production cuts throughout the entire restraint agreement. However, with extending improvement in overall market psychology, demand destruction fear is temporarily squashed. In today's action the Wednesday OPEC+ meeting, declining US treasury yields and a lower dollar project further gains in the petroleum complex.
NATURAL GAS
Obviously, the action in natural gas this week damages the charts and in turn has seriously ruptured bullish confidence. While the sabotage of key European gas pipelines last week leaves the supply side of the equation volatile, the trade now expects some flow to be returned quickly. Another issue likely to keep pressure on natural gas is confirmation of record US production which has added impetus because of a significant reduction in demand in Florida from reports that 600,000 homes and businesses are still without power. This week's Reuters poll pegs EIA natural gas in working storage to increase by 94 BCF to 119 BCF which in turn confirms the increased pace of injections during the shoulder season. Significant technical damage on the charts, a lull in weather related supply threats, recent news of record US output and mild temperatures should leave the bear camp in control. However, with natural gas holding a net spec and fund short position of 121,000 contracts early last week and the market extending downward by $0.46, the gas trade has likely become the most bearish since before news of the pandemic surfaced! In a very bearish longer-term fundamental development press reports overnight from Bloomberg suggest US solar energy has now moved to a 33% discount to gas generated power!
TECHNICAL OUTLOOK
Note: Data is collected using the closing values of the previous session and calculations and analysis are run at the same time. Technical commentary is based solely on statistical indicators and does not necessarily correspond to any fundamental analysis that may appear elsewhere in this report. Data sources can and do produce bad ticks that can cause computation errors. Please verify before use.
CRUDE OIL (NOV) 10/04/2022: Momentum studies are trending higher from mid-range, which should support a move higher if resistance levels are penetrated. The cross over and close above the 18-day moving average is an indication the intermediate-term trend has turned positive. With the close over the 1st swing resistance number, the market is in a moderately positive position. The next upside objective is 86.67. The next area of resistance is around 85.09 and 86.67, while 1st support hits today at 81.41 and below there at 79.30.
HEATING OIL (NOV) 10/04/2022: Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. The intermediate trend could be turning up with the close back above the 18-day moving average. Since the close was above the 2nd swing resistance number, the market's posture is bullish and could see more upside follow-through early in the session. The near-term upside target is at 345.55. The next area of resistance is around 341.69 and 345.55, while 1st support hits today at 330.23 and below there at 322.63.
RBOB GAS (NOV) 10/04/2022: The market now above the 40-day moving average suggests the longer-term trend has turned up. Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. The cross over and close above the 18-day moving average indicates the intermediate-term trend has turned up. There could be more upside follow through since the market closed above the 2nd swing resistance. The near-term upside target is at 262.48. The next area of resistance is around 258.74 and 262.48, while 1st support hits today at 245.06 and below there at 235.13.
NATURAL GAS (NOV) 10/04/2022: Daily stochastics declining into oversold territory suggest the selling may be drying up soon. The market's short-term trend is negative as the close remains below the 9-day moving average. The swing indicator gave a moderately negative reading with the close below the 1st support number. The next downside target is now at 6.031. The 9-day RSI under 30 indicates the market is approaching oversold levels. The next area of resistance is around 6.805 and 7.079, while 1st support hits today at 6.281 and below there at 6.031.
| Technical Statistics | ||||||||
| Crude Oil | Crude Oil | Heating Oil | Heating Oil | RBOB Gas | RBOB Gas | Natural Gas | Natural Gas | |
| Month | NOV | DEC | NOV | DEC | NOV | DEC | NOV | DEC |
| Close | 83.25 | 82.31 | 335.96 | 324.30 | 251.90 | 238.93 | 6.543 | 6.870 |
| 9-Day RSI | 51.28 | 51.64 | 53.47 | 51.32 | 60.01 | 55.69 | 25.43 | 26.67 |
| 14-Day RSI | 47.89 | 48.13 | 50.32 | 48.53 | 54.83 | 51.43 | 31.33 | 32.34 |
| 14-Day Slow D | 28.72 | 28.02 | 33.56 | 29.83 | 53.52 | 41.89 | 10.11 | 10.74 |
| 14-Day Slow K | 35.89 | 35.50 | 43.72 | 38.28 | 65.56 | 50.04 | 8.99 | 9.30 |
| 4 Day MA | 81.53 | 80.77 | 3.30 | 3.21 | 2.44 | 2.34 | 6.78 | 7.05 |
| 9 Day MA | 80.72 | 80.09 | 3.24 | 3.16 | 2.40 | 2.31 | 6.99 | 7.22 |
| 18 Day MA | 83.17 | 82.52 | 3.30 | 3.23 | 2.40 | 2.33 | 7.58 | 7.77 |
| 45 Day MA | 87.04 | 86.36 | 3.42 | 3.36 | 2.50 | 2.43 | 8.31 | 8.46 |
| 60 Day MA | 88.31 | 87.36 | 3.43 | 3.37 | 2.55 | 2.48 | 8.13 | 8.27 |
| Generated: 10/03/2022 3:23 PM (CT) | ||||||||
| Swing Statistics | ||||||||
| Crude Oil | Crude Oil | Heating Oil | Heating Oil | RBOB Gas | RBOB Gas | Natural Gas | Natural Gas | |
| Month | NOV | DEC | NOV | DEC | NOV | DEC | NOV | DEC |
| Close | 83.25 | 82.31 | 335.96 | 324.30 | 251.90 | 238.93 | 6.543 | 6.870 |
| Support 2 | 79.29 | 78.68 | 322.63 | 314.05 | 235.12 | 226.89 | 6.031 | 6.384 |
| Support 1 | 81.40 | 80.60 | 330.23 | 319.81 | 245.06 | 233.64 | 6.281 | 6.627 |
| Pivot | 82.98 | 82.10 | 334.09 | 323.03 | 248.80 | 237.46 | 6.555 | 6.869 |
| Resistance 1 | 85.09 | 84.02 | 341.69 | 328.79 | 258.74 | 244.21 | 6.805 | 7.112 |
| Resistance 2 | 86.67 | 85.52 | 345.55 | 332.01 | 262.48 | 248.03 | 7.079 | 7.354 |
| Generated: 10/03/2022 3:23 PM (CT) | ||||||||