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The Department of Energy released its weekly crude inventory report Wednesday morning and the results on the headlines were bullish. All three markets saw numbers that were friendly per se. This has given the energy markets a boost, though with the tensions in the world, the natural gas expiration yesterday and the California energy crisis, there seems to be plenty of “stories” to help the bullish case. In reviewing the fundamentals though following this report, I would label myself a cautious bull.

When I measure the fundamentals of the energy markets, I look at the relative levels year over year and the change in those levels, year over year. From this I gain an understanding on where the markets are in time which I believe is a much better metric than looking at them in absolute terms. I then combine this data with a demand model, created using various numbers from OPEC and other wonderful stats from my trusty Bloomberg arriving at a demand “trend” to support the other fundamental data.

The Department of energy reported the following data this morning,
Crude Oil Stks Bbls flat vs seen -50k, Gas Stks -3.2M Bbls In Wk; Seen -280,000, Distillate Stks +800,000 Bbls In Wk; Seen +1.6M, Refineries Ran At 92.5%; Seen 93.2% (from reuters)

Upon putting today’s numbers into the “washing machine,” the results are somewhat predictable. At the moment, demand is trending higher though at a much slower rate than a year ago. The year over year fundamental model at the moment is supportive for the unleaded market (for a weekly only it appears) and the distillate market (though not the fuel oil or jet fuel markets interestingly enough) but still bearish for the headline crude barrel. Thus if one were comparing relative performance, I would expect unleaded to outperform.

But do the fundamentals matter at the moment? I think they do. A trader said to me this morning that the news in the marketplace is driving trade and the fundamentals will probably be overlooked. Perhaps he is correct, today, but over the longer term, I have to believe the fundamentals matter and while the news is bullish at the moment for the market, the driver of gains over the next week will be the fundamentals.

Combining bullish news with bullish inventory levels and you arrive at a story which could translate to a crude price near $78? I do not see much higher levels unless the unleaded market draws significantly again next week.

Looking at this market from a technical bias arrives at a bullish conclusion as well. The long term chart still points higher and could be pointing to a breakout in the power model (measures volume vs price). The demand and fundamental model gives credence and support to such a case. However, the intermediate term model is not as bullish which could put a lid on this breakout scenario. My very short term trading model has me trading the short side of the market. Overall, I would have an upside bias for unleaded into next week. For the others? More a neutral stance.

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Source: A Cautious Bull on the Oil Market