Crude Oil Price Analysis for April 18, 2017

Crude oil prices moved lower on Monday falling below the 53-handle declining by 0.85%.  Prices continue to face pressure from geopolitics, but a declining greenback, and supply issues are keeping prices bid.  Traders await Tuesday’s API inventory report, on the heels of last week’s larger than expected draws in crude oil ad products. News that Iran which was exempt from the OPEC oil production cut agreement closed last November, is now ready to join the initiative.

Technicals

Crude oil prices dropped toward support levels, retesting the break out of a downward sloping trend line that comes in near 52.60.  Additional support on crude oil is seen near the 10-day moving average at 52.19.  Resistance is seen near last week’s highs at 53.80. Target resistance is seen near the February highs at 55.32.  The trend continues to remain positive, but a potential head and shoulder pattern is forming now that prices have been unable to push higher.  A heading and shoulder pattern is a reversal pattern that would test the neckline near 47, and a break with high volume would lead to liquidation

The 10-day moving average crossed above the 50-day moving average last week, which shows that a short term up trend is now in place.  Momentum has turned neutral. The MACD (moving average convergence divergence) index is printing in the black, but the trajectory is flat which reflects consolidation. The RSI (relative strength index) moved lower with price action, reflecting declining accelerating positive momentum.

The hourly chart shows that prices are capped near 53.75, and are testing support levels near 52.65. A break of this level would likely lead to a test of the Fibonacci retracement at 51.21. A Fibonacci series, measure the level of an uptrend and then evaluates the 31.8%, 50% and 61.8% retracement of the move to find levels of support.   Resistance on an hourly basis is seen near the 50-hour moving average at 52.95. Prices are forming a topping pattern, as traders await Wednesday’s Department of Energy inventory report.  Hourly momentum is negative as the MACD (moving average convergence divergence) index recently generated a crossover sell signal. This occurs as the spread (the 12-hour moving average minus the 26-hour moving average) crosses below the 9-hour moving average of the spread.

The Dollar is Buoying Oil Prices

A declining U.S. dollar has helped oil prices remains buoyed.  Recent economic data has been softer than expected, which has kept yields in the United States capped.  President Trump is expected to nominate Randal Quarles to the Fed to cover the bank supervision post recently vacated by Governor Tarullo. Quarles was a senior Treasury official under President George W. Bush and Treasury undersecretary for international affairs from 2002 to 2005, and for domestic finance from 2005 to 2006. He is not considered an ideologue. He was graduated from Yale Law School and is currently a managing partner at The Cynosure Group.  His dovish bent should continue to help capped the dollar.

Monday’s weaker than expected manufacturing data was a duel edged sword.  While it will help, the dollar remains soft, the data reflects a slowing U.S. economic backdrop which will hurt oil demand. U.S. Empire State manufacturing index dropped to 5.2 in April, falling 11.2 points after sliding 2.3 points to 16.4 in March. The 18.7 print for February was the highest since September 2014. It was at -5.5 in October. However, the components were mixed. The employment index rose to 13.9 from 8.8, though the workweek slid to 8.8 from 15.0. New orders declined to 7.0 from 21.3. Prices paid edged up to 32.8 from 31.0, while prices received were 12.4 from 8.8. Capital spending rose to 27.7 from 23.9.

 

Iran Will Join OPEC and Cut Production

The agreement between most OPEC member in November to cut production did not include Iran.  The producer has now agreed to join the initiative as long as there is an agreement among the other members. Oil Minister Bijan Zanganeh stated that most OPEC members seem to be already in favor of the extension.  The detail of how Iran would join the initiative and how much they would be willing to cut was not discussed.

This suggest that Iran has found a level of production that is within their efficient range and has a sufficient base for it to continue to ramp up production until May 25, when OPEC will meet in Vienna to decide on the extension. The country was exempted from the initial agreement and allowed to increase its crude output to about 4 million barrels.