Crude Oil Price Analysis for April 25, 2017

Crude oil prices started Monday in the black, moving higher in the wake of the results of the French Presidential Election which saw investors move into riskier assets.  Crude prices recaptured the 50 handle moving up to 50.22, before moving lower into the close during the North American Trading session. It appears that despite the best effort by OPEC to reduce production beginning in February, the growth in production was so large, that it has taken nearly 3-months to reduce U.S. inventories.  Demand for gasoline remains high, but on a year over year basis, demand has declined, which is taking its toll on gasoline margins.

Technicals

Crude oil prices made a lower high and a lower low continuing the downtrend which began as prices topped out near the April highs near 54.  Prices continue to form a head and shoulder reversal pattern, with a neckline near and upward sloping trend line near 48.  A break of this level could lead to a selloff near to the 44 handle. The large from the head and shoulder pattern would be $10 near and reach as far at $37 per barrel.

Resistance on crude oil prices is seen near the 10-day moving average near 52.07.  Support is seen near the upward sloping trend line that connects the lows in August to the lows in March that comes in near 48 per barrel.

Momentum on crude oil prices has turned negative. The MACD (moving average convergence divergence) index generated a crossover sell signal. This occur as the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal. The MACD is printing in the red with a downward sloping trajectory which points to lower prices for crude oil.

The RSI (relative strength index) which is a momentum oscillator that measures accelerating momentum, moved lower with price action reflecting accelerating negative momentum. The current print of 34, is on the lower end of the neutral range just above the oversold trigger level of 30.

The gasoline crack, which is calculated by subtracting gasoline prices from crude oil prices, reflects the margins made by refiners.  During the spring and summer gasoline generally drives petroleum prices, and in the winter, it is usually heating oil. The crack, appears to be forming a head and shoulder reversal pattern which count foreshadow lower prices for gasoline and crude oil.  Most of the movement in gasoline is generated by crude oil, but if margins are high, then demand is usually high and refiners are purchasing crude oil to make gasoline.  If the crack moves lower and the head and shoulder pattern eventually comes to fruition, then it will likely drive crude oil prices lower.

OPEC Output Has Declined but only Offset January’s Increase

In January, ahead of their agreement to cut production, OPEC members increased production by 70 million barrels, putting total OECD stocks above the 3-billion-barrel mark.

The increase was broad based and came because ahead of the ramp up in OPEC production at the end of last year just before members had to make cuts in January. Since the lag time from when the oil was produced and when it made its way to the market meant that inventories in the U.S., continued to increase in the early part of 2017 even after OPEC countries cut their output. This is because the output that was produced prior to the cuts was still coming to the United States, flooding the market. According to the IEA, inventories in OECD countries finally started to drawdown in February and March, although gains in the U.S. through the end of the first quarter meant that the total decrease was rather modest.

While inventories have declined recently, stocks are bloated. The decline in U.S, inventories means that the overall drop in global inventories is likely to accelerate in the next month or two.  The question is whether this reduction in global inventories is enough to convince OPEC members that they should extend their production quotas into the second half of 2017.

Unfortunately, it might not be fast enough for OPEC to declare victory in June. When OPEC members meet in late May, storage levels in OECD countries might be back right where they started at the beginning of 2017. The drawdowns between February and June will have only managed to cut the equivalent of what was added in January.