Crude Consolidates up 1% for the Week

Oil prices were nearly unchanged consolidating at elevated levels. The Baker rigs oil rig count was which might mean that production could be stabilizing.  Prices are up 1% for the week, and Brent prices hit the 80-mark intraday. Crude oil inventories have rebalanced but the question remains for how long.

Technicals

Crude oil prices consolidated on Friday, having already increased by 1% during the week. Support on crude oil is seen near the 10-day moving average at 70.97. Resistance is seen near the weekly highs at 72.30. Momentum is neutral as the MACD (moving average convergence divergence) histogram prints near the zero-index level with a flat trajectory which reflects consolidation.

Oil Rigs Were Unchanged

US drillers added 1 rig to the number of oil and gas rigs this week, according to Baker Hughes, with oil rigs holding steady and gas rigs adding one. The oil and gas rig count now stand at 1,046—up 145 from this time last year. Meanwhile, neighboring Canada gained 4 oil and gas rigs for the week—the first gain in weeks.

Crude Inventories Have Rebalance but for How Long?

Crude oil inventories have declined over the past 2-years and are now back into balance.  The EIA in their short-term energy outlook believes that inventories will slide into the end of 2018 and begin to rise in 2019. The combination of declining inventories and geopolitics has pushed WTI up to 72-per barrel and Brent above $80.

Oil Inventories Continue to Decline

According to the Energy Information Administration during the 16-months to April 2018, U.S. crude oil and other liquids inventories decreased by 162 million barrels while OECD inventories decreased by 234 million barrels. Over this same period, U.S. and OECD crude oil and other liquids inventories moved from 229 million barrels and 334 million barrels, respectively, higher than their five-year averages to 16 million barrels and 2 million barrels lower.

The Decline in Inventories Lead by OPEC Cuts

Just after the U.S. Presidential election OPEC issued a production agreement which took effect in January 2017. OPEC member countries agreed to reduce crude oil production by 1.2 million barrels per day compared with October 2016 levels and to limit total OPEC production to 32.5 million barrels a day. In addition, Russia agreed to reduce its crude oil production. OPEC extended the agreement in November 2017, with the production cuts remaining in place until the end of 2018.  The effect of the cuts has pushed oil inventories back into balance.

Saudi Arabia has also reduced exports to the United States which has pushed U.S. inventories down to the lower end of the average 5-year range.  Despite this decline in inventories the EIA forecasts that the tightening trend in global petroleum markets will reverse. In the May 2018 Short-Term Energy Outlook, EIA forecasts that both U.S. and OECD petroleum and other liquids inventories will return to surpluses compared with their five-year averages, as OPEC ends their agreement at the end of 2018.

Bloated Inventories has Reversed

The extended period of oversupply in global petroleum markets that began before OPECs November 2016 agreement to cut production has ended, and the large buildup of global inventories during that period has now been drawn down.  While OPEC has put on the breaks, the U.S. has attempted to fill the void increasing daily production to more than 10.7 million barrels a day. With U.S. production bucking up against the 11-million barrel a day mark, any increase in OPEC output will likely drive prices lower.