Crude Oil Price Analysis for July 5, 2017

Crude prices remain buoyed in the wake of Friday’s Baker-Hughes rig count report revealed the first decline in 23-straight weeks, indicating U.S. production may be peaking. Offsetting this, a Reuters report indicated OPEC output rose by 280k barrels per day in June, largely due to production hikes from Libya and Nigeria, which may well limit crude’s upside price potential going forward.

Technicals

Crude oil prices were nearly unchanged on Tuesday as the U.S. markets were closed for the Independence Day holiday.  Prices are poised to test the 50-day moving average at 47.42.  Support is seen near the 10-day moving average at 44.57.  Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal.  This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread.

OPEC Output Remains High

OPEC oil output reached a 2017 high in June as Libya and Nigeria continue a production recovery despite the bloc’s efforts to ease a global supply glut, the results of a new Reuters survey shows. Saudi Arabia and Kuwait have shouldered most of the cuts to ensure the bloc sticks to its commitment to reduce production by 1.2 million barrels per day. Compliance to the deal will remain in the 90-95 range, despite the production increase this month

While Goldman Sachs sees prices move lower, it appear that Citi believes prices have bottom. One day after Goldman issued a confused, rambling note in which the bank cuts its 3-month WTI price target by $7.50 from $55 to $47.50 saying “Spot WTI oil prices at $43 per barrel are now back to November pre-OPEC deal levels, down from $52 per barrel just a month ago. Citi increased their target.

ISM Manufacturing Surged to a 3-Year High

The U.S. ISM surged to 3-year high of 57.8 from 54.9 in May and a 4-month low of 54.8 in April, versus a slightly lower 57.7 figure in February. We saw a 47.9 expansion-low in December of 2015 and a 60.0 cycle-high in February of 2011. The producer sentiment surveys have proven slow to moderate from lofty Q1 levels, and today’s ISM managed to set a new recent high, with headline and component strength across the various surveys that signals ongoing upside risk for employment and output, as discussed in today’s commentary on risks for our 185k June nonfarm payroll estimate. The ISM-adjusted average of the major producer sentiment surveys is bouncing back to 56 in June from 55 in May but the same 56 in April, versus a 57 cycle-high in February and March, following a steep climb in the average from 50 in 4 of the 5 months through September. We saw a 56 prior cycle-high in February and March of 2011. Note that today’s jobs index popped to 57.2 from 53.5 in May, a 6-month low of 52.0 in April, and a 6-year high of 58.9 in March, versus a 46.2 expansion-low in January of 2016. We saw a 61.3 cycle-high in June of 2011.

U.S. Construction Spending was Unchanged

U.S. construction spending was unchanged in May after sliding 0.7% in April (revised up from -1.4%), which was the first and only decline of the year (March was revised down to 0.3% from 1.1%). Residential spending dipped 0.5% from a 0.3% gain (revised up from -0.9%). Nonresidential spending rose 0.3% from -1.5% (revised from -1.7). Private spending declined 0.6% from -0.2% (revised from -0.7%). Public spending increased 2.1% from -2.7% (revised from -3.7%).

Eurozone June PMI was Revised Higher

Eurozone June manufacturing PMI revised slightly higher to 57.4 from 57.3 reported initially. The rise from 57.0 in May confirms the renewed acceleration in the pace of expansion in the sector, and Markit reported not only that growth rates improve in the majority of Eurozone nations, but also that Greece returned to expansion, which is encouraging. Job creation meanwhile stayed close to the record from May Production and new orders expanded at the quickest rates since the opening half of 2011, suggesting ongoing growth ahead and adding to the arguments for the ECB to starting taking the foot off the pedal once the current QE schedule ends at the end of the year.