Crude Oil Price Analysis for April 20, 2017

Crude oil prices were hammered on Wednesday, with a sharp drop that followed the Department of Energy’s report on inventories. Initially the decline in imports kept prices buoyed, but the robust increase in gasoline inventories, weighed on prices.  WTI has been buoyed by supply constraints which has lifted market sentiment over the past couple of weeks.  Inventories in the United States remain high, as production from U.S. producers have taken the place of OPEC output. Domestic production has increased nearly 300K barrels from a year ago.  Distillate demand continues to remain robust, as foreign needs for diesel are driving exports, but gasoline demand remains lower year over year.

Technicals

Crude oil prices tumbled dropping approximately 4%, with price action accelerating following the EIA inventory report.  Prices sliced through support near the 200-day moving average which is now seen as resistance at 51.34.  Support on WTI is now seen near an upward sloping trend line that connects the lows in August to the low in March and comes in near 47.40.  Additional resistance is seen near the 10-day moving average at 52.33.

Prices are continuing to form a head and shoulder pattern. This is a continuation pattern that occurs at the top of an uptrend.  Prices are in the process of forming the right shoulder, after forming the left should top in October 2016 and the head in January of 2017.  A break of the neckline that is seen near the upward sloping trend line at 47.40, would lead to a test of the August lows at 44 per barrel.

Momentum is turning negative as the MACD (moving average convergence divergence) index is poised to generate a crossover sell signal. This occurs 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 is headed toward the zero-index level which would confirm the sell signal.

The relative strength index (RSI) accelerated quickly and dropped from nearly overbought to the 43 level within a few trading days.  The movement in tandem with price action reflects accelerating negative momentum.

The hourly chart shows that prices dropped nearly $2 per barrel in the final four hours of trading.  The hourly RSI shows that negative momentum accelerated sharply, pushing the index to the 17 level which is below the oversold trigger level of 30. This type of price action could foreshadow a short term correction in prices. The last time the hourly chart was oversold was on April 4, 2017, and prices coincided with current levels.

Momentum as reflected by the hourly MACD is negative, as  the index generated a crossover sell signal and is printing in the red with a downward sloping trajectory which points to lower prices for crude oil.

Inventories Remain Elevated

U.S. crude oil imports averaged over 7.8 million barrels per day last week, down by 68,000 barrels per day from the previous week, allowing crude oil prices to draw in the latest week.  The Energy Information Administration reported that U.S. commercial crude oil inventories decreased by 1.0 million barrels from the previous week. Despite the decline, U.S. crude oil inventories are near the upper limit of the average range for this time of year. Gasoline inventories surprisingly increased by 1.5 million barrels last week.  Expectations were for a 1-million-barrel draw. Distillate fuel inventories continued to decline, decreasing by 2.0 million barrels last week. In aggregate, total commercial petroleum inventories decreased by 1.7 million barrels last week.

Demand is Mixed

Demand in aggregate edged lower.  The EIA reported that total product demand over the last four-week period averaged over 19.7 million barrels per day, down by 0.8% from the same period last year. Gasoline demand averaged over 9.3 million barrels per day, down by 0.7% from the same period last year. Distillate fuel demand averaged 4.3 million barrels per day over the last four weeks, up by 9.9% from the same period last year.

Refineries are Operating at Robust Levels

U.S. crude oil refinery inputs averaged over 16.9 million barrels per day during the week ending April 14, 2017, 241,000 barrels per day more than the previous week’s average. Refineries operated at 92.9% of their operable capacity last week. Gasoline production decreased last week, averaging 9.8 million barrels per day. Distillate fuel production increased last week, averaging just about 5.2 million barrels per day.  The strong demand for distillate fuels outside the United States should continue to buoy prices.