Crude Oil Price Analysis for August 1, 2017

WTI crude notched up a two-month high at 50.15, eased intra-day into the mid-49’s, before moving higher into the close. Oil prices have rallied by nearly 19% since the June-21 low, with news of the OPEC-led technical meeting next week to discuss supply compliance providing the latest underpinning. This follows news last week of a slowing in U.S. oil rig additions and falling U.S. inventories, while Washington is also considering sanctions on Venezuela’s oil sector following the weekend’s alleged sham election there. There is also news of a fire at a major Shell refinery in the Netherlands.

Technicals

Crude oil prices moved higher Monday, but the price action showed volatility. After moving above the $50 mark for the first time in 2-months, prices moved lower to test support near a downward sloping trend line which reflects the breakout level at 49.25. Prices surged into the close. Additional support is seen near the 10-day moving average at 48.14. Resistance is seen near the May highs at 52.38. Momentum remains positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to higher prices.

Rigs Counts are Not Accelerating

Rig counts are rising but the trajectory of growth is slowing. The number of active oil rigs in the United States, according to Baker Hughes, rose this week by 2 rigs. Combined, the total oil and gas rig count in the US now stands at 958 rigs, up 495 rigs from last year, with oil rigs in the United States increasing by 2 and gas rigs increasing by 6 this week. Rigs in Canada added 14 oil and gas rigs this week, following 15 rigs in the prior week. Of the 14 new active rigs this week in Canada, 11 were oil rigs.

Chinese Official PMI Moved Lower in July

The Chinese official PMI stood at 51.4 in July, according to the National Bureau of Statistics said on Monday, down from the previous month’s 51.7 and a touch below the 51.6 forecast. Export orders, which helped Chinese factories stage a strong recovery in June, had ebbed this month, with manufacturers reporting slackening foreign demand. Overall factory production expanded less quickly compared with June. New export orders slipped to 50.9 in July from 52.0 in June, helping drag the index for overall factory orders to 52.8 from 53.1. The PMI reading on the construction sector showed a solid pickup to 62.5 in July from 61.4 in June. Raw material inventories eased just slightly in July, according to the survey, while imports were almost steady and suggested stable domestic demand. Activity at large factories gathered steam in July, with the sub-index for big manufacturers rising to 52.9 from 52.7.

Japanese IP Was Stronger Than Expected

Japanese Industrial production increased 1.6% in June which was slightly better than expectation that production would rise by 1.5%. This follows a 3.6% in Industrial Production reported in May. The drop May was likely a result of the holiday season called Golden Week, which eroded productivity and production. Production increased by 1.9% in the Q2 on a quarter over quarter basis which was the largest increase since 2014. It appears that the automobile industry was the catalyst for the rise in production in June. Production is forecast to increase by 0.8% in July and rise 3.6% in August. On a year over year basis Industrial Production increased by 4.9% compared to expectations of a rise of 4.8%.

 

Canada Inflation Declined in June

Canada’s IPPI tumbled 1.0% in June after a revised 0.1% gain in May. While the pull-back in June overshot projections, the risk was to the downside so the report is not a shock. Indeed, a well-anticipated tumble in energy and petroleum product prices drove the decline in the total IPPI. The IPPI-excluding energy and petroleum products declined 0.7%. The exchange rate was also a major factor, as expected. Excluding the exchange rate move leaves a 0.5% decline in the IPPI. The IPPI slowed to a 3.3% year over year pace in June from the 5.2% year over year clip in May. The raw materials price index dropped 3.7% in June. Crude energy products were lower, notably crude oil was -9.6%, led the decline in the total IPPI. The pull-back in the IPPI and RMPI will give way to month comparable gains in July as energy prices came roaring back, although the loonie will at least partly offset rebounding energy prices.