Crude Oil Price Analysis for August 18, 2017

Crude oil prices rebounded from session lows, moving higher on the session following news that Saudi Arabia’s crude oil exports in June dropped to their lowest level in 33 months. Saudi exports likely fell further in July according to the JODI, and should continue to fall in August given the recent announcements by the Kingdom that they would cut off exports to the United States. Saudi crude oil exports fell in June by 35,000 barrels per day from May to hit a 33-month low at 6.89 million barrels per day, while crude oil stockpiles hit a 65-month low, or the lowest since January 2012, at 257 million barrels.

Technicals

Prices dropped early but rebounded after hitting support near the 50-day moving average at 46.45. Resistance is seen near the 10-day moving average at 48.41. Momentum is negative as the MACD (moving average convergence divergence) index recently generated a crossover sell signal. The MACD histogram is printing in the red with a downward sloping trajectory which points to lower prices for crude oil. Prices are stuck in a large topping pattern, where there have been lower highs in 4 of the first 8-months of the year. Unless prices are able to make new highs above 50, short will come back in and push the crude oil market lower.

Jobless Claims Fell

Stronger than expected jobless claims helped buoy the dollar which has capped the oil prices rebound. The 12k U.S. initial claims drop to 232k in the BLS survey week reversed the 4k rise to 244k from 240k at the end of July to leave a tightening swing into August, though claims have trended roughly sideways since June with little in the way of auto retooling distortions. Claims are just above the 44-year low of 227k in the President’s Day week, and well below the 2016 average of 263k. Claims are averaging 237k in August, versus higher prior averages of 242k in July, 243k in June, 241k in May, and 243k in April. Today’s 232k BLS survey week figure undershot recent BLS survey weak readings of 234k in July, 242k in June, 233k in May, and 243k in April. We still expect a 190k August nonfarm payroll rise, with ongoing upside risk from still-firm consumer, producer, and small business confidence despite Q2 drop-backs, a firm path for claims, and a solid 217k average ADP rise in 2017 despite the lean 178k July increase. Vehicle sales and assemblies have remained weak since a big drop in Q1, however, hence creating some headwind for the factory sector.

The FOMC was Somewhat Dovish

FOMC minutes showed definite concerns over inflation, and that gave the report a dovish bias. Meanwhile, most on the Committee preferred to defer the announce balance sheet unwinding until the upcoming September meeting. Most members still expect inflation to pick up over the medium term, and still see a Phillips Curve connection between a tighter labor market and rising wage and price pressures, though a few doubted the validity of the framework. Many causes for the sluggishness in inflation were bandied about, suggesting it’s not just idiosyncratic factors weighing. Some participants believed there was room for the FOMC to be patient on further rate hikes. But others saw inflation moving on a clear path toward the 2% target and were concerned about the effect of a tighter labor market. On the appropriate pace of normalization of the funds rate, the FOMC fell back to acknowledging it would depend on how financial conditions evolved.

Manufacturing is Rebounding

U.S. Philly Fed manufacturing index dipped 0.6 points to 18.9 in August after falling 8.1 points to 19.5 in July and 11.2 points to 27.6 in June. It’s below the 26.6 6-month average, and is down from a high of 43.40 in February, which was the best since 1984. The recent low was a -11.30 from December 2015. The components were mixed. The employment index slipped to 10.5 from 10.9, though the workweek jumped back to 18.8 from 3.8, but is just shy of the 20.5 from June. New orders also climbed to 20.4 from 2.1, but was 25.9 in June. Prices paid edged up to 21.1 from 19.1, while prices received rose to 13.5 from 9.0. The 6-month business conditions index rose to 42.3 from 36.9, with employment at 33.1 from 27.0, new orders at 49.1 from 39.4, prices paid at 34.8 from 46.6, and capital expenditures at 39.2 from 42.0.