Crude Oil Price Analysis for August 25, 2017

WTI oil prices are showing a decline reversing out of a three-day high at 48.42. The high extended the 1.4% gain seen Wednesday following EIA data showing a bigger than anticipated draw in U.S. crude inventories. Prices are likely to remain broadly underpinned as weather forecasters believe Hurricane Harvey in the Gulf of Mexico is likely to strengthen into a Category 2 hurricane by Friday. Oil facilities in the region have already been closing. There is a bearish development in the market narrative mix, with data showing U.S. crude production having hit 9.53 million barrels per day last week, the highest since July 2015.

Technicals

Crude oil prices were unable to gain traction, and imports that come into the Gulf will not be able to find a home, which initially will decrease inventories in the United States.  Next week’s inventory numbers are likely to experience significant volatility following the storm. Prices tested support near an upward sloping trend line that connects the lows in late July to the lows in August and comes in near 47. Resistance is seen near the 10-day moving average at 47.84. Additional resistance is seen near a downward sloping trend line that comes in near 49.40.  The relative strength index (RSI) which is a momentum oscillator that measures accelerating and decelerating momentum, appears to be forming a head and shoulder reversal pattern, which points to a further breakdown that leads to accelerating negative momentum.  The RSI is chopping around at the momentum and printing a reading of 47, which is in the middle of the neutral range and reflects consolidation.

Hurricane Harvey is Threatening Houston

The storm in the Gulf of Mexico could generate havoc on the Houston economy which is the 7^th largest in the United States. The storm is expected to be a category 2 hurricane when landfall occurs early next week. The storm surge, is expected to rise 6-10 feet which could put 4 feet of water on land and severely damage many of the refiners. Rain is expected to hammer the area creating flood situations.  The majority of the refining capacity in the United States is on the Gulf of Mexico, where a larger percentage next to the Houston Ship Channel.  Oil storage facilities and refiners have already been closing down and 4-feet of water could generate a shutdown that could last more than a year.

Jobless Claims Rose

The 2k U.S. initial claims rise to 234k in the third week of August partly trimmed the 12k drop to 232k in the BLS survey week to leave what is still a tight path into August. Claims have trended sideways since June with little observable auto retooling distortion. 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 236k in August, versus higher prior averages of 242k in July, 243k in June, 241k in May, and 243k in April. The 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. Our 190k August nonfarm payroll estimate faces 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.

Fed Speak is Hawkish

A hawkish Fed could lead to a stronger dollar which would further weigh on crude oil prices. On Thursday, Kansas City Fed Governor George continues to support the gradual removal of accommodation. Despite low inflation, she believes there’s still room for a rate hike this year, although she’ll assess upcoming data to see if that view still makes sense. It’s important not to be too focused on a point estimate and lose sight of the broader trends. The economy is also in a good place to begin unwinding the balance sheet. George is one of the more hawkish on the FOMC, though she is not a voter this year.