Crude Oil Price Analysis for December 14, 2017

Crude oil prices were trading lower on Wednesday following a mixed inventory report, which showed stronger U.S. oil production and higher week over week imports.  A large build in gasoline inventories were offset by a robust draw in crude, which means that refiners are trying to take advantage of elevated crack levels and running at high operating levels.  While gasoline exports are continuing to rise, in conjunction with demand, the most recent report shows refiners stocked up on gasoline inventories.

Technicals

Crude oil prices moved lower slicing through short-term support near the 10-day moving average at 57.28, which is now seen as resistance.  Target resistance is seen near a downward sloping trend line that comes in near 58.70. Target support is seen near an upward sloping trend line that comes in near 56.20. Prices are trading sideways and forming a top after breaking out in October above the 54 handle. Momentum remains negative as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to lower prices.

U.S. Production is Rising

Data reported by the Energy Information Administration shows that refineries operated at 93.4% of their operable capacity last week, up more than 3% year over year. Gasoline production increased last week, averaging over 10.1 million barrels per day, which is generally the highs that are experienced during the summer months.  The EIA recently reported a surge in gasoline exports, but this level of production is high if product has nowhere to go. Distillate fuel production decreased last week, averaging over 5.2 million barrels per day.

U.S. oil production continued to increase this past week climbing to 9.78 million barrels a day, which is a multi-decade high. This comes as U.S. crude oil imports averaged about 7.4 million barrels per day last week, up by 161,000 barrels per day from the previous week. Despite an uptick this week for imports, crude oil imports averaged over 7.4 million barrels per day, 3.3% less than the same month last year.

Inventories Were Mixed

The increase in gasoline product saw U.S. commercial crude oil inventories decreased by 5.1 million barrels from the previous week, according to the Department of Energy. Finally, crude oil inventories have dipped into the middle of the average 5-year range. The offset of this draw was that gasoline inventories increased by 5.7 million barrels last week. Distillate fuel inventories declined 1.4 million barrels last week and remain in the lower half of the average range for this time of year. The EIA reported that total commercial petroleum inventories decreased by 2.6 million barrels last week.

Demand Remains Strong

Demand remains strong. Total product demand over the last month averaged over 19.8 million barrels per day, up by 2.1% from the same period last year. Over the last month, gasoline demand averaged 9.1 million barrels per day, up by 1.6% from the same period last year. Distillate fuel demand averaged over 4.0 million barrels per day over the last month, up by 2.3% from the same period last year.

API Data Showed a Draw in Crude Oil

API data showed a 7.4-million-barrel drawdown in U.S. crude inventories in the latest reporting week, much bigger than the median forecast for a 3.8 million decline. There is also news that UK’s biggest pipeline form North Sea oil and gas fields has been closed for up to fours weeks as repairs are made. The pipeline carries 450k barrels per day, and had to be closed after cracks were discovered.

U.S. CPI Rose Driven by Energy Gains

U.S. CPI rose 0.4% in November with the core rate 0.1% higher. There were no revisions to October where the headline rate rose 0.1% and the ex-food and energy component was up 0.2%. On an annual basis, CPI accelerated to 2.2% year over year from 2.0% year over year. But the core rate slowed to 1.7% year over year versus 1.8% year over year. A 3.9% surge in energy prices was the culprit behind the strength in the headline gain and more than reversed the 1.0% October decline. Transportation costs were also firm, posting a 1.9% gain versus -0.5%. Prices across the rest of the report were rather tame. Housing costs edged up 0.2%. Services prices were up 0.2%. Meanwhile, food prices were unchanged. Medical care was also flat. Apparel prices declined 1.3%.

U.S. MBA Mortgage Market Dropped

U.S. MBA mortgage market index sank 2.3% along side a 1.1% decline in the purchase index and a 2.5% stumble in the refinancing index for the week ended December 8. The average 30-year fixed mortgage rate rose 1 basis point to 4.20%, but remained at a comfortable level despite building tax cut expectations, a solid November jobs report and short odds of a Fed hike this afternoon. The housing sector has continued to show some resilience in the post-hurricane rebuilding season this fall/winter and the Fed pause in November allowed the markets to adjust to that temporary impact.