Crude Oil Price Analysis for December 15, 2017

Crude oil prices rebounded from support levels, but is trading sideways a mixed inventory report continues to be offset by the volatility that has returned to the UK oil market.  Growth around the globe is beginning to pick up further with the U.S. notching up strong Retail sales gains, while the Peoples Bank of China increased interest rate ahead of the ECB which get rates unchanged.

Technicals

Crude oil prices rebounded from support levels, bounding near an upward sloping trend line that comes in near 56.30.  Resistance on crude oil is seen near the 10-day moving average at 57.22, and then a downward sloping trend line that comes in near 58.75. Prices are consolidating but are forming a bull flag pattern after breaking out above 54, and then trading sideways. 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.

UK Crude Market is a Mess

The UK has been hammered by unfortunate issues. The first incident that made big headlines was the crack in the Forties pipeline in the North Sea, which caused Brent crude oil prices to immediately spike. The outage of a major 450,000 barrel per day pipeline increased volatility and was felt around the world. But the shuttering of the pipeline system will also affect natural gas. At least two UK natural gas fields the Elgin-Franklin and Britannia were forced to shut down because of the outage at the Forties system.

Because the UK doesn’t have nearly as much storage capacity for gas as parts of continental Europe, the disruptions will immediately translate into higher prices. The UK may have to turn to imported LNG, which could push up LNG prices as it competes for cargoes with Asia. That could work to the benefit of U.S. LNG shippers.

China is Putting on the Liquidity Breaks

The Peoples Bank of China nudged rates higher, in an unexpected move that would appear to key off the Fed’s expected rate hike. The PBoC boosted the rates it charges on open market operations and on its medium term lending facility. However, the increases were a modest 5 basis points on the cost of a 7-day and 28-day repo, while the PBOC lifted the cost of funds lent on MLF 5 bps, leaving the 1-year rate at 3.25%. While the rate moves are very small, they do suggest the PBOC is biased toward tightening next year. That perception, of course, may reduce the risk of Yuan depreciation as the Fed continues to tighten next year. The 7-day repo rate has become the new standard for PBoC policy. The 1-year lending and deposit benchmark has been unchanged since 2015, and hence appears to have fallen out of favor with policymakers.

Imports Prices Increased

U.S. November import prices increased 0.7% and export prices were up 0.5%. October’s 0.2% gain in import prices was revised lower to 0.1%, and the flat export price reading from October was bumped up to 0.1%. On a 12-month basis, import prices rose to a 3.1% year over year rate versus 2.3% year over year, while export prices are at a 3.1% year over year rate from 2.7% year over year. For imports, petroleum prices were jumped 7.2% from 0.5%.

Jobless Claims Drop

The 11k U.S. initial claims drop to 225k in the second week of December extended the prior 2k slide to 236k to leave a four-week downtrend from the 252k figure in the week of Veteran’s Day that nearly brought us back to the 44-year low of 223k in mid-October. Tight claims into Q1 with rebuilding and an improved economic backdrop, alongside holiday volatility that begins on Veteran’s Day and extends through January’s MLK weekend. Claims are averaging 227k in December, which is below recent averages of 242k in November and a super-lean 233k in October, versus the hurricane-boosted 269k average in September, and prior averages of 246k in August, and 242k in July.

Retail Sales Were Strong

U.S. retail sales rose 0.8% in November and was up 1.0% excluding autos. October’s 0.2% headline increase was bumped up to 0.5% and the 1.9% September gain was boosted to 2.0%, while the 0.1% ex-auto gain was revised higher to 0.4% and the 1.2% September increase was revised to 1.3%. Excluding autos, gas, and building materials, sales were up a firm 0.8% versus 0.4% previously. Motor vehicles and parts sales dipped 0.2% from a prior 1.2% jump. That was about the only negative number.