Crude Oil Price Analysis for December 18, 2017

Crude oil prices edged higher and remains range bound as strong production continues to offset solid demand. Gasoline demand remains robust and export continue to be at elevated levels.  The EIA short-term energy is subdued, as they expect inventories to balance in 2018.

Technicals

Crude oil prices edged higher, hovering just above short-term support near the 10-day moving average at 57.12. Prices appear to be caught in a relatively tight range, floored by an upward sloping trend line that comes in near 56.30, and capped at a downward sloping trend line that comes in near 58.75.  Prices continue to consolidate after breaking out above resistance at 54.  Momentum remains negative as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to lower crude oil prices.

The EIA’s Forecast is Becoming More Bullish

Oil prices are hovering near the $57 level, and appear to be balanced as we head for 2018.  The was confirmed by The Energy Information Information’s forecast for balanced markets, where supply equals current demand.  The EIA believes there will be supply growth that will overwhelm demand but at the same time describes the accelerating demand for products driven by gasoline.  U.S. demand is at record high, but robust production is now allowing Gulf Coast refiners to export gasoline at accelerating levels. It appears that gasoline demand globally is on the rise.

EIA forecasts a mostly balanced oil market in 2018

In its December Short Term Energy Outlook the EIA forecasts an increase in global demand for liquid fuels in 2018, but believes supply growth will outpace the demand trajectory.  Strong production growth from the United States and Non-OPEC countries will make up for any contraction in production generated by the OPEC production agreements. The EIA sees liquid fuels inventories increasing by 50,000 barrels per day in 2018, down from a 290,000-barrel inventory increase forecast in the November which was driven by revisions to Chinese consumption and downward revisions to forecast OPEC. Although OPEC is expected to reduce production, EIA forecasts that higher output from non-OPEC countries which will lead to an increase in world liquid fuels production in 2018.

With growth starting to accelerate, which can be seen in the United States, Europe and Asia, demand will likely continue to rise.  In the U.S. domestic gasoline consumption has been increasing to record levels. U.S. gasoline demand set a new monthly record high of 9.8 million barrels a day in August 2017. To meet the combined record domestic gasoline demand and the increased export demand for multiple petroleum products U.S. refineries have been running at increasingly higher rates. Operating rates are near 94%, compared to 90% this time in 2016. U.S. gross refinery inputs set a record high of 17.8 million barrels for the week ending August 25 and have been higher than the five-year range for a majority of 2017.  With product exports running hot, and growth beginning to accelerate, is hard to see production keeping up with supply despite efforts from the U.S. and non-OPEC producers.

U.S. Manufacturing in NY Edged Lower

U.S. December Empire State manufacturing index fell 1.4 points to 18.0 after dropping 10.8 points to 19.4 in November. October’s 30.2 ties the September 2014 as the best since October 2009. The index is still well up on the 7.6 a year ago. The employment component slid further to 5.1, after declining 3.1 points to 11.5 in November. The workweek improved slightly to unchanged from -0.8. New orders dipped to 19.5 from 20.7. Prices paid increased to 29.7 from 24.6 and prices received edged up to 11.6 from 9.2. The 6-mnth general business index declined to 46.6 from 49.9, with the latter the highest since May 2011. It was 49.7 last December. The future employment index rose to 29.0 from 20.8 with new orders at 41.1 from 53.7, prices paid at 50.0 from 48.5, and capital expenditures at 34.1 from 25.4. The rise in the current and future price components may be the highlight of this mixed report.

Canadian Manufacturing Also Fell

Canada manufacturing shipments fell 0.4% in October after a revised 0.4% month over month gain in September. A 5.0% drop in transportation equipment sales drove the decline in total shipments during October. Transport was in turn led by motor vehicle industry sales, which plummeted 6.7%, partly due to shutdowns at some assembly plants in October. Hence, there may be a temporary component to the decline in motor vehicle production. Excluding sales of motor vehicles and other transportations equipment leaves a 0.5% gain in manufacturing sales values. Total sales volume tumbled 1.5% in October, leaving ample downside risk to our 0.2% October GDP estimate.