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Crude Oil Price Analysis for December 6, 2017

By:
David Becker
Published: Dec 6, 2017, 19:23 UTC

Large Gasoline Build Weighs on Crude oil Prices

Crude Oil

Crude oil prices dropped more than 2% on Wednesday following a mixed inventory report that saw a larger than expected build in products such as distillate and gasoline that was offset by a substantial draw in crude oil inventories.  Refineries continued to operate a robust level, producing more product than the previous week while imports declined nearly 5% year over year.  Increasing U.S. production was likely the catalyst for the decline rising another 25K this week, and increasing to 9.707 million barrels a day.

Technical

Crude oil prices tumbled more than 2% on Wednesday, and are poised to test target support near an upward sloping trend line that comes in near $55. Resistance on crude oil is seen near the 10-day moving average at 57.75. A larger than expected build in gasoline inventories and stronger U.S. production were blamed for the decline.  Momentum remains 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.

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Refineries are Operating at Elevated Levels

The Energy Information Administration reported that U.S. crude oil refinery inputs averaged 17.2 million barrels per day during the week ending December 1, 2017, 192,000 barrels per day more than the previous week’s average. Refineries operated at 93.8% of their operable capacity last week which is substantial given the time of year, up more than 4% year over year.  Refinery cracks remain robust incenting refiners to run at elevated rates.

Over the last month, crude oil imports averaged 7.6 million barrels per day, 4.9% less than the same month last year. This likely lead to the crude oil draw despite an increase in production from U.S. oil producers

Inventories Were Mixed

On the inventory front, U.S. crude oil inventories decreased by 5.6 million barrels from the previous week. This compared to expectations that crude oil would decline by 3.4 million barrels. Gasoline inventories increased by 6.8 million barrels last week, but expectations were for a rise of 1.7 million barrels. Distillate fuel inventories increased by 1.7 million barrels last week but are in the lower half of the average range for this time of year. Expectations were for a rise of 1-million barrels. Total commercial petroleum inventories decreased by 2.5 million barrels last week, according to the EIA.

Demand Remains Strong

Demand remains strong. The EIA reported that total demand over the last month period averaged about 19.7 million barrels per day, up by 0.5% from the same period last year. Over the last month, gasoline demand averaged 9.1 million barrels per day, up by 0.5% from the same period last year. Distillate fuel demand averaged over 3.9 million barrels per day over the last four weeks, up by 0.6% from the same period last year.

The API reported a Large Build in Gasoline

The American Petroleum Institute reported a large draw of 5.481 million barrels of United States crude oil inventories for the week ending December 1, while analysts had expected a drawdown of 3.507 million barrels. Gasoline inventories, on the other hand, saw a massive build this week of 9.196 million barrels for the week ending December 1, compared to forecasts of a much smaller 1.145-million-barrel build.

Productivity in the U.S. Remains Strong

The unrevised 3.0% U.S. Q3 productivity growth rate defied a lift from the expected Q3 boost in the output index to 4.1% growth after a 3.9% Q3 rate, as suggested by the last GDP report, thanks to an offsetting Q3 boost in hours-worked growth to 1.1%. There was hourly compensation growth of a downwardly-revised 2.7% pace in Q3, after a big trimming in Q2 growth to 0.3% from 1.8%, as were both implied by the Q3 income data. The mix left a -0.2% Q3 growth rate for unit labor costs, following a -1.2%  Q2 clip.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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