Crude Oil Price Analysis for December 8, 2017

Crude oil prices rebounded on Thursday after tumbling on Wednesday following a mixed inventory report.  While imports came in lower than expected, there was a substantial build in gasoline stocks as refiners are operating at levels that are nearly 4% higher than last December. Refining margins are robust incenting refiners to run at elevated levels, despite lower volumes of crude that are hitting U.S.  shores.  With geo-political risks beginning to escalate in the mid-east, there could be less oil available in 2018.

Technicals

Crude oil prices rebounded on Thursday after tumbling in the wake of a mixed inventory report.  Prices found a foothold just above support near an upward sloping trend line that connects the lows in August to the lows in October that comes in near 55.50.  Resistance on crude oil is seen near the 10-day moving average at 57.59. Prices remain in an uptrend but are beginning to form a topping pattern. Momentum has recently turned negative as the MACD (moving average convergence divergence) index generated a crossover sell signal. The MACD histogram is printing in the red with a downward sloping trajectory which points to lower prices. The RSI (relative strength index) which is a momentum oscillator that measures accelerating and decelerating momentum, found support and is printing a reading of 52, which is in the middle of the neutral range and reflects consolidation.

Saudi/Qatar Showdown

The 38th Gulf Cooperation Council (GCC) Summit resulted in a showdown between Qatar and its Saud-led alliance counterparts. Saudi King Salman decided to send a lower diplomatic delegation in his place, chipping away at the stability in the region. Additionally, in an unexpected move, Saudi Arabia and the United Arab Emirates announced that the two countries have formed a new economic and military partnership, separate from the GCC. Arab analysts have already indicated that this could deal a deadly blow to the role of the GCC. The direct impact wasn’t clear within the first few hours of the GCC meeting.

Riyadh and Abu Dhabi have clearly been paving the way for a confrontation with Iran and Qatar for several months, while also setting up major economic projects in their own countries as they coordinate military operations in Yemen, Syria and Libya. Two weeks ago, Emirati analysts indicated that the UAE would take a primary role in regional conflicts, which has now come to the surface more clearly.

Canada Productivity Fell

Canada productivity fell 0.6% in Q3 quarter over quarter after a revised 0.2% dip in Q2. The decline in Q3 was marginally more pronounced than expected. GDP grew 0.3% in Q3 quarter over quarter after the 1.2% rise in Q2 while hours worked expanded 0.9% after a 1.3% jump. Unit labor costs surged 1.2% in Q3 quarter over quarter after falling 0.7% in Q2 and slipping 0.2% in Q1. The bounce in unit labor costs during Q3 was the largest increase since Q1 of 2015’s 1.6% gain, and tracks the pick-up evident in the labor force survey’s average weekly earnings measure. The acceleration in compensation costs growth during Q3 and into early Q4 suggests labor market slack is rapidly being absorbed by a production side of the economy that is in full use of its resources.

Canadian Building Permits Grew

Canada building permits values grew 3.5% in October after a revised 4.9% bounce in September. Residential permit values improved 2.3%, with single units up 1.6% and multiple units rising 3.0% in value. Non-residential permit values expanded 5.5%. Canada’s housing market has seen some moderation this year in select regions amid regulations designed to cool housing. But this report provides a reminder that the combination of lean mortgage rates, strong employment and solid economic growth remain powerful drivers of housing demand and construction. In yesterday’s announcement, the BoC noted that “Housing has continue to moderate, as expected.” Further moderation from elevated growth rates is expected for 2018, as fresh housing regulation take effect in January. Moreover, the base-case remains for the BoC to increase the policy rate in 2018, beginning in March.