Crude Oil Price Analysis for February 1, 2018

Crude prices rebounded from session lows, bouncing following data from the Department of Energy that showed strong demand but rising inventories.  The EIA reported that production increased by 41K barrels in the latest week, but at 9.91 were below whisper number that expected 10-million barrels of crude production from the U.S. this week. API data showed a 3.2-million-barrel build in U.S. oil inventories in the latest reporting week. Crude stocks in the U.S. have fallen by 5 so far in January. U.S. refinery inputs continue to decline, and are on par with last years operating rate, following a busy fall and early winter in the wake of this year’s hurricanes.  Imports also declined but were offset in U.S. production.

Technicals

Crude oil prices rebounded from session lows but generated a lower low and a lower high which is a reflection of a downtrend. Prices have sliced through support now resistance near the 10-day moving average at 64.71.  Resistance is seen near the January highs at 66.66.  Momentum has turned negative as the MACD (moving average convergence divergence) index generated a crossover buy signal. The occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses below the MACD signal line (the 9-day moving average of the MACD line). The MACD histogram is now printing in the red with a downward sloping trajectory which points to lower prices.

Refineries Reduced Operations

Refineries generally start to pair back operations in January to prepare to produce more gasoline. The Department of Energy reported that U.S. crude oil refinery inputs averaged 16.0 million barrels per day during the week ending January 26, 2018, 470,000 barrels per day less than the previous week’s average. Refineries reduced operations to 88.1% last week. As expected, gasoline production increased last week, averaging 9.6 million barrels per day. Distillate fuel production decreased last week, averaging 4.6 million barrels per day.

Imports Declined

Imports were lower, but U.S. production was higher according to the EIA report on Wednesday. U.S. crude oil imports averaged about 8.4 million barrels per day last week, down by 380,000 barrels per day from the previous week.  Imports have steadily declined lead by reductions in Saudi exports. The EIA reported that over the last month, crude oil imports averaged 8.0 million barrels per day, down 4.3% year over year.

Crude Builds Were Offset by Product Draws

The decline in refinery operations lead to an increase in crude oil stocks and a decline in product stocks that nearly offset the entire build.  The DOE reported that crude oil inventories increased by 6.8 million barrels from the previous week. Gasoline inventories decreased by 2.0 million barrels last week while distillate fuel inventories decreased by 1.9 million barrels last week. Propane inventories decreased by 0.9 million barrels last week and total commercial petroleum inventories increased by 2.1 million barrels last week.

Demand Remains Robust

Product demand remains strong, with both distillate and gasoline demand notching up solid gains. The EIA revealed that total product demand over the last month averaged 20.8 million barrels per day, up by 7.6% from the same period last year. During the past month gasoline demand averaged about 8.8 million barrels per day, up by 7.1% year over year. Distillate fuel demand averaged about 4.2 million barrels per day over the last month, up by 13.3% year over year. The worst performer was jet fuel demand which is up 1.6% year over year.

Australian Inflation Improved Lead by Energy

Australia’s CPI improved to a 1.9% year over year pace in Q4, quarter over quarter,  from 1.8% in Q3. CPI grew 0.6% month over month after an 0.6% gain in Q3. Both the annual and quarterly comparable gains slightly undershot projections. Growth in the annual core CPI measures was steady or faster,  the trimmed mean CPI was 1.8% year over year in Q4 from 1.8% year over year in Q3. The weighted median CPI improved to 2.0% year over year in Q2 from 1.9% year over year in Q4. There is gradual improvement in the CPI, but growth rates remain either just below or at the bottom of the RBA’s 2.0% to 3.0% target band. The report is consistent with widespread expectations for the RBA to hold rates steady next week at 1.50%.