Crude Oil Price Analysis for February 12, 2018

Crude oil prices experienced one of the worst weeks in the past year, dropping nearly 8% in early trade on Friday.  Strong production data reported this week by the Department of Energy, was likely the catalyst for the selloff although the general risk off trade also played a role.  An overleveraged market environment that was betting on continued low volatility was unwound during the week, leading to a selloff in all riskier asset.  There continues to be a tug of war between OPEC and U.S. producers. While imports continued to drop this week, U.S. production topped 10-million barrels a day this past week.  The accelerating momentum has prodded the EIA to increase its production estimates in its annual energy report.

Technicals

Crude oil prices tumbled through support, breaking through the 59 level, after easly moving through the 60-handle.  Prices are poised to test support near the 50-day moving average at 57.22.  Resistance is seen near former support which is an upward sloping trend line that comes in near 61.75. 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. The RSI (relative strength index) moved lower with price action and is fast approaching the oversold trigger level of 30.

Rig Counts Increased

Baker Hughes reported a staggering increase to the number of rigs. The number of active oil and gas rigs increased by 29 to Baker Hughes data. This brings the total number of oil and gas rigs to 975, which is an addition of 234 rigs year over year. The number of oil rigs in the United States rose this week by 26 with the number of gas rigs increasing by 3. The number of oil rigs now stands at 791 versus 591 a year ago. The number of gas rigs in the US now stands at 184, up from 149 a year ago.

EIA Increase Production Estimates

In its annual energy outlook, the EIA revised its production estimates to show that the average for 2018 will surpass the 9.6 million barrels per day record set in 1970 but will plateau between 11.5 million barrels of oil and 11.9 million barrels a day. The continued development of tight oil and shale gas resources supports growth in natural gas liquids production, which reaches 5.0 million barrels a day in 2023 which is approximately a nearly 35% increase from the 2017 level.

Production levels will depend on several factors including price.  Continued economic growth will keep demand steady and the standoff between the U.S. and OPEC will determine if prices can remain near $60 per barrel on a WTI basis.  The EIA believe that U.S. crude oil production will level off between 11 million and 12 million barrels per day as tight oil development moves into less productive areas and as well productivity declines. Declines in imports have been outpacing the rise in production levels which has kept oil prices buoyed.  The EIA forecasts that the U.S. will be a net exporter by the early 2020’s following 66-years of being a net importer.

The Japanese Tertiary Index Dropped

The Japanese tertiary activity index dropped 0.2% month-over-month in December, reversing a 1.1% rise in November. Meanwhile, economists had expected a 0.2% increase for the month. Among the individual components of the survey, activity was down for information and communications, finance and insurance, transport and postal activities, living and amusement-related services, retail trade and real estate. At the same time, activity was up for wholesale trade, business-related services, medical, health care and welfare, electricity, gas, heat supply and water, goods rental and leasing.

The Fed’s George Discuss the Needs for Gradual Hikes

Fed’s George said it’s important to continue hiking rates gradually, in comments from late Thursday, especially with fiscal stimulus on board. She still believes 3 tightenings are reasonable estimates for this year and next. Remember George is one of the more hawkish on the FOMC but is not a voter this year. She added higher wages are a welcome development, referring to last week’s increase in earnings.

Canada employment plunged 88.0k in January after the 64.8k gain in December

Canada employment plunged 88.0k in January after the 64.8k gain in December. The decline was contrary to expectations but is not a shock given the elevated risk for a pull-back following the sizable gains in November and December. Also, the drop was the largest one month decline since 2009. The unemployment rate rose to 5.9% in January from 5.8%. Yet full time employment grew 49.0k after a 23.2k rise. The driver of job losses was part time jobs, which fell 137.0k after a 41.6k increase.