Crude Oil Price Analysis for February 13, 2018

Crude oil prices engaged in a dead cat bounce attempting to move higher, but failing and closing near the session lows.  Hedge fund traders existed long position in futures and options ahead of last weeks deluge, and likely continued to head for the exits, given the record number of long positions held by managed money.

Technical

Crude oil prices made a higher high and a higher low, but failed to hold on to gains.  Prices settled near session lows which is not a positive sign. Prices broke down last week, closing through trend line support near an upward sloping trend line that comes in near 61.80. Support is seen near the 50-day moving average at 57.32. 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 for crude oil. Prices are nearly oversold with the RSI (relative strength index) printing a reading of 31 just above the oversold trigger level of 30.

OPEC Production Was Lower in January

OPEC is doing its best to offset the gains recently seen in U.S. Production.  The EIA reported last week that U.S. production eclipsed the 10-million barrel a day mark. OPEC’s total crude oil production averaged 32.30 million barrels a day in January, down by 8,100 barrels a dayt from December, as rising production in Iraq, Saudi Arabia, and Libya did not fully offset another massive plunge in Venezuela’s production and a small decline in Angola.

According to OPEC’s Monthly Oil Market Report, secondary sources, the ones the cartel uses to monitor compliance and official stats, pegged Venezuela’s crude oil production in January 2018 at 1.600 million bpd, down by 47,300 barrels a day compared to December 2017. This was the largest monthly decline in oil production among OPEC’s 14-member states. Venezuela, allowed to pump as much as 1.972 million bpd under the deal, surely did not make that cut voluntarily, its economy is collapsing and oil production has been in freefall for months now.

OPEC’s secondary sources’ estimate is lower than last week’s survey which had estimated that Venezuela’s production dropped to 1.64 million barrels a day in January. Venezuela, for its part, self-reported to OPEC that its oil production last month increased by 148,300 barrels a day over December to 1.769 million barrels a day.

Among the OPEC members that raised their production, Iraq was the leader with an increase of 30,200 bpd in January over December, to 4.435 million bpd, according to OPEC’s secondary sources. This is, yet again, higher than Iraq’s quota under the deal, 4.351 million bpd—showing another month in which OPEC’s second-largest producer is either unwilling or unable to comply with the cuts.

Volatility has Increased

Volatility has perked up and as central bankers have begun to take their foot pedal by undertaking quantitative tapering and tightening, volatility has proven that it’s “not dead yet,” but merely dormant until the appropriate moment. Last week the VIX equity volatility index bolted from a nearly 2-year average low of 10.0 to a high of 50.30 before searching for a fresh equilibrium somewhere between that high and 21.17. Kindling for the move was provided by the jump in average hourly earnings in the January employment report, which boosted yields and Fed tightening fears.

The Dollar is Generating Oil Volatilty

So, too, the beleaguered dollar index suddenly has begun to look like a port in a storm following rhetoric from Treasury Secretary Mnuchin saw it tumble as low as 88.42 in January before reviving to the 90.50 area. A stronger dollar weighs on crude prices. True, rising inflation stateside could put the Powell Fed in a defensive crouch if that genie gets out of the bottle. But Fedspeak since the wage jump has been mostly along typical dovish-hawkish lines, raising doubts among some and confirming inflation trends for others, though in the end the earnings strength may have been more weather-related (snow bomb). Collectively the Fed won’t hang its policy hat on a single data point, but will look for corroboration elsewhere such as this week’s timely CPI/PPI inflation duo. On a core year over year basis CPI has been inching up toward 1.8%, while PPI has hit 2.3%, though we expect those to temper to 1.6% and 2.0% respectively in January compared to the Fed’s 2.0% target. And Fed-favored core PCE prices have been averaging 1.5% year over year. Despite the tumult since the January jobs report, the Fed still remains on track to hike in March and likely June, though more market volatility could give rise to the “Powell put.”