Crude Oil Price Analysis for February 14, 2018

Crude oil prices moved lower but tested support and failed to generated a fresh lower low for February.  With U.S. production gaining traction the global oil market could slip into deeper oversupply on the back of non-OPEC production.  Inventory data continues to show declines in imports, a pull back in refiner operations, and rising crude oil inventories.  The seasonality of the refining business shows downward operations and rising crude stocks until the middle of April when refiners begin to increase gasoline production.

Technicals

Crude oil prices rebounded off session lows, unable to take out the lows seen on Friday at 58.77.  Additional support is seen near the 50-day moving average at 57.41.  Resistance on crude oil is seen near an upward sloping trend line that was former support now resistance at 62.10.  Additional resistance is seen near the 10-day moving average at 62.41.  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 sideways just above the lower end of the neutral range which reflects consolidation.

Oversupply is Coming According to the IEA

It appears that the global oil market could slip into deeper oversupply on the back of non-OPEC production led by the United States, according to the International Energy Agency. The agency said that “The main factor is US oil production”. In just three months to November, crude output increased and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader.”

Commenting on the recent reversal in oil prices, the authority attributed it to profit-taking and a market correction spanning all industries, adding that oil’s fundamentals supported a decline in prices. The situation in the United States suggests that history is repeating itself and what we are seeing now is indeed a second shale revolution that could bring petroleum liquids production on par with global demand growth. But that’s not all. The IEA noted the recent shipment of the first U.S. condensate cargo to the UAE, which although unique might prove to be the start of a new era in international oil trading patterns.

Small Business Optimism Rose in January

U.S. NFIB small business optimism index rose 2 points to 106.9 in January, after falling 2.6 points to 104.9 in December. The January reading is just off the 107.5 print from November, which was the highest since 1986, and is one of the highest in the history of the report going back to 1974, supported by the tax reform package. According to the report, there was a record number of respondents saying it was a good time to expand. Some 41% of respondents, up from 37% in December, expect the economy to improve.

Trump budget will slash entitlement programs

Trump budget will slash entitlement programs by $1.7 trillion  in its preview of the White House summary of the plan, in order to make ends meet on planned defense, infrastructure, veterans and opioid crisis spending increases. This would include a $237 billion cut to Medicare and other unspecified mandatory spending programs. The White House release said its plan would cut the deficit by $3 trillion over 10-years and reduce the debt/GDP ratio. After the recent $300 billion 2-year deal, plus $81 billion in disaster relief, the report suggests this latest proposal will be DoA, though it could be a starting point for negotiations. In addition to heavier defense spending, cuts may be again targeted at the EPA, State Department and DHHS. GDP growth is estimated to average 3.2% in 2019-20 for calculation purposes. Stocks are largely holding on to their 1% rebound, while yields moved off highs, the dollar index is slightly lower near 90.25 and the VIX equity volatility is 6% lower near 27.31 compared to a relatively tight 29.70-25.49 range.