Crude Oil Price Analysis for February 19, 2018

Crude oil prices reversed course and moved higher following an increase in U.S. rig counts that shows that production should continue to rise.  Baker-Hughes released its weekly oil rig count report, revealing a 7-rig increase, to 798, and up 201 from a year ago. This marks the 4th consecutive week of increases, and indicates further gains in U.S. production, which last week topped at a record 10.25 million barrels per day.

Technicals

Crude oil was able to recapture resistance which is now support near the 10-day moving average at 61.19.  Resistance is seen near the February highs near 66. Negative momentum has decelerated as the MACD (moving average convergence divergence) histogram prints in the red with an upward sloping trajectory which points to consolidation.

Inventories Were Mixed

The Energy Information Administration reported that U.S. crude oil inventories increased by 1.8 million barrels from the previous week. This was less than expectations. At 422.1 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Generally, expectations would be for a quicker accelerating in the decline in crude oil inventories.

Gasoline inventories increased by 3.6 million barrels last week, more than expectations. Distillate fuel inventories decreased by 0.5 million barrels last week in line with expectations. Total commercial petroleum inventories decreased by 2.7 million barrels last week.

Demand remains very strong. The EIA reported that total products demand over the last month averaged 20.7 million barrels per day, up by 6.9% from the same period last year. Over the last four weeks, gasoline demand averaged 9.0 million barrels per day, up by 6.5% from the same period last year. Distillate fuel demand averaged over 4.0 million barrels per day over the last four weeks, up by 6.3% from the same period last year.

Sentiment Bounced

The Michigan sentiment bounce to 99.9 from 95.7 in January brought us back toward the 13-year high of 100.7 in October, and above the previous 13-year high of 98.5 from January of 2017. Friday’s rise narrowed the recent under-performance of Michigan sentiment relative to other confidence gauges. The IBD/TIPP index popped to a 56.7 new cycle-high from 55.1 in January and 51.9 in December. The weekly Bloomberg Consumer Comfort index surged to a cycle-high 57.0 in the second week of February, versus a prior cycle-high of 54.6 in the last week of January, leaving a rise in monthly averages to the 55.3 area from a 53.9 prior cycle-high in January. February consumer confidence should rise to 127.0 from 125.4 in January and 123.1 in December, versus a 17-year high of 128.6 in November. There is modest upside revision-risk for the final February Michigan sentiment figure given an upward trend in available monthly and weekly measures. There was a 1.3 boost in the final January report. We saw a 0.2 average downward revision in 2017, but average upward revisions of 0.1 in 2016, 0.4 in 2015, 0.6 in 2014 and 1.8 in 2013.

The U.S. trade price report beat estimates

The U.S. trade price report beat estimates with strength in core prices and ex-agricultural export prices in particular, alongside the expected big gain in oil import prices, though with a downtick for food export prices. Price gains in recent years have been skewed toward exports. The trade price data, alongside January strength in the CPI, PPI and hourly earnings data, add to the narrative of rising inflation, though we read little into these concurrent gains beyond the uptrend in most year over year price pressures into mid-year due to hard comparisons. More generally, trade price firmness since 2016 has been led by a drop in the dollar and recovering growth abroad, and we now face an upgrade in U.S. growth prospects with the new tax and budget laws. Production restraint from OPEC and December supply disruptions lifted oil prices into January, though soaring U.S. shale output has depressed petroleum prices into February as the U.S. fills the OPEC void. Export prices ex-agriculture and import prices ex-petroleum are poised for respective gains in 2018 of 4% and 3%, following respective gains of 2.7% and 1.3% in 2017 and 1.4% and 0.3% in 2016.

The U.S. housing starts report beat estimates

The U.S. housing starts report beat estimates with big January gains for starts and permits after a small December starts boost, and a smaller than expected January completions decline. The surprisingly big gains were led by multi-family units and activity in the northeast, where we possibly had some “catch up” before month-end after a cold start to January and a weak Q4 for the region, as Q4 activity was skewed toward the south and west. We saw a firm 0.9% rise in starts under construction that leaves a robust Q4-Q1 outlook for the housing sector after a disappointing Q3.