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Crude Oil Price Analysis for February 2, 2018

By:
David Becker
Published: Feb 1, 2018, 19:06 UTC

Crude Rebounds as Dollar Slides

Crude Oil

Crude oil prices climb more than 1% on Thursday rebounding from Wednesday’s decline.  Prices were buoyed by a weaker dollar and news that Goldman Sachs increased its forecast for Brent for 2018 above $80 per barrel.  Yesterday’s inventory data showed that imports declined, but U.S. Production rose which resulted in a build in crude oil and a draw in products.

Technicals

Crude oil prices rebounded above 65.50 mid-day, and are poised to test the January highs at 66.66. A break above this level would lead to a test of target resistance near the Fibonacci retracement level at 69.17. Prices were able to pierce through former resistance now support near the 10-day moving average at 64.89.  Momentum remains negative as the MACD (moving average convergence divergence) recently generated a crossover sell signal. The MACD histogram is printing in the red with a downward sloping trajectory which points to lower prices.

Imports Dropped

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 Inventories Increased

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.

Japanese Manufacturing Surged

The Japanese manufacturing sector gained further momentum at the start of 2018. Output and new order growth rates accelerated, while businesses raised employment amid rising backlogs of work. Robust demand also encouraged firms to pass on part of the sharp rise in cost burdens to customers. In line with stronger business confidence, firms increased input buying and were less cautious over inventory levels. The headline Nikkei Japan Manufacturing Purchasing Managers’ increased to 54.8 in January, up from 54.0 in December.

Chinese PMI Data was Disappointing

The Caixin/Markit manufacturing Purchasing Managers’ Index for January came in at 51.5. Economists expected the private Caixin/Markit PMI to come in at 51.3 in January versus 51.5 in December. Growth was supported by increases in total new work and new export sales, Caixin and Markit said in a joint press release. Even though sub-indices reflect improving conditions in output, overall new business and new export orders increased at a slower pace than a month ago. The Caixin/Markit survey focuses on small and mid-size businesses in China and comes after the world’s second-largest economy reported official January manufacturing PMI on Wednesday that hit an eight-month low. The official manufacturing Purchasing Managers’ Index for the month missed expectations, coming in at 51.3.China’s economy surprised on the upside in 2017, but economists expect a managed slowdown this year to hit growth.

Productivity in the U.S. Declined

U.S. preliminary Q4 nonfarm productivity rate posted a 0.1% decline following the 2.7% Q3 gain, with Q2 up 1.5%, and Q1 up 0.1%. Unit labor costs rose 2.0% last quarter after declining 0.1% in Q3, a 1.2% drop in Q2 and a 4.8% Q1 surge. Output slowed to a 3.2% pace versus 4.0% previously. Employee hours more than doubled to a 3.3% rate versus 1.2%. Compensation per hour came in at a 1.8% pace from 2.7%. The price deflator rose to 2.4% from 2.0%. Real compensation dropped 1.8% after rising 0.6% (revised from 0.7%).

FOMC Holds Steady

While the Fed held fast on its policy settings as expected, it did burnish its outlook on the economy and inflation on the margin. This left the markets with a slightly more hawkish takeaway when viewing the statement in its entirety. On the growth outlook, the Fed took a more confident posture, while on inflation it upgraded its assessment as well. It thereby implied that its gradualist normalization path will remain on schedule with the next hike likely in March, barring any unforeseen major detours in the markets.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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