Crude Oil Price Analysis for February 22, 2018

Crude oil prices moved lower as the firmer dollar over the last three sessions has introduced a sell-into-rallies theme, in a market where the speculative net long exposure has been running at or near record highs. Prices bounced off their lows following an unexpected draw in crude oil inventories reported by the API.

Technicals

Crude oil prices initially moved lower as the dollar gain traction in the wake of the hawkish Federal Reserve meeting minutes. Prices bounced at support near the 10-day moving average near 60.71. Resistance is seen near Tuesday’s highs at 62.74. Momentum is turning neutral as the MACD (moving average convergence divergence) histogram prints in the black with a flattening trajectory which points to consolidation.

The American Petroleum Institute reported an unexpected small draw

The American Petroleum Institute reported an unexpected small draw of 907,000 barrels of United States crude oil inventories for the week ending February 16. Analysts had expected a small build of 1.333 million barrels in crude oil inventories, instead. Last week, the American Petroleum Institute reported a build of 3.947 million barrels of crude oil, along with a build in gasoline inventories of 4.634 million barrels. This week’s data is more optimistic, with the API reporting not only a surprise draw for crude oil, but a modest gasoline build of 1.468 million barrels, which was largely in line with analyst forecasts that had the build pegged at a 1.229-million-barrel build.

U.S. Markit manufacturing PMI rose

U.S. Markit manufacturing PMI rose 0.4 points to 55.9 in the flash February print. The January index also rose 0.4 points to 55.5. It was 54.2 last February. This is the best reading since October 2014. New orders increased to 57.8 from 56.8 and is the highest since September 2014. The services index jumped 2.6 points to 55.9, after dipping 0.4 points to 53.3 in January. It was 53.8 a year ago. This is the highest since August. The employment component rose to 54.4 from 53.4 and is the best since August as well. Prices charged were up to the highest since September 2014. The flash composite index climbed to 55.9, up 2.1 points, after sliding 0.3 points to 53.8 last month. The February 2017 print was 54.1. This is the highest since November 2015. New orders and employment increased too. All around it’s a very solid report, lifting the dollar and putting downward pressure on crude oil.

U.S. January existing home sales dropped

The 3.2% U.S. January existing home sales drop to a 5.38 million rate extended a December decline to a 5.56 million pace from a cycle-high 5.72 million in November, leaving a slightly larger than expected sales give-back from a lofty Q4 level, with a likely further hit from cold weather that started in late-December.  There was a seasonal January decline of 2.4% for the median price, and a 4.1% inventory bounce after a big 12.3% December drop. There was a 7% contraction rate for existing home sales in Q1 with a hit from cold weather, alongside some unwind of the Q4 surge that left a robust 15% clip that reversed contraction rates of 10% in Q3 and 4% in Q2. There are cyclical increases of 56% for existing home sales and 44% for pending home sales and the MBA purchase index, versus larger cyclical gains of 131% for new home sales, 177% for housing starts, and 172% for permits.

Dallas Fed hawk Kaplan said Fed should hike rates

Dallas Fed hawk Kaplan said Fed should hike rates “gradually and patiently” this year, but waiting too long would increase the likelihood of recession. He sees GDP growth of 2.50-2.75% and unemployment falling to 3.6% by the year’s end, while making progress toward the 2% inflation goal. Kaplan expects the growth boost from the tax cuts to fade in 2019-20, while arguing that it would be preferable to moderate debt/GDP growth at this point in the economic cycle. Indeed, he warns that the U.S. should be actively seeking ways to reduce growth of government debt.