Crude Oil Price Analysis for January 24, 2018

Crude oil prices moved higher on Tuesday closing near session highs, ahead of Wednesday’s inventory report from the Department of Energy.  With Saudi Arabia pushing for OPEC coordination beyond 2018, and this Friday’s report from Baker Hughes showing the active drilling rigs decline, prices are poised to test further upside. The dollar has also been a catalyst, and Tuesday’s price action in the greenback, shows that the dollar is likely to move lower benefiting further gains in oil prices.

Technicals

Oil is testing resistance near the January highs at 64.89. A break of this level would lead to a test of target resistance near a 50% of the weekly retracement from the move between 112 (2013) and 26 (2016) which comes in near 69.20. Crude has been forming a bull flag pattern which is a pause that refreshes higher. Momentum is neutral as the MACD (moving average convergence divergence) histogram prints near the zero-index level with a flat trajectory which reflects consolidation.

Oil Prices Continue to Climb

Oil prices have recovered after suffering losses late last week. Statements emerging from the OPEC meeting in Oman seemed to shore up confidence in the group’s efforts this year, after a long list of oil analysts raised the prospect of wavering compliance and cohesion. Saudi Arabia is pushing for OPEC coordination beyond 2018. Saudi oil minister Khalid al-Falih said over the weekend that the coordination among OPEC and with Russia and other non-OPEC partners should continue beyond this year. “We should not limit our efforts to 2018. We need to be talking about a longer framework for our cooperation,” he said. The comments eased fears of faltering compliance with the production cuts. But al-Falih said his desire was to solidify long-term coordination to bolster confidence among the oil industry to invest in new upstream projects. The comments suggest that OPEC and Russia, at a minimum, could keep the cuts in place into 2019.

Strong Global Growth Could Lift Oil

IMF revised its global growth outlook higher, in part on U.S. tax cuts. Growth is now forecast at 3.9% for 2018 and 2019, versus the prior 3.7% October projection previously for both years. This would be the fastest clip since 2011. The estimate for the U.S. was boosted to 2.7% versus 2.3% previously. Advanced economies are seen growing 2.3% this year, up 0.3% from the prior estimate, and 2.2% in 2019, up 0.4%. Growth in the Eurozone is projected at 2.2% for 2018  and 2.0% for 2019, led by Germany which is expected at 2.3% and 2.0%, respectively. Japanese growth is estimated at 1.2% and 0.9%, while China is put at 6.6%  and 6.4%.

A Dovish BOJ Buoys Oil

BoJ’s Kuroda sounded dovish at his post-meeting press conference. He said that the central bank will remain strongly committed to monetary easing, including QQE, until the 2% inflation target has been reached, which remains “far” from the case. He said that the BoJ remains committed to yield curve control and, downplaying the January-9 announcement of a trimming in long-dated JGB purchases, said that day-to-day operations are not an indication of future monetary policy. Governor Haruhiko Kuroda delivered a message to investors speculating that the Bank of Japan might be nearing the start of policy normalization, which was not so fast. The BOJ’s board voted 8-1 to keep its interest rates and asset purchases at current levels. In a small sign of progress, it said inflation expectations remained more or less unchanged. The central bank forecast the economy to grow 1.4 percent in the fiscal year starting in April, with inflation of 1.4 percent over the same period.

More Growth in the U.S.

A leaked White House infrastructure plan has been published and the six page document goes over in great detail the so-called “Infrastructure Incentives Initiative” that encourages state, local and private investment in core infrastructure by providing incentives in the form of grants. Federal incentive funds will be conditioned on achieving milestones within an identified timeframe. Clearly, this is an incentive to strike a budget and DACA deal by February 8th and get a move on to something with more bipartisan support as a well constructed and mutual infrastructure plan could provide further fuel for the bullish markets.