Crude Oil Price Analysis for January 4, 2017

Crude oil prices broke out on Wednesday surging to a fresh 2.5 month high following reports that Saudi Arabia cut exports to China.  Stronger than expected U.S. manufacturing and construction data also buoyed oil prices.  The FOMC minutes were in line with expectations keeping the dollar capped, allowing oil prices which are quoted in dollar to continue to break higher.

Technicals

Crude oil prices broke higher clearing 61.60, for the first time in 2.5-years. Target support is seen near the May 2015 highs at 62.51.  Weekly support is seen near the 10-day moving average 58.14.  Both daily and weekly momentum are positive as the MACD is printing in the black with an upward sloping trajectory which points to higher prices for crude oil. The relative strength index (RSI) moved higher with price action which reflects accelerating positive momentum. The current reading of 72, is above the overbought trigger level of 70 and could foreshadow a correction.

Saudi Arabia Cuts Exports to China

Saudi Arabia continues to be the catalyst for higher oil prices as traders see declining exports from the largest importers. Saudi Arabia’s crude oil exports in route to China in December were 20% lower compared to November, which would be the lowest level of Saudi crude sales to China in 2017. According to the tanker tracking figures, released by Bloomberg, less than 3.5 million tons of crude oil, or 25.6 million barrels of oil, left Saudi Arabia in route to Chinese ports in December.

For December, the Saudis had cut total crude oil exports by 120,000 barrels per day from just above 7 million barrels per day in November, reducing shipments to all regions, including a 10-percent reduction of oil exports to the U.S. Saudi Arabia will cut crude oil exports to Asia by more than 100,000 barrels a day in January compared to December, while keeping its shipments to Europe and the U.S. at the December levels, the Saudi Energy Ministry said at the beginning of December. China, on the other hand, boosted its crude oil imports in November 2017 to 9.01 million barrels per day the second highest on record.

Robust Manufacturing Lifts Oil

Solid U.S. national manufacturing gains beat expectations.  The Institute for Supply Management reported that its index of factory activity surged to a reading of 59.7 last month from 58.2 in November. The survey’s production sub-index rose 1.9 points to a reading of 65.8 and a gauge of new orders shot up 5.4 points to 69.4. Manufacturers also reported an increase in export orders. A measure of factory employment, however, fell to 57.0 last month from 59.7 in November. Additionally, the Commerce Department reported that construction spending rose 0.8% to an all-time high of $1.257 trillion in November. Construction spending advanced 2.4% on a year-on-year basis.

FOMC Minutes Left Markets Unchanged

The FOMC meeting minutes came out in line with expectations with central bank members seeing growth and wages rising but overall inflation remaining flat.  The FOMC said that the tax cuts could lead to a faster rate of increases in the Fed Funds rate. The committee saw that the risks to the economy were balanced, but some saw the dot plots pointing to higher rates as too aggressive, given the current rate of inflation.

U.S. MBA mortgage market index rose

U.S. MBA mortgage market index rose 0.7% in data released earlier, accompanied by a 0.1% dip in the purchase index and a 1.4% gain in the refinancing index for the week ended December 19. In addition, the average 30-year fixed mortgage rate was unchanged at 4.25%.

U.S. chain store sales dropped

U.S. chain store sales dropped 2.3% in the week ended December 30, following the 0.4% slip in the prior week. Though the final sales push to Christmas was contained in this report, the big Artic freeze which impacted the eastern two-thirds of the U.S. limited post-Christmas shopping, gift card redemptions, and merchandise exchanges. And compared to the same week last year, however, sales posted a 3.9% year over year pace from 3.3% year over year.