Crude Oil Price Analysis for January 8, 2018

Crude oil prices edged lower on Friday, as traders took some profits after a robust runup. Still, prices are higher by 2% this week. Prices were unable to hold above the 62-handle, despite solid demand for crude oil by refiners.

Technicals

Crude oil prices moved lower by 0.76%, moving lower on profit-taking. Prices are supported by the 10-day moving average at 60.22. Target resistance is seen near the 2015 May highs at 62.58. The RSI (relative strength index) moved lower reflecting decelerating negative momentum, as the oscillator moved below the overbought trigger level of 70. The MACD is also losing a little altitude, which reflects decelerating positive momentum.

Refining Demand is Robust

Refiners are operating at elevated levels as higher than average crack prices are outperforming during a period that seasonally sees margins decline.  With the east coast experiencing a cyclone bomb and both the mid-west and east coast experiencing frigid temperatures demand for heating fuels is soaring higher.  Heating oil’s competitor natural gas saw record demand on January 1, with the EIA estimating that U.S. natural gas demand hit 150.7 billion cubic feet, surpassing the previous single-day record set in 2014.  This can only buoy heating oil which likely experienced similar demand.

Refiners are Operating at Full tilt

Distillate demand is rising, and the backwardation in the term structure of crude oil reflects the strong demand for crude oil by U.S. refiners.  Refiners are operating at 96.7% of capacity in the latest week, compared to 91% of capacity a year ago.  Surprisingly heating oil outperformance generally occurs in the summer when gasoline outperforms, as diesel (which is basically heating oil), also sees strong outperformance.  The chart above of heating oil performance relative to WTI crude shows that the January through April period has historically been a time when heating oil prices underperform crude oil prices.

The heating oil crack is trading at elevated levels which is making margins attractive which is why refiners are running near capacity.  The distillate crack hit a 3-year high on a weekly chart, and is the highest its been during a winter period since 2014.  With demand sparked by colder than normal weather, and stronger economic growth, the heating oil crack will likely remain elevated. The cold weather has been a strong focus as both heating oil and natural gas consumption is typically highest in the winter months, when residential and commercial demand for heating fuels increases.

Inventory Data Was Mixed

Inventory data was mixed. U.S. commercial crude oil inventories decreased by 7.4 million barrels from the previous week. At 424.5 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year. Gasoline inventories increased by 4.8 million barrels last week, while distillate fuel inventories increased by 8.9 million barrels last week. Total commercial petroleum inventories increased by 1.2 million barrels last week.

Demand Remains Strong

Demand remains strong. The EIA estimates that total products demand over the last month averaged 20.6 million barrels per day, up by 5.0% from the same period last year. Over the last month, gasoline demand averaged about 9.2 million barrels per day, up by 2.1% from the same period last year. Distillate fuel demand averaged about 4.1 million barrels per day over the last four weeks, up by 5.8% from the same period last year.

The builds in distillate inventories appear to have initially capped heating oil prices which are poised to test the May 2015 highs which is seen as resistance near 2.08.  Support is seen near the 10-day moving average at 2.0293. The RSI (relative strength index) has bumped up into the overbought level above 70 and has subsequently come off, which generally reflects consolidation at resistance levels.

Jobs Data Was Softer than Expected Weighing on the Dollar

U.S. nonfarm payrolls rose 148k in December, disappointing expectations for a stronger gain. But it follow a revised 252k gain in November and a 211k October increase. The job market has posted gains since October 2010. The unemployment rate was steady at 4.1%. The labor force edged up 64k after the prior 162k rise, with household employment up 104k from 71k. The labor force participation rate steady at 62.7%. Earnings edged increased 0.3% versus 0.1% previously. The workweek was flat at 34.5. For other details, private payrolls increased 146k (ADP was 250k), with the goods producing sector adding 55k and construction 30k. Manufacturing employment increased 25k. Jobs in the service sector were up 91k. The government added 2k.