Crude Oil Price Analysis for July 11, 2017

Oil prices took another let lower, with another 1% loss, early in the session which was the lowest level seen since June 28. Prices were able to find a foothold and rebound to close up on the session. The oversupply narrative was back early following data last week showing rising production out of the U.S., Nigeria and Libya, which is offsetting OPEC supply trimming efforts. Kuwait said on Sunday that both Nigeria and Libya have been invited to the next OPEC meeting, on July 24. Last week the Baker-Hughes revealed a 7-rig increase in operating oil rigs for the latest week, bringing the total to 763, from 412 a year ago. Operating rigs have risen in 23 of the past 24 weeks.

Technicals

Crude oil prices rebounded from session lows, but stop short of recapturing resistance which was former support near the 10-day moving average at 44.97.  Prices halted a 3-day decline, after a rebound took crude oil prices back above the 47 handle. Positive momentum has decelerated as the MACD (moving average convergence divergence) histogram prints in the black but the trajectory of the histogram has moved lower which reflects consolidation.  The RSI (relative strength index) has also chopped around and is currently printing a reading of 43, which is in the middle of the neutral range and reflects consolidation.

Inventories are Declining but only in the U.S.

EIA reported the biggest drop in combined crude and refined-product stocks in four years. In the four months through June, which is when OPEC crude delivery cuts to the U.S. was expected to show up in lower import numbers, oil stockpile tumbled by almost 21 million barrels. Regardless, on the surface the drop is even more impressive when one considers that this is the first year since at least 2000 that total U.S. oil inventories have fallen between the end of February and June 30. The average increase in stockpiles over that period has been 53.9 million barrels.

Part of the reason that oil inventory number have decline is that there has been a surge in U.S. exports which is contributing to growing inventory levels elsewhere. Stocks in the key European storage hub of Amsterdam-Rotterdam-Antwerp, are up 5.5 million barrels since the end of February. Separately, while Chinese government data, notoriously unreliable when it comes to oil flow data, show commercial stockpiles almost unchanged between the end of February and the end of May, oil exports to Asia’s biggest economy have soared. In the first four months of 2017, 55 million barrels of crude and products flowed from the U.S. to China – more than the first nine months of 2016. Here the 2-billion-barrel question is just how much crude is truly stored in China’s SPR.

Listen to Draghi and Praet

The dollar has weakened recently which has helped buoy oil prices. Since oil prices are quoted in dollars, a weaker dollar is generally bullish crude oil prices. The ECB may have recently published a research report suggesting that markets overall understood the central bank’s communication policy, but with the central bank heading for the exit, central bank comments over the past weeks have only added to volatility on markets. Fact is the central bank has effectively settled this year’s monetary policy path in advance, when it set monthly asset purchase volumes at EUR 60 billion for the duration of 2017. Looking ahead few doubt that real tapering will start early 2018 and so far the ECB maintains that rates won’t rise before the end of QE. So the current swing in markets is not so much due to changes in the expected path of actual policy, or degree of monetary accommodation, but rather the communication that has been somewhat misleading.

The key players to listen to are clearly Praet and Draghi, with the former effectively setting the tone for council meetings in his introductory comments at the start of the meeting. Today’s minutes confirmed that the pressure to remove the easing bias had increased with positive survey data and the broadening and strengthening of growth. True, the brief uptick over the Easter period aside, inflation remains far below the 2% limit and wage growth is low, but with the recovery strengthening and broadening, the easing bias looked increasingly anachronistic.