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Crude Oil Price Analysis for July 19, 2017

By:
David Becker
Published: Jul 18, 2017, 18:25 UTC

Crude has held up near recent highs, trading above $46 highs but moving lower in the session close. Support has come recently from reports that demand is

Crude Oil

Crude has held up near recent highs, trading above $46 highs but moving lower in the session close. Support has come recently from reports that demand is expected to rise through the second half of the year, specifically from China. This said, ongoing U.S. shale production increases, and upped output from Libya and Nigeria, will counteract to a degree, and likely limit price gains going forward.

Technicals

Crude oil prices closed with the middle of today’s trading range, ahead of the API’s inventory report scheduled for Tuesday evening. Prices tested support near a downward sloping trend line at $45.90. Additional support is seen near the 10-day moving average at $45.47. Resistance is seen near the session highs at $47.  Momentum remains positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to higher prices for crude oil.

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No Additional Cuts Needs

The Kuwaiti oil minister was jawboning on Tuesday reiterating what industry bodies and other OPEC oil officials have been saying for weeks, which was that the market would take longer to rebalance than initially expected, and that no deeper cuts are needed or on the table. Al-Marzouq said that “We have always been looking at the second half of the year,” for the stocks to draw down, thanks to higher demand during the U.S. summer driving season.

Last week, the International Energy Agency (IEA) said in its Oil Market Report that “we need to wait a little longer to confirm if the process of re-balancing has actually started in 2Q17.” OECD industry stocks fell in May by 6 million barrels, but stocks were still 266 million barrels above the five-year average, down from 300 million barrels in April, the IEA said. Preliminary data show a moderate reduction in OECD stocks for June, the agency noted.

But as early as in January, Al-Marzouq was proclaiming victory for the cartel: “We are confident that rebalancing in the oil markets has already started. “We expect a positive impact on the market by the end of the first quarter of 2017,” Al-Marzouq said at a Petroleum Intelligence Conference.

Demand Continues to Rise

Demand is rising faster than expected, particularly in the second quarter compared to the first, which suggests the second half the year will probably lead to stronger inventory declines. The demand figures from the IEA were backed up by recently released data from China showing that refinery demand in June was the second strongest on record. And because China’s domestic production has contracted substantially over the last few years, it has had to step up imports.

Oil prices are starting to slowly inch up is that the U.S. rig count, while still increasing, is expanding at a slower rate. Last week the rig count only increased by 2, a rather small number in the context of the 14-month-long expansion since the spring of 2016. In the past three weeks, the oil rig count has only increased by 7; in the prior three-week period the rig count jumped by 25. Lower oil prices are starting to scare away shale drillers from jumping back into the field too aggressively. The smaller increases are giving oil traders hope that the drilling boom could be curbed, which in turn would contribute to a tighter market.

A Softer Dollar Helps Crude Oil

The dollar remains under pressure as Fed funds futures continue to show little chance for another rate hike over the near term, with only about 44% risk for action by the end of the year. The next FOMC meeting is July 25, 26 and futures show nearly a zero percent chance of a hike. However, the markets have another policy matter on which to ponder, quantitative tightening.

U.K. CPI Fell

UK June CPI unexpectedly softened to 2.6% year over year after May’s cycle-high rate of 2.9% year over year. The median forecast had been for an unchanged 2.9% outcome. The ebb is in sync with the directional pattern seen in inflation readings in other key economies in June, although price pressures in the UK remain relatively more elevated due to the inflationary consequences of the sharp year over year sterling decline following the Brexit vote at the end of June last year. A decline in motor fuels was a key factor driving the headline rate lower, along with the prices of recreational and cultural goods and services.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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