Crude Oil Price Analysis for July 26, 2017

Crude oil prices broke out on Tuesday as news that the Saudi’s planned on reducing exports by 1-million barrels helped lift crude oil above resistance. The Saudi’s are targeting exports to the United States which show up in the inventory report released by the Department of Energy on a weekly basis. With these numbers coming down, showing that inventories in the United States were balancing, traders are lifting their short positions and betting that prices will move higher. Traders now await the API inventory report scheduled for Tuesday evening in the U.S. and Wednesday inventory report from the Energy Information Administration.

Technicals

Crude oil prices broke out above trend line resistance generated from a downward sloping trend line that connects the highs in May to the highs in July and comes in near 47.30.  This is now seen as short-term support. Additional support on crude oil is seen near the 10-day moving average at 46.55.  Resistance is seen near the 100-day moving average at 48.87. Momentum remains positive and is accelerating higher as the MACD histogram is printing in the black with an upward sloping trajectory which points to higher prices for crude oil.  The RSI (relative strength index) which is a momentum oscillator that measures accelerating and decelerating momentum broke out which reflects accelerating positive momentum. The current reading of 57, is in the middle of the neutral range and reflects consolidation.

Crude Rallies as Saudi’s Target Additional Exports

The strategy that the Saudi’s are employing is not getting enough credit from the market.  Participants are in “show me” mode, and will not be convinced that global inventories are balanced until changes are reflected in U.S. inventories.  Oil bears are convinced that despite an additional decline in exports announced by the Saudi’s on Monday, prices will be unable to rise.  This will only be disproven if U.S. inventory data continues to move lower. The strategy that the Saudi’s are attempting to undertake to bring prices back to the mid-50 level, is to lower exports which should eventually show up in U.S. inventory data.

While the Saudi strategy could eventually trigger the long-sought for price rally, it’s possible the real boost to prices will come from developments entirely separated from Riyadh’s oil policy. The U.S. threat to place sanctions on Venezuela, an OPEC member suffering from massive economic and political instability due to low oil prices, could trigger a collapse in that country’s oil industry. Venezuela ships most of its heavy crude across the Caribbean to refineries in the Gulf of Mexico, which are uniquely equipped to handle the Venezuelan output.

The EIA Issues Bearish Report

The price climb may be short lived, especially since EIA’s statement on US crude oil production. U.S. crude oil output, according to the EIA, is now expected to rise to an average of 9.9 million barrels a day in 2018, a figure that would squarely beat the previous record-high of 9.6 million bpd from 1970, with the Permian and the Gulf of Mexico the main growth drivers. The Permian Basin is expected to produce 2.9 million barrels a day of crude oil by the end of 2018, around 500,000 barrels a day above the EIA estimates for the Permian’s June 2017 production. Permian output will account for almost 30 percent of the total U.S. crude oil production in 2018.

German Import Price Inflation Declined

German import price inflation fell back to 2.5% year over year from 4.1% year over year in the previous month, with prices down -1.1% month over month. Base effects from oil prices and currency moves are largely behind the drop in the headline rate and at 2.5% year over year import price inflation remains at elevated levels. Still, weaker than expected data, which together with the expected stable HICP reading for July this week will add to the arguments of Draghi, who is only very slowly inching towards tapering, although Mersch’s comments highlight again that postponed is not cancelled.