Crude Oil Price Analysis for July 27, 2017

Crude oil prices surged higher and started the session in the black, following a larger than expected draw in crude oil inventories reported on Tuesday evening by the American Petroleum Institute.  Prices gapped up to the 48.66 level, but then eased ahead of the EIA data. Prices refreshed their upward climb following the robust inventory draw reported by the Energy Information Administration which appears to show that the Saudi’s tactic to reduce exports to the United States and now the rest of the world is working. The Fed kept rates unchanged and told the markets that quantitative tightening, which is the unwinding of the balance sheet will begin sometime this year.

Technicals

Prices rallied on Wednesday but were unable to break through resistance is seen near a downward sloping trend line that comes in near 48.90.  Support is seen near the 10-day moving average at 46.86. 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. The RSI (relative strength index) which is a momentum oscillator, broke out to fresh highs, which reflects accelerating positive momentum. The current reading of 61, is in the upper end of the neutral range but below the overbought trigger level of 70.

Inventories Are Declining

Strong demand and declining inventories helped lift crude oil prices on Wednesday following a larger than expected decline in total petroleum inventories.  On Monday, Saudi Arabia announced that it would further cut exports, reducing the total by another million barrels a day which should reduce inventories in the United States.  While imports were slightly higher week over week, they were down slightly more than 4% year over year.

According to the Energy Information Administration, U.S. crude oil imports averaged over 8.0 million barrels per day last week, up by 48,000 barrels per day from the previous week. Over the last month, crude oil imports averaged over 7.8 million barrels per day, 4.2% below the same month year over year.

The decline in imports along with a drop in U.S. domestic production led to a drop-in inventory. The EIA reported that U.S. commercial crude oil inventories decreased by 7.2 million barrels from the previous week. This compares to the 2.2 million drop expected by analysts, and a 10.2 million barrel decline reported by the API on Tuesday. Gasoline inventories decreased by 1.0 million barrels last week, while distillate fuel inventories decreased by 1.9 million barrels last week. Total commercial petroleum inventories decreased by 9.4 million barrels last week.

Demand Is Picking Up

Demand has picked up.  The EIA reported that total products demand over the last month averaged about 21.2 million barrels per day, up by 4.6% from the same period last year. Over the last month, gasoline demand averaged over 9.7 million barrels per day, nearly unchanged from the same period last year. Distillate fuel demand averaged over 4.2 million barrels per day over the last month, up by 13.2% from the same period last year. Jet fuel demand is up 10.7% compared to the same four-week period last year.

U.S. crude oil refinery inputs averaged 17.3 million barrels per day during the week ending July 21, 2017, 166,000 barrels per day more than the previous week’s average. Refineries operated at 94.3% of their operable capacity last week. Gasoline production increased last week, averaging 10.4 million barrels per day. Distillate fuel production increased last week, averaging over 5.1 million barrels per day.

The API reported that crude oil stocks declined by 10.3 million barrels, more than 5-times what was expected and the largest draw of the year. Gasoline inventories increased by 1.9 million barrels while distillates declined by 111K barrels.

A Tame Dollar Helps Oil Prices

U.S. yields edged slightly higher as stocks in the U.S. hit fresh all-time highs, which kept the dollar capped. ECB yields eased after rising on Tuesday, despite broad gains on European stock markets. The Fed said that further changes to the normalization policy were coming soon, when discussing the balance sheet. They also left rates unchanged.  The Fed said that the economy is modest running below 2%. The ECB’s Nowotny implicitly confirmed that tapering is underway, although he argued against committing to a final end date for asset purchases, indicating that the ECB remains committed to caution as it removes accommodation The IMF also urged the ECB to maintain its stimulus amid low underlying inflation and wage growth. Greece took some steps back to normality while Italian sentiment took a step back.