Crude Oil Price Analysis for July 31, 2017

Crude oil prices broke out this week, rising approximately 8%, as a weaker dollar, large drawdowns in U.S. inventories and comments from Saudi Arabia over exports helped prices rise above resistance.  Additionally, there is likely to be taxing on Venezuelan oil, which will make refiners scramble for other sources. If oil was cut off, the U.S. would lose approximately 720,000 barrels per day, and it would generate a huge bid under prices.

Technicals

Prices broke out above trend line resistance which comes from a downward sloping trend line that connects the highs in April to the higher in May and comes in near 49.20. Target resistance is seen near the May highs at 52.38.  Support below the breakout level is seen near the 10-day moving average at 47.44. 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.

Rig Counts Increased

Rig counts are rising but the trajectory of growth is slowing. The number of active oil rigs in the United States, according to Baker Hughes, rose this week by 2 rigs. Combined, the total oil and gas rig count in the US now stands at 958 rigs, up 495 rigs from last year, with oil rigs in the United States increasing by 2 and gas rigs increasing by 6 this week. Rigs in Canada added 14 oil and gas rigs this week, following 15 rigs in the prior week. Of the 14 new active rigs this week in Canada, 11 were oil rigs.

Canadian GDP Surged

Canada GDP surged 0.6% month over month in May after the 0.2% gain in April, blasting past expectations for where was 0.2%. Goods production surged 1.6% in May while service producing industries improved 0.2%. The hefty gain in goods production was led by a 4.6% run-up in mining, quarrying and oil and gas extraction. The oil and gas subsector grew 7.6%, driven by a 13% bounce in non-conventional oil extraction after declines in March and April. Statistics Canada says there was a rebound in activity at an upgraded facility in Alberta that experienced ongoing production difficulties following a fire and explosion in March.

CPI in Japan is Increasing

Japan’s core CPI increased by 0.4% in June year over year, compared to expectations of a 0.4% increase.  Stripping away the effect of fresh food and energy, consumer prices were unchanged in June from a year ago.  Core consumer prices in Tokyo, available a month before the nationwide data, rose 0.2% in July from year over year, versus expectations of a 0.1% annual rise. Higher inflation could lead to expectations that the BOJ would reduce accommodation.

Japanese Spending is Increasing

Japanese household spending hit its highest for two years in June as unemployment fell and job availability reached a 43-year peak. household spending rose annual 2.3% year over year in June which was better than the median forecast for a 0.6%. Retail sales also grew 2.1% year over year in June. The jobless rate fell to 2.8% in June, and job availability rose to very tight 1.51 jobs available per applicant, up for the fourth straight month and the highest reading since February 1974

GDP Was Stronger than Expected

U.S. GDP accelerated to a 2.6% pace in Q2, more than doubling the 1.2% Q1 rate which was revised down from 1.4% and compares to the 1.8% clip in Q4. Personal consumption increased 2.8% from Q1’s 1.9% which was revised up from 1.1%. Fixed investment rose 2.2% following the prior 8.1% Q1 gain, with residential spending falling 6.8% from 11.1% and business spending up 5.2% from 7.2% which was revised from 10.4%. Government consumption edged up 0.7% from -0.6%, with Federal spending at 2.3% from -2.4%, including a 5.2% increase in defense spending from -3.3%. State and local spending dipped 0.2% from 0.5%. Inventories subtracted $1.5 from -$61.9 billion in Q1. Net exports added $7.3 billion after adding $8.9 billion previously. The GDP chain price index, which is used as an inflation gauge, posted a 1.0% increase, halving the 2.0% gain previously, with the core rate at 0.9% from 1.8%.

Sentiment in the UK is Slowing

UK July Gfk consumer confidence fell to -12, down from -10 in June and making lowest reading since July 2016, which was the month that followed the vote to leave the EU. Households’ view of the broader economic situation dropped to a four-year low. High inflation and weak pay growth, which is generating real declines in average household incomes, has been weighing on consumer spirits. The CBI business lobby group warned about this yesterday as a caveat to its above-forecast distributive trades survey for July.