Crude Oil Price Analysis for March 12, 2018

Crude oil prices surged higher following the better than expected jobs report. Strong production in the U.S. is being offset by rising exports as global demand is outstripping supply. The IEA reported risking production that is expected to eclipse 11-million barrels a day in 2019.

Technicals

Crude oil prices surged higher rising more than 3%, and eclipsing resistance which is now support near the 10-day moving average at 61.93. Resistance is seen near the March highs at 63.28. Prices are still forming a topping pattern and will likely rise if stock prices continue to rise.  Negative momentum is decelerating as the MACD (moving average convergence divergence) histogram prints in the red with a rising trajectory which reflects consolidation. The fast stochastic generated a crossover buy signal coming out of oversold territory which points to higher prices.

Strong Crude Exports Offset Record Production

U.S. crude oil production continues to rise, but exports are keeping stockpiles stable.  Production rose by 86K barrels in the latest week, increasing the daily average to 10,369 per day. Stocks are in the middle of the average range for this time of year, should continue to increase until mid-April.

In its Short-term energy outlook, the EIA forecasts that U.S. crude oil production will average 10.3 million barrels a day in February, which is slightly lower than the last print, which shows that production is accelerating higher.  U.S. crude oil production is nearly 100,000 higher than the 2017 average of 9.3 million barrels a day, and 40,000 a day higher than December.  The EIA also forecasts that U.S. crude oil production will average 10.7 million barrels a day in 2018, easily surpassing the highest annual average which was set in 1970 at 9.6 million barrels a year.  The EIA now also forecasts that 2019 crude oil production will average 11.3 million barrels a day.

Despite the increase global demand is rising and exports are pulling petroleum out of the United States. The EIA estimates that inventories of global petroleum and other liquid fuels declined by 0.6 million barrels a day in 2017. In this forecast, the EIA estimates that global inventories will increase by about 0.4 million barrels a day in 2018 and by another 0.3 million barrels a day in 2019.

Exports are Surging

The EAI estimate that U.S. crude oil exports increased sharply in 2017 allowing the country to become the 3^rd-largest U.S. petroleum exporter. Increased U.S. crude oil exports were supported by increasing U.S. crude oil production and expanded infrastructure.

Exports grew to 1.1 million barrels per day in 2017, rising nearly 90% year over year to 527,000 in the country’s second full year of unrestricted U.S. crude oil exports. This is the largest single year-over-year increase of a petroleum export since 1920. The annual volume of exports is nearly four times larger than the previous period of material U.S. crude oil export growth in 1980.

Higher exports are keeping inventories relatively low, as demand from both inside the United States and globally continue to rise.  The term structure of crude oil prices remains in backwardation when comparing delivery for June, versus deliver for June in 2019.  Prices currently are 4.6 dollars a barrel higher, removing the incentive to store crude oil. It speaks of the higher demand by refiners for crude oil, both domestically and globally.

NAFTA uncertainty and growing trade tensions will need to be watched

NAFTA uncertainty and growing trade tensions will need to be watched for their possible impact on the outlook. The BoC does not know how or when NAFTA and other trade issue will end, or how industries or governments will react. Given the wide range of possibilities, their working assumption for the time being is that exiting trade agreements will persists over the two year projection horizon. Since Canada is one of the largest receivers of crude oil exports, NAFTA could play a large role in the future price of crude oil.