Crude Oil Price Analysis for March 13, 2018

Crude oil prices moved lower on Monday, after rebounding sharply on Friday. Trader’s are eying U.S. production and OPEC’s ability to hold and agreement together as June approaches a decision on how to treat the balance of 2018. OPEC has been losing market shale to U.S. shale producers, who are now able to be profitable at crude oil levels as low as $20 per barrel.

Technicals

Crude oil prices decline more than 1% on Monday, after rallying on Friday following a bullish rig count report. Prices slipped back through the 10-day moving average which was former support now resistance. Support on crude oil prices is seen near an upward sloping trend line that comes in near 60.50. Momentum, as reflected by the fast stochastic, has turned negative as the index generated a crossover sell signal. The MACD histogram, on the other hand, is printing near the zero index level with a flat trajectory which reflects consolidation.

Active Rigs Declined

Baker Hughes reported on Friday that the number of active U.S. rigs drilling for oil fell by four to 796 last week. The oil-rig count had climbed in each of the past six weeks. The total active U.S. rig count, which includes oil and natural-gas rigs, however, edged up by three to 984.

OPEC’s Production Agreement Faces Challenges

OPEC’s oil production cut agreement could start falling apart soon, as Saudi Arabia and Iran once again face off. This time, however, the spat is over determining what the best price level is for the commodity. That’s what Iran’s Oil Minister Bijan Zanganeh told the Wall Street Journal in an interview. The split, apparently, stems from Saudi Arabia’s insistence that crude oil should be kept closer to 70 a barrel for Brent and Iran’s equal insistence that 60 is a better place for oil to trade at. This disagreement could see the cartel start unwinding the cuts as early as June, when it will meet with its partners to discuss progress and next steps.

The problem is that U.S. drillers have demonstrated that they could pump more at US$60 a barrel, too, so bringing prices closer to that level is not a guaranteed way to stymie U.S. oil production growth. Production has been growing steadily, last week hitting 10.37 million barrels per day. The oil production in the United States is not the only problem. The bigger problem is soaring U.S. exports that are eating away the market share of OPEC members. This could be the last drop to swing OPEC in Iran’s favor.

Tariffs are Provocking Issues

U.S. imposition of steel and aluminum tariffs caused consternation and hand wringing for much of last week. News of an agreement to meet between the leaders of the U.S. and North Korea, possible carve-outs on the tariffs, and the a stellar U.S. jobs report helped revive global equities, even as bond yields resumed their rise too. This helped buoy oil prices. Tweeting loudly and carrying a big stick seems to be yielding some results on the geopolitical and trade fronts, though whether the ends justify the means remains to be seen. The exit of globalist NEC director Gary Cohn and the ascendance of nationalists at the White House, like Navarro and Ross, suggests that more strong-arm tactics may be in store on the trade front.

Meanwhile the threat of another government shutdown could put a wrinkle into trading The continuing resolution passed in early February that kept the government open expires on March 23. Another stop-gap CR may be needed if legislators can’t pass a spending package. And that could prove tough doing as DACA remains a major stumbling block, with the recent tariff turmoil adding to a contentious debate.

Jobs Data is Goldilocks

The February U.S. jobs release was about as goldilocks as one could hope for with solid heading payrolls gains and upward back revisions, accompanied by retreat in average hourly earnings and a 4-year high in labor force participation. That was pretty much an ideal mix of strong job growth, a recovering labor force and low inflation. But, the still-tame wage numbers and indications that the labor market might have more slack than expected, won’t force the FOMC into a more aggressive tightening trajectory at this point. This should keep the dollar in check and not weigh on crude oil prices.