Crude Oil Price Analysis for May 1, 2017

Crude oil prices attempted to move higher on Friday, climbing approximately 1/3% following news that Russia has complied completely with its production cut promises. With OPEC set to meet in May to determine if they should extend their production cuts, this message from a Non-OPEC producer is a welcome sign. Production in the U.S. is likely to continue to move higher, which is forecasted by the increase in U.S. rig count for the latest week. According to oil service giant Baker Hughes, the oil rig count increased by 9 to 697, for the 15^th consecutive increase in rigs. Weaker than expected U.S. and Canadian GDP also is weighing on prices.

Technicals

WTI prices continue to form a head and shoulder reversal pattern, as prices testing the neckline which is trend line support that comes in near 48.20.  Prices hit this level on Thursday, and bounced, but are likely to try again.  A break of this level on heavy volume which finalized the pattern, and point to target support near the November lows at 46.  The ultimate target of the head and shoulder is the distance between the head and the neckline added to the breakdown which would put prices near the 38 region. Resistance on crude oil is seen near the 10-day moving average at 50.37.

Momentum on crude oil prices remains negative as the MACD (moving average convergence divergence) index prints in the red with a downward sloping trajectory which points to lower prices for WTI crude oil.

Russia Compliance is at 100%

Russia has reached its 300,000-barrel-per-day production cut target under its agreement with OPEC, according to Energy Minister Alexander Novak. Russia had promised to achieve this level by end April. Russia had undertaken the cut off its October daily average, which exceeded 11 million barrels per day in a bid to help OPEC’s efforts to rebalance the market and improve prices.

U.S. GDP Was Weaker than Expected

U.S. GDP growth rose only 0.7% in Q1, weaker than expected and only about one-third of the 2.1% clip in Q4. Personal consumption expenditures slowed dramatically to 0.3% from 3.5% previously, which was the best since Q2 2016’s 4.3% rate. The offset to the decline in personal consumption was business fixed investment, which surged to a huge 10.4% from 2.9% with residential investment at a 13.7% pace and nonresidential at 9.4% versus respective growth rates of 9.6% and 0.9% in Q4.

Government spending weakened sharply to -1.7% compared to 0.2%, with a -1.9% clip for Federal government, versus -1.2% for Q4. Inventories subtracted $39.3 billion after Q4’s $42.5 billion contribution. But net exports added $2.3 billion following the $82.8 billion Q4 plunge. The GDP chain price index accelerated to 2.3% from 2.1%, with the PCE price index at 2.4% from 2.0%. The Q1 core rate was 2.0% from 1.3%. The jump in the price measures will overshadow the weakness in growth and weigh on Treasuries.

Labor Costs are Rising

U.S. Q1 employment costs posted a 0.8% growth pace, firmer than expected, versus 0.5% in Q4 and 0.6% in Q3, Q2, and Q1 of last year. Both components saw accelerating growth rates. Wages and salaries rose at a 0.8% clip as well, compared to 0.5% in Q4 and Q3, and 0.6% in Q2. Benefits were up 0.7% from 0.5% previously which was revised from 0.4% and a 0.7% rate in Q3. For annual rates, ECI rose to a 2.4% year over year pace from 2.2% year over year in Q4, with wages and salaries at 2.5% year over year versus 2.3% year over year, and benefits at 2.2% year over year from 2.1% year over year. The stronger than expected pace of wage and salary growth is good news for the Fed but overall strength in ECI will be a worrying development for bond bulls as it could portend rising inflation.

Canadian GDP was Unchanged

Canada GDP was flat  in February following the 0.6% surge in January. The lack of growth in February was as expected. A 0.2% month over month gain in service producing industries was offset by a 0.3% drop in goods producing industries. Goods production was knocked lower by a 0.6% drop in manufacturing, a 0.2% dip in mining, quarrying oil and gas, a 1.2% plunge in agriculture, forestry, fishing and hunting and a 0.2% decline in utilities. Construction grew 0.5%. Service production was supported by finance and insurance, and real estate, and rental and leasing. Despite the stall-out in February GDP, Canada’s GDP remains on track to come in near the BoC’s 3.8% estimate for Q1 GDP quarter over quarter.