Crude Oil Price Analysis for May 15, 2017

Crude oil prices edged slightly lower on Friday unable to pierce through resistance levels which are the neckline of the massive head and shoulder pattern. Rigs counts in the United States continue to climb, which shows that U.S. producers are poised to add production as OPEC continues to reduce their output. Gasoline demand declined in the past week, but this could be a function of more efficient fuel vehicles which are reducing the need for cars and trucks to go to the pump as much as they have had to in the past.

Technicals

Crude oil prices edged lower, after attempting to push through resistance near an upwards sloping trend line that used to be support and is now resistance near the 48 handle. Support on crude oil prices is seen near the 10-day moving average at 47.12.  Momentum on crude oil prices has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the spread (the 12-day exponential moving average (EMA) minus the 26-day EMA) crosses above the 9-day EMA of the spread. The index moved from negative to positive territory confirming the buy signal. The MACD histogram has a positive trajectory which points to higher prices for crude oil.

Rig Counts Continue to Climb

According to Baker Hughes the Oil Service giant, the number of active oil and gas rigs in the United States rose by 8 on Friday. The total oil and gas rig count in the U.S. now stands at 885 rigs, or 479 above the count a year ago. Oil rigs increased by 9, while gas rigs fell by 1.

Is Consumer Consumption Falling

The question about gasoline demand remains at the heart of consumer consumption.  The health of the consumer continues to be robust, but spending seems to be dedicated to housing and healthcare.  Retail has seen a decline in most other spaces as the market has become more commoditize.  This issue with gasoline demand is probably not demand destruction due to higher prices, it might be that cars fuel efficiency is picking up, allowing consumers to purchase less gasoline and still travel has far as they use too.

Miles Traveled Hit a Record

The Department of Energy data shows that total vehicle miles travelled reached a record 3.217 trillion miles in 2016 which was a 3% growth year over year. This helped gasoline demand reach a record annual high of 9.33 million barrels per day barrels a day according to the EIA. Fuel economy for the light-duty vehicle stock in 2016 is estimated at 22.2 miles per gallon, which was a climb of 1% over 2015, but expectations are even higher in 2017.

New vehicles with turbo charged 4-cylander engines are getting the same horse-power as 6-cylander engines did in prior years, allowing fuel efficiency to rise. Consumers are going to the pump less frequently which is reducing gasoline sales.

Crossover vehicles, which have been introduced in the light vehicle space, has greatly enhanced fuel efficiency. Wards Automotive,  reports that the share of the total light-duty vehicle market attributed to crossover vehicles rose to 32% in 2016. Smaller lighter engines are reducing fuel consumption, which is being reflected in weekly gasoline demand data that is reported by the Department of Energy.

The U.S. is the largest global consumer of gasoline, but efficiency is now taking its toll on demand growth.  This is not to say the demand will not remain robust, but it is hard to see volume increasing at current levels if efficiency is offsetting growth due to stronger economic performance.

Hedge Funds Liquidated

Hedge fund traders exited long position in futures and options according to the most recent commitment of trader’s report released for the date ending May 2, 2016.  Not only did they dump oil, but they closed out long position in RBOB gasoline changing their bets to a net short.  According to the CFTC, managed money reduced long crude oil positions in futures and options by 23K contracts, while increasing short position by 29.3K contracts.

Open interest that is long outnumber open interest that is short by 203K contracts, which was probably reduced significantly during last week’s market plunge. In RBOB gasoline, managed money reduced long position in futures and options by nearly 4K contracts while increasing short position by 19K contracts.  Currently open interest that is short RBOB outnumber open interest that is long RBOB contracts by 4K contracts, 55K to 51K.