Crude Oil Price Analysis for May 16, 2017

WTI crude rallied sharply up over 2% but closed the trading session well off its highs which was $49.66. The move came following a joint press conference from Saudi and Russian oil ministers who said they were in favor of extending the current OPEC/NONOPEC production cut agreement for an additional 9-months. The group will meet on May 25 to formalize a new agreement. Firmer oil prices will bring additional U.S. shale production to market, offsetting OPEC cuts, and likely limiting upside price potential going forward. Hedge fund traders substantially added to short position in futures and options according to the latest CFTC report, which could explain the surge in prices on Monday as the market was squeezed.

Technicals

Crude oil jumped, surging toward resistance near the 50-day moving average at 49.92.  Support is seen near the former neckline of a head and shoulder pattern, which is an upward sloping trend line that comes in near 48. Additional resistance is seen near the 10-day moving average at 47.14.

Momentum 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 exponential moving average) crosses above the 9-day EMA of the spread. The index moved from negative to positive territory confirming the buy signal. The MACD histogram is printing in the black with an upward sloping trajectory which points to higher prices.

Hedge Funds Add to Short Positions

According to the most recent commitment of trader’s report released for the date ending May 9, 2017, managed money increased short positions in futures and options by 40K contracts, while increasing long position by a mere 6K contracts. The open interest that is long futures and options in the managed money category outnumbers short position by 178K, which is still quite a large number.

Chinese Planned Maintenance Will Decrease Demand

Amid planned maintenance at some big Chinese state refineries, China’s refinery runs in April dropped to their lowest levels since last September per the National Bureau of Statistics. Refinery runs last month were down by 0.6% annually to 44.45 million tons, equal to around 10.82 million barrels per day. This throughput compares to 11.19 million barrels per day refinery runs in March.

Compared to April last year, China’s domestic crude oil production decreased by 3.7% to 15.99 million tons, or 3.89 million barrels per day, last month. Between January and April, Chinese crude output dropped by 6.1% annually to 64.01 million tons, the statistics bureau data showed. Still, domestic production is expected to drop less than it has dropped so far, and to recover more in the second half to post zero growth for full-2017.

Floating Storage is Lower

Floating oil storage globally declined by a third in the first quarter of the year, according to OPEC. The statement supports OPEC’s claims that the production cut agreed on last December has helped to relieve a glut that last year. Earlier this month, Reuters reported that there were 35 tankers with a combined capacity of 65 million barrels of crude sitting in the Straits of Malacca in Malaysia, one of the main global oil shipment routes.

Morgan Stanley chimed in, citing shipping and import data that showed that the global supply had not declined. On the contrary, the figures suggested maritime supply, and more specifically OPEC supply, went up in the first quarter of the year, by as much as 700,000 barrels per barrel.

Manufacturing is Sliding in the U.S.

U.S. May Empire State manufacturing index fell 6.2 points to -1.0, weaker than expected, after tumbling 11.2 points to 5.2 in April. This is the lowest level since -5.5 in October. The index was as higher as 18.7 in February, the best since the 30.2 reading in September 2014. Weakness was broad-based. The employment index slid to 11.9 from April’s 13.9, with the workweek at 7.5 from 8.8. New orders dropped to -4.4 from 7.0. Prices paid declined to 20.9 from 32.8, with prices received at 4.5 from 12.4. The 6-month general business conditions index was little changed at 39.3 from 39.9 and was as high as 49.7 in December and January. The future employment index declined to 17.2 from 19.7, though new orders rose to 33.2 from 31.0, while prices paid moved up to 38.1 from 37.2, with price received at 22.4 from 25.5.