Crude Oil Price Analysis for May 23, 2017

WTI front month futures expire at the close today, leaving July as the front-month contract, which is notched up a 0.79% gain. The market continues to look for unanimous agreement by OPEC/NOPEC producers to extend its current output cut agreement until the end of Q1 2018, when the group meets on Thursday. U.S. shale production continues to rise, offsetting some of the OPEC cuts, which should limit upside price potential for the time being. Baker-Hughes on Friday reported the 18th consecutive week of operating rig increases.

Technicals

Crude oil prices continued its up trend and poised to test resistance near the 200-day moving average at 51.95.  A break of that level would test a downward sloping trend line that comes in near 53.10.  Support is seen near the 10-day moving average at 49.93. Prices could consolidate ahead of Tuesday evenings API Inventory report and Wednesday EIA energy report.

Momentum has turned positive as the MACD (moving average convergence divergence) index recently generated a crossover buy signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The MACD histogram is printing in the black with an upward sloping trajectory which points to higher prices for crude oil.

The relative strength index (RSI) which is a momentum oscillator that measures overbought and oversold levels along with accelerating and decelerating momentum, is grinding higher in smooth trend reflecting accelerating positive momentum.  The current reading of 60, is on the upper end of the neutral range and below the overbought trigger level of 70.

Prices might continue to be capped despite OPEC’s efforts given the robust production in the United States and future production foreshadowed by increasing oil rigs.  On Friday the Baker-Hughes weekly oil rig count revealed the 18th consecutive week of increases, this time adding 8 for a total of 720, and the most since April 2015. That’s the longest weekly streak of increases since 2011, when rigs increased for 19 straight weeks.

The weekly chart shows that prices have a long way to go before breaking out of a $15 per barrel range that is capped at $55 and floored near $40.  OPEC will have to surprise the markets to get prices to break out, as inventories remain robust, and U.S. Production is coming on strong.

OPEC is on Deck

Markets are anticipating this Thursday’s OPEC meeting will affirm a nine-month extension in the 1.8 million barrel-a-day output reduction, which has been in place since the start of the year and is due to finish at the end of June. Crude prices have gained 4.7% over the last week, largely on this anticipation of this with the likes of Saudi Arabia, Kuwait and Russia having indicated agreement on the extension.

Saudi Arabia is Pushing Iraq

Saudi Arabia’s Oil Minister Khalid al-Falih is meeting with Iraqi Oil Minister Jabar Ali al-Luaibi in Baghdad on Monday as OPEC’s de facto leader is trying to persuade fellow cartel members but specifically Iraq, who that has yet to comply with the cuts so far, to extend the production deal for another nine months. Ahead of OPEC’s meeting in Vienna on Thursday, al-Falih is due in Baghdad on Monday in the first visit by a senior Saudi energy official to Iraq in almost three decades.

Saudi Arabia and Russia, which leads the non-OPEC group of nations part of the production cut deal, are proposing a nine-month extension to March 2018. These two have also had the highest levels of compliance.

Last week, Iraq’s Prime Minister Haider al-Abadi said that Baghdad would support an extension of the cuts, but did not provide specifics on exactly how long an extension it would support.

OPEC data shows that Iraq has so far been the OPEC member furthest off target in complying with the output cuts, producing in each of the months between January and April more than it had pledged under the production cut deal. At the time of the initial deal, Iraq also disputed OPEC’s secondary sources estimates and argued that it deserved exemption because its funds are depleting in the fight against ISIS. Saudi Arabia, on the other hand, has cut more than required since the start of the deal, compensating for non-complying fellow OPEC members.