Crude Oil Price Analysis for May 25, 2017

Its D-day for OPEC on Thursday and expectations are for the cartel to extend their output for an additional 9-months until March 2018.  This is currently priced into the market, as Ministers in Vienna prepare to vote, there is constant news hitting the headlines.  A 6-month extension would hammer crude prices temporarily, while additional cuts would likely push the market higher.

Technicals

Crude oil prices moved higher initially following a larger than expected draw reported on Wednesday by the Department of Energy.  Prices hit a fresh one month high at 51.88, just shy of resistance near the 200-day moving average at 51.99.  Additional resistance is seen near a downward sloping trend line at 52.60. Support on crude oil prices is seen near the 50-day moving average at 50.13.

Momentum is positive as the MACD (moving average convergence divergence) index prints in the black while the MACD histogram has a positive trajectory which points to higher prices. The RSI is printing a reading of 59, which is on the upper end of the neutral range but shy of resistance near the 69 level.

OPEC Production is Declining

Distillate demand continue to remain robust, but gasoline demand has yet to surpass last year’s pace.  Imports were down in the latest week, which could mean that OPEC cut in production is finally taking hold. This was somewhat offset by a rise in U.S. production and given that drilling rig activity has climbed for 18-consecutive months, U.S. production should continue to climb.

The decline in crude oil inventories was likely a function of a decline in imports.  As per the Energy Information Administration report, U.S. crude oil imports averaged 8.3 million barrels per day last week, down by 296,000 barrels per day from the previous week.

Inventories Dropped More than Expected

The U.S. commercial crude oil inventories decreased by 4.4 million barrels from the previous week, according to the Department of Energy report. This compares to expectations of a decline of 2.4 million barrels. Gasoline inventories decreased by 0.8 million barrels last week, while distillate fuel inventories decreased by 0.5 million barrels last week. Total commercial petroleum inventories decreased by 3.5 million barrels last week.

Demand is Mixed

The Demand picture remains mixed, as prices for gasoline are eroding total demand. The EIA estimates that total products demand over the last four-week period averaged 20.2 million barrels per day, down by 0.8% from the same period last year. Gasoline demand over the past month averaged over 9.4 million barrels per day, down by 1.9% from the same period last year. Distillate fuel demand averaged over 4.2 million barrels per day over the last four weeks, up by 3.6% from the same period last year. Jet fuel demand remain very strong and is up 10.4% compared to the same period last year.

U.S. crude oil refinery inputs averaged 17.3 million barrels per day during the week ending May 19, 2017, 159,000 barrels per day more than the previous week’s average. Refineries operated at 93.5% of their operable capacity last week. Gasoline production increased last week, averaging over 10.2 million barrels per day. Distillate fuel production increased last week, averaging 5.2 million barrels per day.

Existing Home Sales Dropped

Tight supply of existing homes is taking its toll on sales.  Prices continue to get buoyed, as inventories dropped to multi-year lows.  On Wednesday, the National Association of Realtors said that existing home sales declined 2.3% to an annual rate of 5.57 million units last month. Despite the decline, April’s sales pace was the fourth highest over the past year. March’s sales pace was revised down to 5.70 million units, which was still the highest level since February 2007.

Ahead of Tomorrow Meeting

In advance of the formal recommendation, there was a lot of noise as OPEC summits tend to create, and non-stop headlines from all the newswires. Distilling it down, Saudi ally Kuwait signaled on Wednesday OPEC could discuss deepening the cuts, in what would come as a positive surprise for market bulls, but hopes quickly faded after a key committee recommended keeping the curbs unchanged. Two OPEC sources said the ministerial committee comprising OPEC members Algeria, Kuwait, Venezuela, current OPEC president Saudi Arabia and non-OPEC producers Russia and Oman recommended keeping the cuts at the same level.

Also, Saudi Energy Minister Khalid al-Falih gave the thumbs up when asked whether the committee had agreed on a nine-month extension. Most other OPEC ministers including Iraq’s had already voiced support for extending cuts by none months.