Crude Oil Price Analysis for May 26, 2017

Oil prices tumbled dropping more than 4%, as the markets sold off following an as expected extension by OPEC of their current oil output cut. What was clear is that the market had probably priced in something even greater than the extension of the agreement until March.  What many had hoped was that OPEC would generate deeper cuts, and further attempt to rebalance markets by reducing the amount of crude oil placed on the market on a daily basis.  The selloff reflects disappointment, but OPEC believes that a 9-month rollover will rebalance global inventories.  Meanwhile the happiest producers have to be the United States, who has gladly filled the void left by OPEC.

WTI crude futures are down 4.3% closing near $49.15, which breaks a three-week bull run and stands as the biggest one-day drop since May 4. The losses have been seen after the Saudi energy minister said that we’re going to roll over with the same terms over a nine-month period, with regard to the OPEC-led output cut. This would extend the existing accord for a 1.8 million barrels-per-day supply reduction from the end of June through to the end of March next year.

The so-called Vienne Group, which is OPEC nations plus allied oil producing nations, most notably Russia, met on Thursday. The sell-off in crude markets appears to be an on-the-fact style market reaction. Saudi Arabia and Russia are concerned about current levels and will likely keep cheating to a minimum which would be the driving force behind higher crude oil prices.

Technicals

Crude oil prices tumbled, forming an outside day which is a reversal pattern. This is created when there is a higher high a lower low and a lower close, as the market was rising.  Prices tumbled through support which is now seen as resistance near the 50-day moving average at 50.11. Support on crude oil prices is seen near the March lows at 48 per barrel.  The failure at 52, which coincides with the 200-day moving average brings back in place the head and shoulder reversal pattern, which could target the 38 per barrel level.

Momentum has turned negative as the RSI (relative strength index) moved lower after not being able to pierce through resistance.  The current print on the RSI at 47, is in the middle of the neutral range.  The MACD is reflecting a neutral condition. The MACD histogram is moving lower reflecting decelerating positive momentum.

 

A Weak Dollar Supports Crude Oil

A softer dollar is helpful to boosting crude oil prices.  The dovish tone of the Fed, helped the dollar slip and could buoy crude oil prices. The FOMC minutes indicated a hike could be seen soon. However, there was a caveat that it “Members generally judged it would be prudent” to wait to ensure the Q1 slowing was temporary before tightening further.

The minutes also included a staff outline of a plan on the balance sheet which would showed gradually increasing run-off caps every three months which would eventually hit fully phased in levels which would then be held at that level until the size of the balance sheet was normalized. Nearly all policymakers supported this plan. The minutes indicated that the Q1 slowing was likely “transitory” and participants generally agreed that the medium-term outlook on the economy was little changed. Traders will now need to wait until June, when the Fed next meets.  The data which will shed light on the Fed’s intentions is the payroll report, retail sales and CPI.

Canada Weekly Earnings Growth Remains Subdued

Canada average weekly earnings growth remained tame through March, slowing to a 0.9% year over year growth rate from the 1.1% pace in February. Earnings improved 0.2% in March compared to February, but that followed a 0.3% month over month drop in February and a 0.4% tumble in January. The establishment survey’s employment measure edged up 8.1k in March after the 44.8k jump in February. The timely labor force survey showed a 19.4k rise in March hiring after the 15.3k gain in February, while jobs grew 3.2k in April. The establishment survey’s employment and earnings figures are consistent with the combination of hiring gains but tepid wage growth that is on vivid display in the labor force survey.