Crude Oil Price Analysis for November 25, 2017

Crude oil prices are breaking out as low product stocks and strong demand for gasoline are propelling prices higher. With an OPEC meeting just a week away, trader’s are on edge to whether the cartel will extend its output cuts, which have helped rebalance the markets. This week, inventories were mixed, demand was solid and rig counts came back on line.

Technicals

Crude oil broke out further on Friday, jumping as high as $58.92 mid-day and poised to test target resistance near the May 2015 highs at 62.92. Support is seen near the 10-day moving average at 56.58.  Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses above the MACD signal line(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.

Low Product Stocks Could Lead to Price Spikes

Crude oil prices are continuing to move higher, and it appears that solid demand for products is keeping prices buoyed.  Supply disruptions cause by the temporary reduction in refiner runs following August 25th Hurricane Harvey which made landfall as a Category 4 hurricane. As a result, gross inputs to refineries in the Gulf Coast fell from by 3.2 million barrels a day. Refinery activity has since recovered, and gross inputs are 8.8 million barrels a day, higher than the previous five-year maximum for this time of year. Refineries are operating a full steam, but the combination of recovering demand still recovering supply has created a divergence in year over year days’ supply.

Days Supply is Low

The days supply chart issued by the Department of Energy shows that volume of gasoline available in terms of daily demand.  The most recent chart shows the current 2016-2017 chart shows days supply declining while 2015-2016’s levels were increasing at this time of year.

Crack Spreads are Elevated

Both the gasoline and heating oil crack spreads (the margin between products and crude oil) have consolidated during the past couple of weeks, following huge run-ups since April.  The gasoline crack has surged more than 100% while the heat crack has soared a less impressive 50%.

Demand is Solid

Product demand remains solid, with gasoline leading the charge. The EIA reported that over the last month gasoline demand averaged over 9.4 million barrels per day, up by 2.6% year over year. Distillate fuel demand averaged over 4.0 million barrels per day over the last month up by 0.8% year over year.

The weather in the U.S. has helped capped a surge in heating oil prices. Natural gas which is used as a heating substitute is pricing near a 52-week low.  Warmer than normal weather continues to be forecast to cover most of the United States over the next 2-weeks.  The catalyst for demand has been exports from the United States, which remains strong, but a cold snap in December or January could be the catalyst for a spike in prices given the current level of distillate inventories.

Inventories Dropped

The EIA added that U.S. commercial crude oil inventories decreased by 1.9 million barrels from the previous week, which was in line with expectations. Gasoline inventories remained unchanged last week, but expectations were for a 1-million barrel build. Distillate fuel inventories increased by 0.3 million barrels last week but are in the lower half of the average range for this time of year. Total commercial petroleum inventories remained unchanged last week.