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Crude Oil Price Analysis for October 16, 2017

By:
David Becker
Published: Oct 13, 2017, 17:47 UTC

Oil prices moved higher on Friday, hitting a higher of 51.74, slightly shy of resistance near 52.05.  Prices were buoyed by declining active rig counts

Natural Gas Production

Oil prices moved higher on Friday, hitting a higher of 51.74, slightly shy of resistance near 52.05.  Prices were buoyed by declining active rig counts and news that President Trump was going to de-certify the current Iranian nuclear deal. While refinery operations have rebounded from their post-Hurricane Harvey lows, they have still not recovered back to levels seen in late July.

Technicals

Crude oil prices moved higher recapturing the 51 handle, but unable to hold near the highs of the session. Resistance is seen near the May highs at 52.05, while support is seen near the 10-day moving average near 50.46. Momentum is neutral as the MACD (moving average convergence divergence) index prints in the red but the MACD histogram has a flat trajectory which reflects consolidation.

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Rigs Continue to Decline

According to Baker Hughes, the oil service giant, the number of active oil and gas rigs in the United States decreased this week by 8 rigs. The total oil and gas rig count in the United States now stands at 928 rigs, up 389 rigs from the year prior, with the number of oil rigs in the United States decreasing by 5 this week and the number of natural gas rigs decreasing by 2. Miscellaneous rigs decreased by a single rig. The oil rig count now stands 311 above the count one year ago, shedding a total of 20 oil rigs in the last eight weeks.

Demand Will Pick Up a Refiners Recover

While oil production in the United States remains stable, refinery runs have yet to make it back in the wake of Hurricane Harvey. The hurricane knocked out nearly 1-quarter of refining output at its peak, which buoyed distillate prices.  Distillate exports have been robust during most of 2017, increasing at some points by more than 15% year over year. The declines in refinery operations have led to a rise in the crack prices, which is inversely correlated to the declines in distillate stocks.

The disparity of operation and refinery inputs is striking when you compare the end of July to the beginning of September relative to the current period. The EIA reported that U.S. crude oil refinery inputs averaged 17.4 million barrels per day during the week ending July 28, 2017, and operated at 95.4% of their operable capacity. This compares to crude oil refinery inputs averaged 14.5 million barrels per day during the week ending September 1, 2017 and operations at 79.7% of their operable capacity following Hurricane Harvey. This current week the EIA reported that U.S. crude oil refinery inputs averaged over 16.2 million barrels per day during the week ending October 6, 2017, and operations at 89.2% of their operable capacity last week. Operations are still down 6%, and part of that is due to the demand for gasoline after the summer driving season.

IEA Reports that Prices Will Peak in 2018

The global oil market continues to make progress, but the ongoing production gains from non-OPEC countries will probably act as a cap in 2018, according to a new report from the International Energy Agency. In its monthly Oil Market Report published Thursday, the IEA cataloged the long list of indicators that suggests the oil market has made huge strides this year towards rebalancing. In the second and the third quarter, the global supply/demand balance was in a deficit, putting total inventories on track to drain at a rate of 0.3 million barrels per day for the whole of 2017.

 

The drawdowns were especially felt in floating storage, oil in transit, and in independent storage. Currently, OECD inventories are only 170 million barrels above the five-year average, a substantial drop from the 318 million-barrel surplus seen back in January. Moreover, stocks even fell in months when they typically rise.

U.S. CPI rose 0.5%, with the core rate up 0.1% in September

U.S. CPI rose 0.5%, with the core rate up 0.1% in September. Not as hot as feared after the PPI jump Thursday. August gains of 0.4% overall and 0.2% on the core were not revised. Compared to last year, the headline number rose to a 2.2% year over year pace, versus 1.9% year over year previously, while the ex-food and energy component was steady at 1.7% year over year. The components showed energy led the uptick, climbing 6.1% after the prior 2.8% gain. Transportation increased 2.8%, while commodities were up 1.1%. Aside from those, gains were more modest. Food prices increased 0.1%. Housing costs edged up 0.2%, as did the owner equivalent rent measure. Medical care and apparel prices each fell 0.1%.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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