Crude Oil Price Analysis for October 18, 2017

Ahead of the heating season in the Northern Hemisphere, prices are on the rise and poised to break out.  While October has been warmer than normal, the demand for U.S. distillate has remained robust, as export continue to rise.  Distillate inventories, which include heating oil, have declined to the lower half of the average range for this time of year, and a colder than normal weather would likely be the catalyst to drive crude oil prices up to $60 per barrel.

Technicals

Crude oil prices edged higher nearly unchanged and continue to hover below resistance levels near a downward sloping trend line near 53.10.  Support on crude oil prices is seen near the 10-day moving average at 50.77. Prices have rebounded and are moving higher in a relatively smooth up trend. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occur 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).

U.S. Household Heating Demand will Increase this Winter

The Energy Information Administration EIA forecasts that average household expenditures for all major home heating fuels will rise this winter because of expected colder weather and higher energy costs. The National Oceanic Atmospheric Administration forecast as cooler than normal winter for the mid-west and North East, the main heating fuel consuming regions. The average increases vary by fuel, with natural gas expenditures forecast to rise by 12%, home heating oil by 17%, and propane by 18%. Most of the increase reflects expected colder weather rather than higher energy costs. A warmer-than-forecast winter would see lower increases in expenditures, and a colder-than-forecast winter would see higher increases in expenditures.

Iraq Conflict Continues

It appears that the Iraqi military, supported by Shia militias and Iranian forces, are battling in and around Kirkuk to retake the city and its vast oil reserves. The official Iraqi military move is a reaction to the Kurdish independence September 25 referendum, where an overwhelming of the Kurdish voters cast their ballots in favor of independence. Most Western countries oppose the Kurdish referendum, and have reacted negatively to the outcome. The Kurdish move, supported by most Iraqi Kurds, is feared to start a regional drive for a greater Kurdistan influence.

The current success of the Iraqi military in Kirkuk is still unclear as fighting appears to be scattered. Outside Kirkuk, sources report that Iraqi military and Shia militias have taken control of a power plant and refinery adjacent to the oil fields. Baghdad’s forces also seem to have secured control of a military airport west of the city.

The U.S. Administration sees the current military confrontation is a big headache. The military conflict now pits one American-trained military force against another. The Iraqi army and the Kurdish peshmergas are supported and trained by U.S. forces in their fight against ISIS. U.S. weapons and systems have been provided to both sides. According to the U.S. army, no assistance or coordination has been given to the Shiite militias. However, reports and pictures from the area, in which Shi’a militias are using U.S. weapons or armored vehicles, counter this. Presently, Shi’a militias are openly taking part in the fight against the peshmergas.

New Zealand CPI Increased

New Zealand Q3 CPI grew 0.5% quarter over quarter after the flat reading in Q2 and 1.0% bounce in Q1. CPI expanded at 0.2% to 0.4% rates, quarterly, in 2016. The resumption in quarterly comparable growth left CPI running at a 1.9% year over year pace in Q3 versus the 1.7% rate of expansion in Q2. CPI modestly overshot expectations in Q3, but the RBNZ should hold rates steady for an extended period as GDP growth remains modest and the housing market is slowing. Also, while inflation did pick-up in Q3, CPI remains in-line with the Bank’s target, and tepid GDP growth suggest little in the way of upside risk to CPI.