Crude Oil Price Analysis for September 13, 2017

Oil prices moved higher on Tuesday as traders focused on OPEC production which declined in August thanks to Saudi Arabia cutting more production that expected.  Demand for gasoline remains robust, and refiners have come back on line with only 6% of the U.S. refining capacity remain offline this week.

Technicals

Crude oil prices rose 0.29% on Tuesday, making a higher high but remaining in a relatively tight range ahead of Wednesday EIA energy report. Resistance is seen near a downward sloping trend line that comes in near 49.20, while support is seen near the 10-day moving average at 47.76. Additional support is seen near and upward sloping trend line at 46.50. Momentum is neutral as the MACD (moving average convergence divergence) histogram prints in near the zero-index level with a flat trajectory which reflects consolidation.

OPEC Production Dropped

Reports today shows that OPEC’s crude oil production declined in August thanks to Saudi Arabia cutting more from its production. OPEC produced 30.004 million barrels daily last month, versus 30.113 million barrels per day in July, with Saudi Arabia, the group’s leader and biggest producer, reducing output to 10.022 million barrels per day, from 10.049 million barrels per day in July. The Kingdom’s own data is, as often happens, more positive than that, suggesting an average output of 9.95 million barrel a day.

The news comes on the heels of a statement from Riyadh that Oil Minister Khalid al-Falih had discussed the possibility of another extension of the 1.8-million bpd production agreement between OPEC and 11 other producers beyond the March 2018 deadline.

A growing number of analysts, however, are of the opinion that OPEC is digging itself into a deeper hole the more it extends the production cuts. Lower output from the cartel’s members means lower exports and, consequently, lower crude oil revenues. It is also costing them market share to rivals, including partner Russia and the U.S.

Demand Could Fall in the Future

Demand for petroleum over few decades is likely to drop significantly. China is now joining the UK, France, and Norway in banning vehicles powered by fossil fuels. If China, the world’s largest new vehicle market with sales of 28.03 million units last year, were to ban gasoline and diesel vehicles in the market, the impact on petroleum would be huge.

The national government has been headed in this direction for a few years, issuing generous “new energy vehicle” subsidies to automakers to build electric vehicles and for consumers to buy them. The subsidies are being cut back this year and the government is expected to adopt a zero-emission vehicle mandate similar to California’s where automakers would be mandated to manufacture a set percentage of electric and fuel cell vehicles in the short term.

China is open to direction from other countries as it deals with increasingly crowded cities, booming auto sales, and air pollution in growing metro areas. The country had already committed to cap its carbon emissions by 2030.

BoC defended its communication strategy, taking the unusual step of responding to criticism from a top economist over its lack of guidance between July and September’s rate hike. The statement was made by Jeremy Harrison, the Bank’s chief spokesman, and first sent to the Globe and Mail yesterday. Harrison said the lack of new communication between July and September was not unusual, as it has been the case in three of the past four year. Poloz’s comments in July highlighted the forward looking data dependent stance of monetary policy. All of the issues that were relevant in the July decision were referenced in the September decision, Harrison said. As for inflation, the July MPR clearly explained their assessment that inflation was below target in large part due to temporary factors. Also, the most significant piece of data between the July and September decision was Q2 GDP, but it was published in pre-decision blackout period. Finally, while economists/analysts may have been caught flat-footed by the September move, Harrison points out that “market data indicated roughly 50-50 odds of an increase prior to the announcement. Evidently, a much higher percentage of trading desks were correctly interpreting the Bank’s prior message that monetary policy would be forward looking and data dependent, not predetermined.”