Crude Oil Price Analysis for September 21, 2017

Crude oil prices are breaking out to fresh highs, as larger than expected draws in distillates which include diesel and heating oil helped the petroleum complex surge higher.  Distillates are now below the 5-year average range and ahead of winter could continue to drive petroleum prices higher.  The EIA reported a robust demand for distillates, which show strong demand for heating oil exports.

Technicals

Crude oil prices broke out on Wednesday in the wake of the EIA report.  Prices had been consolidating after breaking out above a downward sloping trend line near 49.20.  Prices are now poised to target resistance near the July highs near 52. Short term support is seen near the 10-day moving average at 49.19. Momentum has turned positive as the MACD (moving average convergence divergence) index recently generated a crossover buy signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal. The MACD histogram is printing in the black with an upward sloping trajectory which points to higher prices for crude oil. The RSI (relative strength index) which is a momentum oscillator that measures accelerating and decelerating momentum, broke out which reflects accelerating positive momentum. The current reading is at 62, which is on the upper end of the neutral range.

Hurricanes have Altered Production of Products

In the wake of Hurricane Irma and Harvey, crude oil inventories continue to increase while product inventories such as gasoline and diesel, continue to decline.  Imports have been on the decline, but rebounded in the latest week as ports open up following the recent Hurricanes. U.S. production surged in the latest week, as shale producers play catch up following the disruptions caused by the recent hurricanes.

Refineries have come back on line, and are operating at rates that are still below normal. U.S. crude oil refinery inputs averaged about 15.2 million barrels per day during the week ending September 15, 2017, 1.1 million barrels per day more than the previous week’s average. Refineries operated at 83.2% of their operable capacity last week, which is lower than the 93% 5-year average. Gasoline production decreased last week, averaging 9.8 million barrels per day. Distillate fuel production increased last week, averaging over 4.5 million barrels per day.

Imports Rebounded

Last week imports increased but over the last month imports have been on the decline. The EIA reported that U.S. crude oil imports averaged about 7.4 million barrels per day last week, up by 888,000 barrels per day from the previous week. Over the last month, crude oil imports averaged 7.2 million barrels per day, 10.9% below the same month last year.

Inventories Were Mixed

Crude oil inventories increased more than expected.  The Department of Energy reported that U.S. commercial crude oil inventories increased by 4.6 million barrels from the previous week. Expectations were for a 2.5-million barrel rise in stocks. At 472.8 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year despite the Saudi’s attempted to drop this figure. Gasoline inventories decreased 2.1 million barrels last week, in line with expectations. Distillate fuel inventories decreased by 5.7 million barrels last week and are in the lower half of the average range for this time of year. This is the first time this year that distillates have dropped to these levels, and as we head into the winter, this could generate price spikes.

Demand Remains Strong

Demand remains strong especially for distillates. Total products demand over the last four-week period averaged 20.4 million barrels per day, up by 0.5% from the same period last year. Over the last month, gasoline demand averaged over 9.5 million barrels per day, down by 0.2% from the same period last year. Distillate fuel demand averaged about 4.1 million barrels per day over the last month, up by 14.5% from the same period last year.

The API Reported A Large Product Draw

The American Petroleum Institute reported that U.S. crude supplies climbed by 1.4 million barrels for the week ended Sept. 15, in line with expectations while gasoline inventories dropped 5.1 million barrels, and inventories of distillates fell by 6.1 million barrels both much more than expected. The big decline in product inventories are a function of the lack of supply from refiners in the wake of Hurricane Harvey.