Crude Oil Price Analysis for September 26, 2017

Crude has rallied to four-month highs of $51.90, with follow through buying seen in the aftermath of Friday’s OPEC/NOPEC meeting in Vienna. While the group did not extend its output cut agreement, it suggested that production caps may remain in place through 2018. That, coupled with recent upwardly revised demand growth forecasts, have supported oil prices. Rig counts in the U.S. appear to have peaked and the recent reductions in production of both crude oil and refined products in the wake of Hurricane Harvey and Irma have buoyed prices.

Technicals

Crude oil prices surged higher on Monday climbing 2.5%, and testing resistance near the May highs at 52. A break of this level would lead to a test of the April highs at 53.67.  Support on crude oil prices is seen near the 10-day moving average at 50.02. Momentum on crude oil prices is positive as the MACD (moving average convergence divergence) histogram is printing in the black with an upward sloping trajectory which points to higher prices.  Positive momentum is accelerating higher which is reflected by the upward momentum of the relative strength index (RSI). The index have broken out to the upside and printing a reading of 68, which is on the upper end of the neutral range.

Rig Counts of Stabilized

The weekly rig count reported by Baker Hughes seems to have plateaued in the U.S., held back by range-bound oil prices, rising field costs and skittish capital markets. With oil on the way higher, traders should expected players to come back into the market, as prices move to the 60 per barrel range.

Another significant influential factor is the knock-on effects of the shutdown of refineries due to Hurricane Harvey and the after effects of both Harvey and Irma. Huge draw-downs in fuel and distillates should continue to buoy prices as we move into the winter months. According to the latest report from the Energy Information Administration, distillates (heating oil and diesel fuel), are experiencing record demand as supplies fall into the lower end of the 5-year range for this time of year.

The impact of lower investment

The IEA reports that upstream oil and gas investment was down 44% in 2016 from 2014. While a modest uptick is expected in 2017 the spillover effect of this drawback in investment is in most analyst’s views likely to be tight supply starting perhaps as early as late 2018, especially if the OPEC cuts hold and the US has really plateaued.

The biggest factor in any strength of prices or longer-term reduction in inventory has to be demand driven. According to the IEA, demand growth is a robust 1.6 million barrels a day so far this year, far ahead of earlier forecasts and supporting some of the highest levels of global GDP growth in recent memory, proving yet again that the world craves nothing more than sweet, cheap oil.

Manufacturing Activity Appears to be Slowing

U.S. Chicago Fed National Activity index fell to -0.31 in August after slipping to 0.03 in July which was revised from -0.01 from 0.16 in June and May’s -0.20 which was revised from -0.30. That left the 3-month average at -0.04 for August from unchanged previously which was revised from -0.05, and from 0.15 in June which was revised from 0.09. Of the 85 indicators that make up the index, 50 made positive contributions. A negative reading indicates below trend growth. This isn’t market moving data, however.

NY Fed’s Dudley sees continued gradual policy tightening and temporary factors depressing inflation “fading.” The dovish voter expects the 2% inflation target to be reached in the medium-term and views economic fundamentals as “generally quite favorable,” though the hurricane effects should be short-lived and boost growth over time. Dudley expects the weaker dollar and overseas growth to boost the trade sector, supporting growth and wage gains. Dudley has generally been more hawkish of late, so his remarks on policy tightening and inflation shouldn’t have a major lasting impact on firmer yields.