Crude Oil Price Analysis for September 27, 2017

Crude oil prices ran up to a fresh 5-month highs before profit taking saw prices dip on the day. Brent prices were also on a tear, climbing above $58 per barrel.  Strong demand for distillates continues to drive petroleum prices higher.  Export from the United States have pushed distillate demand higher by more than 14% according to the latest estimates from the Department of Energy. Meanwhile Iran exports continue to climb, despite softening exports from Saudi Arabia. The recent OPEC meeting in Vienna failed to come to a conclusion of whether to increase production cuts.

Technicals

Oil prices hit a fresh 5-month high, as bullish demand continues to outpace slowing supply. Prices broke through resistance near the 52 handle but were unable to hold on to gains closing near 51.94. A close above the 52 level would lead to a test of the April highs at 53.67.  Prices have been forming a topping pattern for all of 2017.  Prices topped out in the Q1, and continued to drift lower throughout most of the year. For a new uptrend to commence prices would need to eclipse the 54.50 level. This would be difficult because this is the level that ignites drilling activity.  Drilling rig activity has started to top out, but it will quickly move back if prices begin to rise. Momentum on crude oil prices remains positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to higher prices. It appear that prices reached overbought level as the RSI (relative strength index) touch the overbought 70 trigger level and has since eased.  The RSI will need to clearly push through the 70 level, for the markets to be convinced that momentum is accelerating and poised to breakout to the upside.

Rig Counts Reflect Supply

The Baker Hughes weekly active rig counts seems to have stabilized in the U.S., held back by range-bound oil prices, which have not breached the $55 level, and have reduced interest in investing in shale production. With oil on the way higher, traders should expected players to come back into the market, as prices move to the 55 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.

Exports From Iran are Climbing

Iran currently exports a total of 2.6 million barrels of crude oil and condensate combined, with crude oil at around 2.2 million barrels, and condensates at up to 450,000 barrels a day. Iran expects to ship more crude and condensate overseas at the end of this year. Currently, some 60% of the crude oil is bound for Asia, and 40% for Europe.

The Dollar is Mixed

The dollar was stronger during the European trading session which allowed crude oil prices to test higher levels, but weaker than expected data including soft U.S. Housing starts, weighed on the greenback. Additionally, the Fed is now concerned with low inflation which might keep rates low. Fed Chair Yellen was the keynote speaker at the NABE conference and spoke on the topic of “Inflation, Uncertainty, and Monetary Policy.”  It appears that the Fed is unsure why inflation has not perked up and believe that monetary policy will need to stay lower for longer for the Fed to see inflation move up to its target of 2%. Currently the year over year core PCE inflation estimate if 1.4%, well under the Feds target.