Crude Oil Price Analysis for September 29, 2017

Crude oil prices whipsawed hitting fresh 5-month highs and then reversing course, moving lower generating an outside day. The bullish case remains for crude and draws in stocks should continue as refineries come back on line.   The backwardation in the Brent market is a bullish sign for crude oil prices, as it shows that current demand is strong.

Technicals

Crude oil prices generated an outside day which usually comes at the top of the rally. This is a higher high a lower low and a lower close, as the last buyers come in and are whipsawed generating a correction. Resistance is seen near the Thursday’s highs at 52.86, while support is seen near the 10-day moving average at 50.86. Positive momentum is decelerating as the MACD (moving average convergence divergence) index is printing in the black, but the MACD histogram has a negative trajectory which reflects consolidation.

Bullish Sentiment in the Term Structure

Bullish sentiment is being displayed by the term structure of crude oil as WTI has moved to less of a contango and Brent futures have exhibited backwardation.  Backwardation is a scenario where near term oil contracts trade at a premium to futures dated further out, which is a clear sign that the market is on its way to rebalancing. Backwardation will help drain inventories at a faster rate in the months ahead. This is because there storage facilities and refiners actually lose money from holding crude oil as current prices are higher than future prices.

Refiners are Revving Up

Refiners should start to come back online and recent data from the EIA shows that runs are increasing. The EIA reported Wednesday that refinery runs on the U.S. Gulf Coast last week rebounded to 8.15 million barrels per day, back in line with the five-year median. This is a rebound of over 2.4 million barrels a day from just two weeks ago, and further upside lies ahead in the coming weeks as refineries return to full strength.

U.S. Q2 GDP Growth was Revised up

U.S. Q2 GDP growth was revised up to a 3.1% rate, as expected for the third look at the data, following the 3.0% pace previously and the 2.6% rate in the Advance report. Growth was 1.2% in Q1. Personal consumption left at the 3.3% rate. Fixed investment was lowered to 3.2% from 3.6% (and versus 2.2% initially). Inventories added $4.3 billion, up from the $0.6 billion previously. Trade added $8.6 billion versus $8.8 billion. Government spending was -0.2% versus -0.3%. The chain price index was unchanged at 1.0%, with the core rate holding at 0.9% too.

Canada Weekly Earnings Dipped

Canada average weekly earnings dipped 0.1% in July compared to June. Earnings grew at a 1.8% year over year pace in July. The establishment survey’s jobs tally shows a 8.6k gain in July. The timely labor force survey revealed an 11.0k rise in July, followed by a 22.2k gain in August. Governor Poloz, in his presser yesterday, noted that “we know from the labor market that we have some slack,” while also observing that unit labor costs are falling because wages are not keeping up with gains in productivity.

U.S. Advanced Indicators Saw an Trade Suprise

The U.S. advance indicators report revealed a $1.3 billion upside August trade surprise, with a big overshoot for exports despite expected hurricane disruptions but lean imports, alongside wholesale and retail inventory figures that sharply beat assumptions. The mix lifted our Q3 GDP estimate to 3.0% from 2.6%, following the expected boost in the Q2 GDP growth rate to 3.1% from 3.0%. For August trade in goods, the advance deficit narrowed to $62.9 billion from $63.9 billion in the last goods and services trade report. There was a 0.2% rise in exports and a 0.3% decline in imports. The advance goods data implies an August narrowing in the goods and services trade deficit to $42.5 billion from $43.7 billion in July, with a 0.3% August rise for exports and a 0.2% drop for imports. For inventories, a 1.0% August wholesale inventory surge followed a 0.6% July increase, alongside a 0.7% retail inventory rise with a 0.4% ex-auto increase that followed respective July figures of zero.