Crude Oil Price Analysis for September 4, 2017

Crude oil prices were nearly unchanged buoyed by gasoline supplies which are dwindling due to refinery outages that have curtailed operations in nearly 20% of the U.S. production. The lack of refining capability has weighed on crude oil demand which has seen gasoline margins soar. OPEC continues to cap output and reduce exports which should eventually allow oil prices to move higher.

Technicals

Crude oil prices generated an inside day which is one of indecision. Prices were unable to recapture the 10-day moving average which is seen as resistance near 47.22. Support is seen near the weekly lows at 45.58. Momentum is neutral as the MACD (moving average convergence divergence) histogram prints in the red with a flat trajectory which reflects consolidation.

Distillate Supply is Low

The distillate market is experiencing a short squeeze, driven by the lack of supply following refinery closures due to Hurricane Harvey. Nearly 20% of U.S. production is off-line, and Motiva, the U.S.’s largest refiner confirmed on Thursday that it would take 2-weeks to come back to full operation.  While the supply of gasoline and distillates are dwindling, the demand for oil is tumbling, as refiners are not purchasing crude.  While there will be some relief, to gasoline prices as the U.S. shifts to winter gasoline production, export demand for distillates will remain strong, putting upward pressure on heating oil prices.

Recall, total demand for products and specifically distillates are running at high levels, due to global demand and the rise in distillate exports.  In its most recent estimate of demand, the Energy Information Administration reported that total products demand over the last month period averaged over 21.2 million barrels per day, up by 3.4% from the same period last year. Most of this was driven by distillate demand which includes heating oil and diesel. Distillate fuel demand averaged 4.2 million barrels per day over the last month, up by 11.1% from the same period last year. Jet fuel demand remains on the rise. The EIA reported that jet fuel demand is up 3.3% compared to the same month last year.

Exports and Output Remain Stable

Saudi Arabia continued to further cut crude oil exports in August to 6.6 million barrels per day, bringing OPEC’s total for the month to 25.897 million barrels daily. All but five of OPEC’s members cut their daily shipments abroad. The notable exceptions were Algeria, Angola, Iran, Kuwait, and Nigeria. For Iran and Nigeria, August marked the highest daily export rate year-to-date. Despite the decline in OPEC crude oil exports, oil prices continue to falter, due to the lack of demand from U.S. refiners.

Iran led the increase with an additional 182,000 barrels per day versus July, to a total 2.698 million barrels per day exported in August. Kuwait upped its outbound shipments by 157,000 barrels per day to 2.135 million barrels per day. Algeria exported 147,000 barrels per day more in August than in July, at 668,000 barrels per day, and Angola exported 103,000 barrels per day more, at 1.763 million barrels per day. Nigeria increased its August exports by 102,000 barrels per day to 2.06 million barrels per day.

Saudi Arabia led the cutters’ camp, exporting 494,000 fewer barrels per day in August than in July, followed by Qatar, which reduced its foreign crude oil shipments by 208,000 barrels per day from July, to 732,000 barrels per day in August.

Libyan exports also fell, by 64,000 barrels per day to 813,000 barrels per day. Production at Sharara was suspended for quite a while last month. Yet, other terminals, namely Es Sider and Zueitina, loaded and will be loading more crude going forward, and these loadings will offset the declines in Zawiya.

While the latest sign that Saudi Arabia is indeed committed to doing whatever it takes to help the oil market rebalance should be a positive one for market participants, prices continue to be depressed. Compliance among OPEC members had risen to 89 percent and that also estimated OPEC crude oil output had fallen by 170,000 barrels per day in August. The precariousness of OPEC’s position was highlighted by the effects of Hurricane Harvey, which apparently provided enough of a counterweight to the positive potential of these figures.