Crude Oil Price Analysis for September 6, 2017

Crude oil prices surged on Tuesday as refiners came back on line quicker than expected, driving up the demand for crude oil and increasing the supply of products such as gasoline and heating oil.  Margins tumbled on Tuesday as gasoline prices fell nearly 3%, just as much as crude oil prices gained. With Hurricane Irma moving toward the Gulf of Mexico, prices are beginning to rise.

Technicals

Crude oil prices surged more than 3% and are poised to test target resistance near a downward sloping trend line that comes in near 49.50. Support on crude oil is seen near the 10-day moving average at 47.35. The next level of target resistance on a break of 49.50 is the 50.50 region.  Momentum on crude oil price has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the spread (the 12-day exponential moving average minus the 26-day exponential moving average) crosses above the 9-day exponential 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.

Refineries are Coming Back Online

As refineries along the Gulf Coast started returning to normal operations after Hurricane Harvey, WTI prices surged. The biggest storm in more than five decades to hit the Texas coast took about 25% of the country’s refining capacity offline. As of Sunday, around 2.3 million barrels of refining capacity, or 13% of the total in the United States, remained shut down. Including partial shutdowns, around 17% of refining capacity was offline as of Sunday. By Monday afternoon, however, the shut-down capacity had fallen to approximately 10%.

Meanwhile, traders are buying oil amid another spike in geopolitical tensions. The spike followed the latest missile test North Korea performed over the weekend that was said to be carrying a hydrogen bomb. A war could lead to a substantial spike in international crude prices. Such a conflict would cripple North Asia’s production and refining capacity. Some 65% of Asia’s crude oil refining capacity is located in China, Japan, and South Korea.

OPEC Could Extend Deal

The crude oil production cut deal that OPEC, Russia, and several other producers agreed to late last year could get yet another extension. This extension would push the deal beyond the March 31, 2018 end date that was agreed earlier this year, according to Russia’s Energy Minister Alexander Novak, speaking to news agency TASS.

Novak said he had discussed another extension with his Saudi counterpart, Khalid al-Falih, at a meeting in Saint Petersburg earlier this year, noting that all options are on the table and no decisions have been made yet.

Russia’s Energy Minister has been consistently guarded in his comments regarding the deal ever since the idea was floated last year. We’re unlikely to see anything more specific than such guarded comments, suggestions, and speculation until OPEC’s next meeting, due to take place in November.

This recovery has been unsteady, to say the least, as compliance levels among the participants in the deal continue to be a cause for concern and the main headwind, U.S. shale output growth, persists.

Demand, however, seems to be improving, which is lending some support to OPEC and its partners. The chances of the deal getting extended will likely remain hard to gauge in the coming months. On the one hand, OPEC’s de facto leader Saudi Arabia has demonstrated more than once that it is prepared to go to great lengths to support prices, but at some point, Saudi Arabia’s commitment to do whatever it takes could involve a loss of market share that is difficult to live with, especially as U.S. crude starts flowing into Asia, taking up OPEC territory.

A Lower Dollar Buoys Crude

Fed Governor Brainard sees raising rates more gradually than the median forecast as prudent, but is ready to start shrinking the balance sheet. If rates remain on hold, the dollar becomes less attractive relative to other currencies. Since crude oil is priced in dollars, a lower dollar means crude oil is less expensive in other currencies allowing prices to rise. She remains concerned that recent low price readings are due to depressed underlying inflation, which remains “well short” of its objective, and remains cautious on rate hikes accordingly. Moreover, she thinks the Fed should make it clear that it is comfortable pushing inflation “modestly above target for a time.” Dovish Brainard sees few signs of asset bubbles and feels inflation data should be closely assessed and the Fed should be confident before raising rates.