Crude Oil Price Analysis for September 8, 2017

Crude oil prices are moving higher as demand for refined products such as gasoline and heating oil remain robust.  Refinery inputs are much lower week over week, while operations in the latest reported week are down significantly in the wake of Hurricane Harvey.  Runs have been increasing, which has allowed the crack to contract slightly but demand for products remains robust, as Hurricane Irma bares down on Florida.

Technicals

Crude oil prices were nearly unchanged mid-day as products such as heating oil broke out leading the petroleum complex higher.  Resistance is seen near a downward sloping trend line at 49.50. A break of this level would lead to a test of the 52 handle. Support on crude oil is seen near the 10-day moving average at 47.58. Momentum has turned positive as the MACD (moving average convergence divergence) index recently generated a crossover buy signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread.

Refinery Runs Tumble

The EIA reported that U.S. crude oil refinery inputs averaged 14.5 million barrels per day during the week ending September 1, 2017, about 3.3 million barrels per day less than the previous week’s average. Refineries operated at 79.7% of their operable capacity last week. Gasoline production decreased last week, averaging over 9.5 million barrels per day. Distillate fuel production decreased last week, averaging 4.5 million barrels per day.

The Hurricanes have impeded crude imports, which has been helpful to crude prices given that refineries were operating well below capacity. With 25% of U.S. refining in the Gulf area, crude demand fell off a cliff. The EAI reported that U.S. crude oil imports averaged 7.1 million barrels per day last week, down by 822,000 barrels per day from the previous week.

Inventories Were Mixed

Inventories were mixed as expected.  The EIA revealed that U.S. commercial crude oil inventories increased by 4.6 million barrels from the previous week. This compares to expectations of a 3-million-barrel increase. Gasoline inventories decreased 3.2 million barrels last week, while distillate fuel inventories decreased by 1.4 million barrels last week. Total commercial petroleum inventories increased by 7.0 million barrels last week.

Demand Remains Solid

Demand remained solid. Total products demand over the last month averaged about 20.8 million barrels per day, up by 0.2% from the same period last year. Over the last month gasoline demand averaged over 9.5 million barrels per day, down by 1.0% from the same period last year. Distillate fuel demand averaged about 4.1 million barrels per day over the last month, up by 9.9% from the same period last year.

Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 2.8% below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 475,000 barrels per day. Distillate fuel imports averaged 110,000 barrels per day last week.

The Dollar Tumbles Buoying Crude Prices

The dollar tumbled as the ECB left rates unchanged and cut back inflation forecast, mainly due to a stronger than expected EUR. The forecast for this year was left unchanged at 1.5%, but projections for 2018 and 2019 were cut to 1.2% and 1.5% from 1.3% and 1.6% respectively. So even at 2019 the headline rate would remain clearly below the 2% limit. GDP forecasts were left unchanged at 2.2% this year, 1.8% in 2018 and 1.7% in 2019.

Jobless Claims Dropped

U.S. initial jobless claims jumped 62k to 298k in the September 2 week, after rising 1k to 236k in the August 26 week. It’s the highest since 2012, but the surge is a function of Hurricane Harvey. That boosted the 4-week moving average to 250.25k from 236.75k. Continuing claims fell 5k to 1,940k in the week ended August 26 after dropping 9k to 1,945k previously.

Productivity Grew

The Q2 productivity growth boost to 1.5% from 0.9%, with an associated hike in output growth to 4.0% from 3.4%, tracked the expected lift from the Q2 GDP growth boost, following unrevised Q1 growth of 0.1% for productivity and 1.8% for output. We saw hourly compensation growth revisions to 1.8% from 1.6% in Q2, and to 4.9% from 5.5% in Q1, which slightly undershot revised income data. The mix left unit labor cost growth of 0.2%  in Q2 and 4.8% in Q1. Productivity has tracked GDP gyrations around a more stable growth path for hours-worked and payrolls, with a Q2 bounce after a Q1 stalling. The trend in productivity growth for the expansion remains disappointing. For Q3, we expect a 3.0% productivity growth rate that beats the 1.7% average over the 15 years since the start of the last expansion in Q4 of 2001, alongside a 4.3% output rise that beats its 2.2% average, and a 1.3% hours-worked rise that beats the 0.5% average.