Crude Oil Stabilizes Just Above Support as Brent Spread Points to higher Prices

U.S. crude oil prices are hovering near the lows for the week, but the spread between Brent and WTI point to higher prices.  Brent is the European benchmark, and it is continuing to face upward pressure and this weeks OPEC production report should continue to buoy prices. WTI on the other hand appears to be capped, by heavy production which is now beginning to back up in specific regions of the United States.

Technicals

Crude oil prices are lower and hovering just above support near an upward sloping trend line that comes in near 66. Resistance on crude oil prices is seen near the 10-day moving average at 69.45. Momentum is negative as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to lower prices.

Why is WTI Facing Selling Pressure

WTI is the benchmark for U.S. crude and is priced in Cushing Oklahoma, which is a landlocked region of the country.  Prices throughout the United States are different reflecting the costs of transporting crude from one location to another.  Recently a disparity in prices has risen due to the lack of pipeline capacity which has failed to keep up with production.

U.S. producers continue to ramp up output, which reached a new high of 10.77 in the last week of May.  The inability to increase capacity has allowed crude oil inventories to rise in specific location, while other areas continue to see a dearth of crude oil stocks.

Getting crude oil to the coast has become an issue, and demand both inside the U.S. and outside the country has climbed. While the U.S. has spare capacity, it cannot move efficiently which is driving up the price of crude that has flexibility which is Brent.

The Brent versus WTI spread has rallied to a 3-year high and is closing in on the 2015 highs. Historically the increase in the spread is a precursor to a rally in crude oil prices.

Refiners Cracks are Mixed

Refiners are searching for pipeline capacity of WTI which is cheap relative to Brent. Refiners that are on the east and west coasts are experience declining margins, as they are purchasing available Brent as opposed to waiting for WTI. As the driving season kicks into gear, refiners will be running at maximum capacity to take advantage of the surge in demand.  The timing will likely continue to drive crude oil demand which should in turn generate higher prices.

Payrolls Where Stronger than Expected

The 223k U.S. May payroll gain beat expectations of 190K after 15k in upward revisions beat estimates after two months of headline payroll undershoots, alongside firm gains of 0.2% for hours-worked and 0.3% for hourly earnings that left a year over year uptick to 2.7%, with no back-revisions. and a workweek that’s spent four months at 34.5. For the bellwether goods sector, jobs rose by 47k with gains of 18k for factories, 25k for construction, and 4k for mining. Hours-worked for the goods sector were flat thanks to a 0.3% drop for factories that offset other gains of 0.6% for construction and 1.2% for mining. Firm goods-sector data tracked robust producer sentiment that extended through May, alongside a welcome improvement in the service sector data. There were gains of 293k for civilian employment and just 12k for the labor force to leave a jobless rate decline to a 3.75% cycle-low that rounded up to 3.8%, and a drop in the participation rate to 62.7%.

Markit PMI Dipped

U.S. final May Markit manufacturing PMI dipped 0.1 point to 56.4, after rising 0.9 points to 56.5 in April. The index was 52.7 a year ago. The May number is just shy of April’s reading, which was the best since September 2014. Strength was underpinned by “sharp increases in production and new business,” said the report, with “The greatest lengthening in supplier deliveries since the series began in October 2009.” The employment index was up versus April, while new orders declined to 58.0 from 58.8. Price pressures eased slightly, but remain elevated.