Crude Oil Tumbles Following Comments from Russian Energy Minister

Crude Oil prices are tumbling on Friday, in early North American trade, as traders dump long position.  Prices are under pressure as the Russian Energy Minister said that supply restriction from the OPEC and non-OPEC group could be eased now that global inventories have stabilized. The Saudi’s expressed the same view, following complaints by major consumers such as India.  Gasoline demand in the United States is solid, and should continue to climb as the driving season begins this weekend.

Technicals

Crude oil prices are tumbling in early North American trade. WTI has dropped more than 5% since hitting a trend high earlier in the week at 72.90.  Support is seen near the 50-day moving average at 67.49. Resistance is seen near the 10-day moving average at 71.22.  Momentum has turned negative as the MACD (moving average convergence divergence) index generated a crossover sell signal. This occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses below the MACD signal line (the 9-day moving average of the MACD line).

Gasoline Prices are Elevated Because of Higher Brent Prices

Ahead of this summer’s driving season gasoline prices are elevated as Brent crude oil has surged above $80 per barrel.  After hitting a trend high of $80.50, Brent has declined nearly 4.5%, which will provide some relief to gasoline prices. The gasoline crack versus Brent is relatively stable, which means that most of the increase in gasoline prices has come from the rise in crude oil prices.

Crude oil prices solid off in the later part of the week following comments from Russia’s energy minister Novak who said that the OPEC-led supply restriction initiate could be softly eased on the view that global inventories are stabilized. Saudi Arabia also expressed assurance, that there would be enough crude supply to support global growth after Brent benchmark prices topped $80 for the first time in the cycle, a development which sparked a complaint from India. Oil prices are now set for the first weekly decline out of the last seven weeks.

The Gasoline Crack is in the Middle of its Long-Term Range

The gasoline crack, which reflects the refining margin of U.S. gasoline relative to Brent crude oil is slightly above the middle of the average range.  The spread is approximately $2 per barrel above the 50-week moving average with highs over the past 10-years in the upper 20’s and the lows during the great recession below zero.  With refining margins near the middle of the average range, the increase in gasoline prices were mostly a function of rising crude oil prices.

Consumption Remains Robust

Ahead of the driving season, U.S. gasoline consumption has remained relatively high, putting additional upward pressure on prices. As of May 11, 2018, the four-week average U.S. demand was 9.4 million barrels per day approximately 1% higher than the May 12, 2017 levels. AAA reports that it expects more than 41.5 million Americans will travel this weekend, nearly 2 million more travelers than last year and the highest travel volume since 2005. Decreasing gasoline inventories, including finished gasoline and gasoline blending components, are also contributing to the recent increase in gasoline prices. While 2018 inventories have remained higher than the five-year average, they have remained lower than 2017 inventory levels for the past five weeks. High consumption and geopolitical unrest is a bad combination for drivers.