Oil Price Analysis for July 3, 2017

Oil prices surged higher on Friday following the Baker Hughes rig count which showed that rigs dropped for the first time in 24-weeks, as prices near $45 per barrel started to become unprofitable to some shale producers. Crude markets have been underpinned by data on Wednesday showing a dip in U.S. production, which reflects curtailed supply from costly shale mining operations following five weeks of price declines. A weaker dollar is also helping to buoy prices. The EUR/USD climbed to a 1-year high on Thursday.  Since crude oil is priced in dollars, a weaker dollar makes crude oil less expensive in other countries.  China’s manufacturing PMI increased more than expected which also helped buoy crude oil prices.

Technicals

Crude oil prices surged 2.5% on Friday, recapturing the 46 handle, following the Baker Hughes rig count which declined for the first time in 24-weeks.  With hedge funds out of their long position in futures and options, the move back into crude oil long positions helped buoy prices.  Resistance is seen near the 50-day moving average at 47.54.  A break of this level would lead to a test of a downward sloping trend line that comes in near 50. Support is seen near the 10-day moving average at 43.96.

Momentum on crude oil prices 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 crude oil prices.

Rig Counts Finally Dipped

According to Baker Hughes, the oil service giant, the number of active oil and gas rigs in the United States fell by a single rig this week, and thus concludes the US shale patch’s impressive run of 23 weeks of steady gains. The decrease comes as oil prices are on track to record their worst first-half performance since H1 1998. The number of oil rigs in operation decreased by two, while gas rigs increased by one. Combined, the total oil and gas rig count in the US now stands at 940 rigs, which is 509 rigs over a year ago today. While the numbers were down for the first week in a long time in the United States, Canada has seen four weeks of two-digit gains, adding 90 rigs in total in that timeframe, after this week’s 19-rig gain.

Chinese PMI Increase More than Expected

China’s official manufacturing purchasing managers’ index increased to 51.7 from 51.2 in May. The June reading beat a median forecast of 51.1. The sub index measuring new orders climbed to 53.1 from 52.3 in May, while the production sub index strengthened to 54.4 from 53.4. China’s official nonmanufacturing PMI, also released Friday, rose to 54.9 in June from 54.5 in May.

Japanese CPI Improved in May

Japan’s core CPI improved to an 0.4% year over year pace in May from the 0.3% growth rate in April. The modest pick-up was roughly as expected. National CPI grew at a 0.4% year over year clip in May, matching the 0.4% rate in April. But Tokyo core CPI which is ex-fresh food, but energy is included in Japan, was flat in June after the 0.1% gain in May. Tokyo CPI was also flat in June on the heels of the 0.2% year over year gain in May. The lack of growth in both measures of Tokyo CPI during June suggests a similar sputtering of national CPI growth in June, which could further distance the BoJ from the hawkishness that has gripped the BoC, Fed and ECB recently.

Japanese Unemployment Rate Rose in May

The Japanese unemployment rate rose to 3.1% in May from 2.8% in April. Household spending dipped 0.1% year over year in May following the 1.4% drop in April. Industrial production tumbled 3.3% month over month in May after a 4.0% rise in April.