Crude Oil Price Analysis for August 21, 2017
Crude oil prices rebounded on Friday following news from Baker Hughes that oil rigs declined. This comes following news earlier in the week, that crude oil inventories declined at a larger than expected rate. The contango in the oil market which is the term structure has narrowed significantly making it more difficult for U.S. oil producers to hedge their exposure.
Technicals
Crude oil prices surged 2.8%, rebounded to resistance near the 10-day moving average at 48.30. Prices will need to close above 50.50 to generate upside momentum. Support is seen near the 50-day moving average at 46.50. The RSI (relative strength index) moved higher along with price action reflecting accelerating positive momentum. Prices are still making a topping pattern, and need to take out the 2017 highs to end the topping pattern.
U.S. Production has Been Rising
The move Friday comes as traders focus on the increases seen in U.S. production rather than the robust inventory drops experienced over the past few weeks. Inventories have been declining as refiners ramp up production and exports from Saudi Arabia decline. What appears to be happening is that U.S. producers are trying to fill the void, but the question of sustainability remains.
Last week, U.S. oil producers ramped up production with the EIA reporting a shocking jump in output. Total U.S. production rose to 9.5 million barrels per day for the week ending on August 11, up 79,000 barrels per day from a week earlier. That puts U.S. output at the highest level in nearly two and a half years. The U.S. shale industry has been adding new supply pretty much uninterrupted since late last year, despite volatile swings in oil prices over the course of 2017. In fact, the gains continued even through the price downturn in June, which saw WTI flirt with the $42 per barrel threshold, which, at first glance, suggests that the shale industry is doing just fine.
U.S. producers were able to produce uninterrupted because the oil they were producing was locked in with future prices, as there was a robust contango in the market which allowed U.S. producers to lock in gains.
The term structure of the market is measured by looking at current prices relative to future prices. For example, crude oil delivered in December of 2017 minus crude oil delivered in December of 2018. (this is charted as 2018 minus 2017 so it can be viewed as a positive number). The contango in June was as high at $2.30 per barrel. So, when current prices were $42 in June, traders could lock in a sales price of $44.30 for delivery in December 2018.
If you fast forward to today, the contango is all but vanished. Now, the term structure only shows a $0.61 benefit, which makes $47 crude oil $47.61. If prices revisit the $42 level, U.S. producers will not be able to lock in higher gains, and will likely pull back production allowing prices to rebound.
Active Oil Rigs Declined
Baker Hughes, the oil service giant, reported that the number of active oil and gas rigs in the United States fell this week by 3 rigs. Combined, the total oil and gas rig count in the US now stands at 946 rigs, up 455 rigs from the year prior. Oil rigs in the United States now number 763, 357 rigs above this time last year. Canada lost 6 oil rigs this week, with the number of gas rigs holding steady, for a total of 214 oil and gas rigs, 93 above the year ago levels.
Despite the falling average weekly gain in active US oil rigs, US crude oil production continues to increase, with average production averaging 9.502 million barrels per day for the week ending August 11, according to the Energy Information Administration, who now expects US production to reach an average of 9.9 million barrels per day in 2018.
Canadian CPI Accelerated
Canada’s CPI accelerated to a 1.2% year over year growth pace in July from the 1.0% year over year rate of increase in June. CPI was flat in July on a month comparable basis following the 0.1% month over month dip in June. The annual and month gains in total CPI matched expectations. The core measures were either flat or improved on an annual basis. CPI-trim growth was 1.3% year over year in July from 1.2% in June, CPI-common was 1.4% from 1.4% and CPI-median was 1.7% from 1.6%.
This article was originally posted on FX Empire
