Each week, the U.S. Energy Information Administration (EIA) issues its weekly inventories report. In the report it gives us information on the supply of crude oil, gasoline and distillates. It also provides data on production and capacity utilization. One of the most overlooked parts of the report is data on U.S. exports. This is probably because the U.S. is primarily known as an importing country.
This week, export data jumped to the forefront, when a surprise rise helped trigger a volatile response in the crude oil market.
According to the EIA, U.S. crude oil supply fell sharply the preceding week as crude exports rose to a record high of nearly 2 million barrels per day (bpd).
Crude inventories fell 6 million barrels in the week-ending September 29, compared to a forecast of a 756,000 barrel draw. This was the second straight draw as Gulf Coast refineries restart after weeks of shutdown due to Hurricane Harvey.
The surprise news was that crude exports jumped to 1.98 bpd, surpassing the 1.5 million bpd set the previous week.
Traders said the jump in U.S. exports points to growing demand and rising profile of the United States as a major global supplier of crude and oil-related products.
Traders also said the steep increase the past two weeks has in part been driven by a recent widening between prices for U.S. West Texas Intermediate (WTI) crude and Brent futures.
The international-benchmark North Sea Brent last week hit its highest premium over WTI in two years, making WTI crude increasingly competitive in foreign markets.
To summarize, the wide price premium of Brent over WTI crude has made the international benchmark less desirable, triggering increased foreign demand for U.S. oil.
The spread between the December Brent crude oil and the December WTI crude oil futures contracts narrowed to $5.20 from $5.31 before the data.
The EIA report also showed that U.S. crude imports fell last week by 706,000 bpd.
U.S. exports should continue to rise until the spread between Brent and WTI crude tightens. Some traders are wondering how long this will last given the current supply/demand outlook. However, buyers of U.S. crude are facing a rising U.S. Dollar, which will make WTI crude more expensive for foreign buyers.
The dollar is strengthening due to rising expectations of a Federal Reserve interest rate hike in December. Currently, investors are saying there is about an 83 percent change the central bank will increase its benchmark rate.
Due to the recent surge in the dollar, next week’s exports number could fall due to lower demand from foreigners. This is one thing to watch for in next week’s EIA report.
In other news, Russia and the Saudis said they support an extension of the production cut policy controlled by OPEC and non-OPEC producers. According to reports, they support an extension to the end of 2018. However, traders are saying the extension is likely to involve tapered production cuts.
The markets barely rallied on this news which to me represents a change in investor sentiment. About a month ago when crude oil was in a news driven mini-bull market, this type of news would’ve probably sent prices over the top. However, the current price action suggests that we’re not in a buyer’s market anymore and that sellers have taken control.
Throughout the year when crude has crossed the $50 level, we’ve seen some aggressive hedging from producers. This action may be preventing prices from rising further.
As far as Russia and the Saudi’s are concerned, I think investors didn’t react too much to the news of the production cut extension because in September, OPEC and the non-OPEC producers passed on a chance to make the extension official. As it stands, the new talk is just that, talk. I don’t think this will become bullish news until OPEC makes it official and in writing.
Monthly December West Texas Intermediate Crude Oil
(Click to enlarge)
The monthly chart indicates that crude oil is still in a downtrend with price locked inside a pair of retracement zones.
The main trend is down according to the swing chart. A trade through $58.44 will change the main trend to up. A move through $43.08 will signal a resumption of the downtrend.
Momentum on the monthly chart has been trending higher since June. A trade through $53.11 will indicate that upside momentum is getting stronger.
The main range is $37.73 to $58.44. Its retracement zone is $48.09 to $45.64. Holding above this zone will give the market a slight upside bias.
The short-term range is $58.44 to $43.08. Its retracement zone is $50.76 to $52.57. This zone is acting like resistance.
Without extremely bullish or bearish news, price are likely to bounce between $50.76 and $48.09 over the near-term.
A breakout and sustained move over $52.57 will indicate the buying is getting stronger and a breakdown under $45.64 will be bearish.
Monthly December Brent Crude Oil
(Click to enlarge)
The Monthly December Brent Crude Oil chart shows the strength in this market over the WTI market.
Its main range is $38.00 to $60.00. Its retracement zone is $49.00 to $46.40. The market is currently trading well above its retracement zone which indicates strength.
Falling back into this retracement zone will likely bring the spread between Brent and WTI crude back in line.