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Crude Oil Rebounds Despite Trump Tweet

Crude fell nearly $1 following Trump tweet saying “Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!” The tweet comes as Saudi has recently said it would be happy with $80-$100 crude prices, and as OPEC/NOPEC keeps their production capped.

Technicals

Crude oil prices rebounded late in the trading session to close nearly unchanged and recapturing the 68-handle after initially testing lower levels. With the term structure pointing to strong demand for crude oil, prices will likely remain elevated. Support is seen near the 10-day moving average at 66.80. Resistance is seen near the April highs at 69.56. Momentum is positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to higher prices.

Crude Hits 40-month Highs

Crude oil prices hit a 40-month high this week, notching up a high of 69.56, and then pulling back. Inventories are now in the middle of the 5-year average range at 420-million barrels compared to the 540-million barrels in stocks last year at this time which was well above the 5-year average range. The Saudi’s have spearheaded the decline in exports to help rebalance the crude oil markets, but domestic production is climbing at break neck speed and is currently at the highest levels on record.

Refiners are Running Hot

The bullish price action is a function of demand which continues to be strong. Refiners are running at very high levels ahead of the driving season as gasoline inventories are in the middle of the 5-year range. For all of 2018, EIA expects U.S. regular gasoline retail prices to average $2.64 per gallon and gasoline retail prices for all grades to average $2.76 per gallon, which would result in the average U.S. household spending about $190 which is up 9% year over year. Refineries operated at 92.4% of their operable capacity last week. Gasoline production increased last week, averaging 10.2 million barrels per day.

Drilling is Solid

According to EIA’s March Drilling Productivity Report crude oil production growth in the United States and in particular the Permian region is forecast to accelerate in April, growing month-over-month by 0.08 million barrels per day. So, while imports into the U.S. remain subdued production growth continues to accelerate.

The Term Structure is Bullish

With prices climbing to fresh 40-month highs, the term structure of crude oil remains robust. The term-structure, reflected in the chart of June 2018 crude oil versus June 2019 crude oil, is currently $6.54. This means prices today are more than $6.5 higher than prices in the future. When the term-structure is this high, there is no incentive for refiners to store crude oil and there is no incentive for pipeline companies to purchase crude oil and store it.

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If you do that, you would lose at least $6.5 plus storage costs and financing. When prices today are higher than prices in the future the term to describe this situation is called backwardation. It exists because refiners are interested in using crude because the demand for products such as gasoline and heating oil are very high. Until the term structure begins to decline and moves toward flat or contango, prices should remain buoyed.

This article was originally posted on FX Empire

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