Crude Oil Consolidates forming Bear Flag Pattern

Crude oil prices moved lower and continued to form a bear flag pattern.  Prices have been trading under pressure following comments from Russia and Saudi Arabia that they could consider curbing their output cuts when they meet on June 22.  This weeks EIA number showed an unexpected build in crude oil inventories due to a larger than expected increase in imports.  WTI is trading at a significant discount to Brent and Dubai crudes, which is a relatively bullish sign.

Technicals

Crude oil prices moved lower and are trading sideways forming a bear flag pattern which is a pause that refreshes lower. Resistance is seen near the 10-day moving average at 66.22. Support is seen near the June lows at 64.22. Negative momentum is decelerating as the MACD (moving average convergence divergence) histogram prints in the red with an upward sloping trajectory which points to consolidation.

Non-Domestic Crude oil prices Continue to Gain Traction

Crude oil prices are continuing to diverge as international benchmarks rise relative to land locked WTI. The huge increase in production in the U.S. is capping prices and increasing demand for U.S. crude oil outside the United States. While production in the U.S. has skyrocketed, pipeline capacity has failed to keep up allowing pockets of oil gluts to generate headwinds for WTI.

Demand Could be Dipping

Demand could also be faltering. Data out of China showed a dip in May crude imports to 9.2 million barrels per day, down from the record high seen in April of 9.6 million barrels per day. Surging U.S. output is also featuring in market narratives, which has driven the discount of U.S. WTI crude over Brent and Dubai crude to its sharpest since 2015. Market participants are also anticipating a softening in supply limits from OPEC and Russia at their meeting on June 22, to offset supply outages in Venezuela.

The spread between the middle eastern benchmark Dubai crude and WTI has surged in 2018 rising from the 5-year average near $2 per barrel, to a high of $8.93. The spread to Brent crude oil has been even more significant rising to $11 per barrel.  The increase shows that lack of supply that is coming from OPEC crude relative to supply from U.S. production. U.S. production according to the latest report from the Department of Energy has increased to 10.8 million barrels per day. The United States is the second largest producer of crude oil and higher prices have now become more important to the U.S. economy then lower prices.

OPEC meets to determine future production on June 22, 2018.  While there are those who believe that OPEC will vote to increase production when their agreement runs out, they are more likely to use rhetoric to keep prices stable. In fact, Saudi Arabia wants to IPO Saudi Aramco, their state-owned oil company and needs prices to stabilize near $80 per barrel for the IPO to be considered successful.