Crude Oil Price Analysis for October 11, 2017

Oil prices recaptured the USD 50 per barrel handle ahead of inventory data, which is forecast to show a third weekly drop in U.S. crude inventories. Saudi Arabia meanwhile said it’s state oil company will sell 560,000 barrels a day less than customers are demanding in November. At the same time September data showed that Iraq and Iran boosted crude exports in September, thus taking advantage of lower shipments from Saudi Arabia.

Technicals

Crude oil prices surged higher climbing above the 50-handle reaching a high above 51, before easing back to close the session near 50.86. Prices recaptured resistance which is seen as short-term support near the 10-day moving average at 50.69.  A break below this level would lead to a test of an upward sloping trend line that comes in near 48. Negative momentum is decelerating as the MACD (moving average convergence divergence) histogram has an upward sloping trajectory despite the MACD line which is printing in the red. The relative strength index moved higher which reflects accelerating positive momentum with the current print at 55, which is in the middle of the neutral range and reflects consolidation.

Output Increased by Iraq and Iran

Iraq and Iran boosted their crude oil exports abroad last month, filling the void left by lower Saudi exports to key destinations in an effort to expand their international market share. Iraq, shipped 3.98 million barrels per day to foreign clients in September, which was the highest daily rate since last December. Iran, for its part, exported 2.28 million barrels per day in September, the highest since February.  It appears that Iran and Iraq are opportunistic, using the current output cut agreement to increase revenues from oil.

The two neighbors have also made no secret of their oil production expansion plans. Despite their participation in the OPEC-wide production cut, Iraq and are Iran both eager to boost their crude oil production sooner rather than later. Iraq has plans to increase production to more than 4.99 million barrels a day and further develop several fields would could provide the additional capacity. This means that Iraq will be very reluctant to agree to any further extension to the OPEC deal, which Russia’s Vladimir Putin last week suggested could be extended until end-2018.

Iran is growing its production, as it was allowed to pump an additional 90,000 barrels per day based on its October production level under the OPEC cut deal, and it is expanding its footprint in Asia. China is a major destination for Iranian crude, and fresh cargo data suggests that last month Iran exported 600,000 bpd to China, versus 833,000 bpd of Asia-bound crude oil exports for Saudi Arabia.

One of the issues that OPEC continues to face is the speed at which U.S. shale producers turn on the spigots when prices move above 55 per barrel. With shale producer now able to generate profits at 50 dollar oil, it is hard for prices to remain above that level.

OPEC Asks for Shale Producer Compliance

In an unconventional plea to U.S. shale drillers, OPEC’s Secretary General Mohammad Barkindo urged North American producers to share the responsibility for drawing down the global oil overhang. “Emerging from this most vicious of all oil cycles, the need to sustain the rebalanced market in the medium- to long-term, some extra-ordinary measures could be considered by countries participating in ‘the Declaration of Cooperation’, including expanding the membership,” Barkindo said at the India Energy Forum in New Delhi.

The EIA estimates that crude oil production will average 9.3 million barrels a day for 2017 and 9.8 million bpd in 2018, which would mark the highest annual average production in U.S. history, surpassing the previous record of 9.6 million bpd from 1970. Last year, average U.S. oil production was 8.9 million barrels a day, lower than the 2015 level of 9.4 million barrels a day. Rising supply from the U.S. and from other producers outside of the deal, as well as recovery of production in exempt OPEC members Libya and Nigeria, have been offsetting much of the OPEC/non-OPEC production cuts.