Crude sidewinding

March 2, 2017 08:37 AM

Conflicting stories are keeping oil in a sideway reading range. Crude oil is under pressure after a report that Saudi Aramco cut April official selling prices for its crude oils to Northwest Europe by between 45 cents/bbl and 60 cents/bbl versus March. That is raising concerns about compliance to cuts or it could be just reflection increasing demand. On the bull side Iraqi oil shipments of about 105,000 barrels a day were halted briefly on Thursday after Kurdish troops seized control of a pumping station in disputed Kirkuk province and demanded that crude shipments to the country’s central government be stopped.

U.S. oil inventories hit a record high but OPEC and non-OPEC compliance cuts are at a record high as well. The conflicting factors are keeping oil in a tight, sideways trading range that seems like it has been going on forever. In fact, the last time I saw a market go sideways for so long, it broke out like a coiled spring to the upside. You do not have to have that long of memory; just look at the new record highs in the stock market because that is the market I am talking about.

That was the recent up move in the Dow Jones Index and the S&P 500 market that went to the upper Bollinger band yesterday to new record highs; and is a perfect example of how a market can move after it breaks out of long sideways move. I believe that crude oil will have a similar upward spike in the coming weeks or months. History shows the longer we go sideways, the bigger the eventually move will be and I predict it will be to the upside for a multitude of reasons.

When a market gets into a long-term sideways pattern, normally it will break out of that pattern the way it came into it. In the case for crude oil, that was from a significant rally. In fact, if we indeed breakout to the downside, that would be extremely worrisome because it would project sharply lower oil prices and more than likely a deep recession.

While that is possible the stock market is suggesting the opposite. The market is pricing in strong future economic growth that would bode well for oil demand growth in the future. It is possible that we could have some unforeseen economic event that could cause a deep recession but right now I am not seeing it. I know some are fearful that the stock market is going to crash but it really is not overextended enough from a historical basis to do that. I know that we are setting records last set during 1987 and that is worrisome, but if you look back at 1987 on a chart, now it looks like a minor blip. Besides, it was just a year ago when the U.S. stock market had the worst start in history and now it is making up for lost time. 

A year ago I also kept my long term bullish outlook even as most others were calling for a continued crash in prices. While it was a wild ride, we had one of the most bullish and correct calls on the street. We expect that this year’s up move will drive oil toward $73.00 a barrel and recent sideways action only makes me feel more confident in my long-term call.

Still, to get it moving it would be nice to see inventories start to fall. We did see some oil move out of the Strategic Petroleum Reserve last week and refinery runs increased to 86%. That is a sign that maintenance season is stating the long road back to normalcy. U.S. crude oil exports have exceeded 1.2 million barrels a day at a record that will also work off bloated oil inventories.

Crude oil inventories rose 1.5 million barrels and we also saw a increase in Cushing, Okla., for the first time in weeks. Products are still weak due to heavy supply. Still, because of the season it would be unusual for prices to continue to fall into April. The export equation also will change that dynamic as we move forward.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.