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Inventory Build and US Dollar Strength Entice Crude Oil Bears; Venezuela’s Declining Production Threatens Country’s Stability

Crude Oil & ULSD

EIA estimates for commercial crude inventories showed its first build in 11 weeks. Initial analyst estimates expected a build of 100,000 but were surprised with a build of 6.8 million for the week ending 1/26/2018. Following the surprise build, the US Dollar posted gains on Friday as the Bureau of Labor Statistics released a bullish report on the US labor market. Nonfarm payroll increased by +200k while analysts expected an increase of +180k. Average hourly earnings for US workers increased by 9 cents to $26.74. For the past few years, wage growth has been stagnant. The Federal Reserve has sighted flat wages as a primary reason for holding off on major increases to interest rates. Friday’s release has given traders hope that the US Dollar could be bottoming out as the FED accelerates its move toward normalization.

Crude oil and its products faced heavy selling pressure last week as prices tested key support levels after the bearish news events. Crude oil began trading lower last Monday, as the market speculated on an inventory build with prices falling roughly $1.50 from a high of $66.46 to a low of $64.98. The potential of a build was confirmed by the API on Tuesday who showed inventories increasing by +3.23 million barrels. Crude Oil bulls looked jittery at these levels as price traded lower from a Tuesday high of $65.56 to a Wednesday low of $63.67. Looking forward, we’ll need to see another build in commercial crude oil inventories or an upward breakout in the US Dollar for WTI to challenge support at $64.00.

On the technical side, the MACD for WTI futures appears to be confirming the bearish divergence that began setting up two weeks ago. A challenge and break below $64.00 will offer additional confirmation of the divergence and hopefully see price slide toward $62.00 and $60.00.

ULSD futures are facing more downward pressure than WTI as warmer weather is expected across the US. Early trading this week saw prices fall below short-term support at $2.04 and drop as low as $2.0184. ULSD looks overly susceptible to declines in oil prices and any bearish momentum in WTI should be magnified across ULSD price.

The technicals for ULSD show an increasingly bearish sentiment as the MACD and RSI accelerate to the downside. If prices continue to fall, we expect a pause at trendline support near $2.00 before making any further moves. Beyond this, price is likely to face support at $1.95 and $1.86.

Venezuelan Oil Production

Venezuela remains the largest contributor to OPEC’s production cut compliance which recently clocked in at 138%. Venezuela faces an economic crisis that began in 2012 and was further exacerbated by low crude prices and crumbling oil production. The Venezuelan economy is overdependent on crude oil production which makes up 50% of its GDP and 95% of the country’s total exports.

Venezuela’s oil production began falling drastically in mid-2016 as the economic and social condition in the country began to spiral out of control. Analysts expect production to fall an additional 200,000-300,000 bpd by the end of 2018. Venezuela has defaulted on $1.2 billion worth of bonds and is looking to restructure roughly $60 billion of outstanding debt. A default on the remaining bonds would be disastrous for the country and could trigger a further collapse of oil production. If enough investors of defaulted bonds demand immediate repayment they could seize Venezuelan crude that resides in the US or is aboard shipping vessels in international waters. This action would further reduce Venezuelan GDP and escalate the current economic crisis.