With Hurricane Harvey abating, and Irma in the forecast, crude oil inventories were reported by the EIA Status Report to have increased by 4.6 million barrels for the first time since June 23. The increase in inventories is widely attributed to the shutdown in crude oil refining (read consumption), as hurricane Harvey made landfall right onto one of the United States largest concentration of gasoline refiners. It’s estimated that between 18% to 27% refinery capacity was lost during the storm surge, and now that waters have resided and cleanup has begun, energy futures are returning to a normal trading condition. Hurricane Harvey was a textbook example of how basic economics affects the energy markets. Refineries offline = decreased crude consumption + decreased gasoline supply. This directly translated into a rally in gasoline futures and sell off in crude in anticipation of Harvey, and now that the storm has abated, that trend is unwinding and the “crack spread” is narrowing refiners margins.
From a technical perspective, front month crude oil futures have broken above trend line resistance at the 49.00 handle (as seen on the chart below), and have held technical 50% Fibonacci support (drawn from the June lows to August Highs) at 46.24. This is constructive price action for bulls, as a clear big has returned to the market as US refineries first protect their margins (even before being able to turn their refineries back on) by buying crude oil futures, and second as real consumption of crude begins when those refineries get back to work.
The true test for resistance will be on a sustained break and close above the 50.43, which will immediately put the 55 handle highs from the beginning of 2017, back into the scope for bulls. Without a doubt, WTI crude futures are still in a range from 42.00 to 55.00 over the last year of price action, however, the current trade is taking the market higher in this range for the time being. Every test of the range highs and lows are a chance for a break one way or the other, but until then, we will continue to track the dynamics which are governing the price of crude oil.
Crude Light Daily Continuous Chart