Oil Week Ahead - Cutting Loose Of The $50 Anchor

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Includes: CHK, COG, COP, CVX, EOG, OIH, OIL, PSX, PXD, RICE, SPY, USO, XLE, XOM, XOP
by: Markos Kaminis
Summary

The week ahead for oil prices looks good in my opinion, with a break higher seen from the recent $50 anchor point.

The case for improving energy demand was confirmed by last week's employment data, and economic improvement is a long-term factor that can give oil prices traction.

OPEC and non-OPEC producers are meeting this week to nail down compliance to production quotas, and I expect the energy market to receive the reassurance it needs.

The possibility of U.S. sanctions against Venezuela's energy indusry remain in play and are supportive of oil prices.

Oil inventory data should be favorable for oil prices again this week.

The week ahead for oil should be driven by both long-term factors and short-term event catalysts. As a result, I expect oil prices to break higher from the $50 threshold that held crude through last week. In fact, I expect this run higher for oil will eventually lead to a breakout from the recent trading range top near $60 a barrel.

I believe oil prices rose significantly Friday for two separate reasons, one economic in nature and one sector specific. The good news for the energy sector is that at least one of the two factors should continue to serve higher oil prices. Where oil prices are gaining the best traction, today, is via the sustainable driver of improving demand for energy on global economic recovery.

Security 08-04-17
United States Oil (NYSEARCA:USO) +1.1%
iPath S&P GSCI Oil (NYSE: OIL) +1.4%
Energy Select Sector SPDR (NYSE: XLE) +0.3%
SPDR S&P Oil & Gas E&P (NYSE: XOP) +2.3%
Exxon Mobil (NYSE: XOM) -0.4%
Chevron (NYSE: CVX) +0.6%
ConocoPhillips (NYSE: COP) +1.5%
Phillips 66 (NYSE: PSX) -0.1%
Rice Energy (NYSE: RICE) +0.3%
Pioneer Natural Resources (NYSE: PXD) +0.2%
Cabot Oil & Gas (NYSE: COG) +0.6%
EOG Resources (NYSE: EOG) +1.7%
Chesapeake Energy (NYSE: CHK) +0.7%

The price of WTI Crude Oil (Nymex) September futures contracts rose 1.1% Friday, to $49.58. Oil found early support in the monthly jobs data, and it got a later push from favorable weekly rig count data. I think more than anything, antsy longs found relief in good news and short betters were forced to close positions. I expect that allowed oil prices to continue to gain on new capital support being drawn in now on tangible economic reasoning.

At least one of Friday's two catalysts should push oil prices higher in coming weeks and months, the case for improving demand. The Employment Situation Report for July showed healthy job growth of 209K, well above economists' expectations for 174K. It was a stellar data point for an economy near or at full employment, where job creation should be closer to 125K per month, in my estimation. The unemployment rate improved to 4.3%, from 4.4% in June, and employment participation gained as well. It was a positive report all around, and it reflects well on the economy.

I expect economic growth to improve upon Q2's 2.6% pace in the second half of this year and in 2018. In my report, Why Oil Prices will Break Out - The Demand Driver, I talk about my expectations for the underappreciated catalyst. I found confirmation of my views in this month's jobs data.

On Monday and Tuesday of this week, oil traders and energy sector investors will be eyeing Abu Dhabi for a meeting of OPEC and non-OPEC producers. The focal point of the meeting will be compliance to agreed upon production quotas. It is hoped by oil longs that something substantive will come of the meeting to give the energy market some assurance that forward production will see better compliance. I see a positive product of the meeting probable, but recent chatter indicates there will be some playing of the blame game as well, with some producers pointing to faulty secondary source independent data. Also, non-compliant Algeria and Venezuela will not attend. Nonetheless, I expect this meeting, which is intended to restore credibility and support price, to be carefully shaped to do so. Saudi led actions at the last meeting, and the U.A.E. announcement to further cut production that followed it set that process in motion.

Otherwise, the usual weekly oil inventory data will play big for oil prices again this week. Investors need to see net draws from crude and petroleum products for reassurance that the supply glut is being resolved in real time. Fortunately, last week's gasoline draw seems to imply there will be a decent draw from crude supplies this week. Full employment in America, and improving demand for energy in the USA, Europe and China, implies market balance is on the way, in my opinion. And I'll be discussing in a near-term report how another smart factor, set in play by Saudi Arabia, will help as well.

Baker Hughes Weekly Rig Count data was helpful to oil prices this week. The data showed the North American rig count dropped by 7 rigs, to 1,171 in the week ending August 4. U.S. rigs producing oil declined by one, to 765, and gas rigs fell by 3, to 189. This marked the second week in the last 14 showing a decrease in North American rig counts. I'm not sure we can expect the same next week, as oil prices are climbing again, but recently lower oil prices had some producers reconsidering capital expenditure plans this quarter, so it is possible.

Wildcards remain for the oil patch, namely in Venezuela. There remains the possibility, though its weighting is debatable due to repercussions to American firms, that the Trump Administration and/or Congress might seek to impose sanctions of some sort on Venezuela's critical energy sector. Sanctions to the sector would strike Venezuela where it hurts, and possibly increase pressure on its despot leader to allow free elections or to step down from office. The fact that sanctions are possible continue to weigh in favor of oil prices.

In conclusion, I am looking for oil prices to break to a higher level next week, mainly due to improving demand for energy globally. Last week's jobs figures provide confirmation of as much, and I believe investors are starting to agree with my view on the subject. The usual regular energy market data will weigh as well of course, as will the producers' meeting, but I expect, in favor of higher oil prices on net. For more of my regular work on the energy market, readers are welcome to follow the column here at Seeking Alpha.

Disclosure: I am/we are long USO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My position is through options.