Commodities Week Ahead: Oil Caught Between U.S. Data and China Wait

• US data likely to point to more inflation this week, keeping Fed on its toes
• Oil, like other risk assets, is caught in cross-currents of fear over Fed action
• Crude prices are seen moving sideways till China import data on oil lands

Another week dawns, with more US data likely to point to higher inflation and the need for proportional interest rates that could keep risk assets, including oil, range-bound or lower.

For those long crude, hopes for a market breakout from exponential Chinese buying could remain elusive as key data on oil arrivals and consumption in the world’s largest importer of the commodity won’t be available for another couple of weeks.

Meanwhile, personal income and spending data, due on Friday, will likely keep the Federal Reserve on its toes over inflation and the need for accordingly higher rates.

The central bank’s minutes of its own February policy meeting are due on Wednesday to provide markets an insight into what its policy-makers were thinking when they authorized a second straight slowing of rate hikes since December. The February hike of 25 basis points compared with December’s 50-basis point increase and November’s 75-basis point jump.

Aside from the personal income and spending data and Fed minutes due this week, there will also be updates on new and existing home sales for January, along with revised data on fourth quarter gross domestic product and the weekly report on initial jobless claims. New York Fed president John Williams is also due to speak about inflation at an event on Wednesday.

The slowing in rates over the past two months came before a surprise spike in US inflation readings. The latest Producer Price Index, issued Thursday, showed that wholesale price rose by the most in seven months in January.

Prior to that, a blowout US nonfarm payrolls report for January released two days after the Fed rate decision on Feb. 1 prompted investors to reevaluate expectations for how high the central bank will ultimately raise rates. According to interest rate futures, the forecast is now for a peak above 5.2% by July.

Crude prices, which slumped 4% last week, rebounded somewhat in Monday’s scarcely-traded session, with US market participants mostly away for the President’s Day holiday.

But as electronic overnight trading began in New York during Tuesday’s Asian market hours, some of those gains were rolled back as anxieties over what the Fed would do with rates at its Mar. 22 meeting trumped any optimism riding on China.

By 03:00 ET (08:00 GMT), New York-traded West Texas Intermediate, or WTI, crude for March was up 31 cents, or 0.4%, to $76.86 per barrel. The US crude benchmark has fallen in three of the past four weeks, losing nearly 7% in that stretch.

London-traded Brent crude for March delivery was down 62 cents, or 0.7%, to $83.45. The global crude benchmark, like WTI, has slid in three of the past four weeks, losing more than 5% in that period.

Said Craig Erlam, an analyst at online trading platform OANDA:

“As we’ve seen over the last few months, there’s more to this story than just China, and the decline over the last week was likely a reflection of more pessimistic global expectations against the backdrop of higher interest rate forecasts.

Sentiment remains very fragile, and the economic data is inconsistent. Until we see an improvement in the latter, the former will likely remain choppy, as will the price of oil.”

Since Beijing announced at the start of the year that it was doing away with all COVID controls, the long-oil world has been salivating over what that could mean for demand in the largest importer of the commodity.

Even the Paris-based International Energy Agency (IEA), which looks after the interest of oil-consuming nations, has been waxing lyrical about how Chinese buying could exponentially remake this year’s oil market.

The IEA forecasts an additional 500,000 barrels per day of consumption from China this year, which would take global oil demand to a record high. “Global oil demand is set to rise by 1.9 million bpd in 2023, to a record 101.7 million bpd, with nearly half the gain from China following the lifting of its COVID restrictions,” the agency said in its January market report.

Notwithstanding the positive forecast, the IEA is typically labeled by oil bulls as the “perma-bear” of demand — due to the agency’s bias towards energy-consuming countries, which are often seeking the lowest possible prices.

The problem, though, with what the long side of oil wants is there has to be enough hard data to support it.

Analysts say Chinese import data supporting a major oil rally will likely not emerge for at least another two weeks. Meanwhile, the latest available data showed the world’s largest crude importer bought 10.98 million bpd, or barrels per day, in January, down from December’s 11.37 million bpd and November’s 11.42 million bpd.

The government in Beijing declared a “decisive victory” on Friday in its battle against COVID, claiming it had created “a miracle in the history of human civilization” in successfully steering China through the global pandemic. In the absence of hard numbers, such statements could only have a fleeting impact, analysts said.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.