By Barani Krishnan
Investing.com -- Oil longs who rushed to load up on Friday after the growth in U.S. jobs numbers turned out to be tamer than thought must have overlooked something else that’s pending: Inflation data on Tuesday.
The Consumer Price Index for February is the last piece of the puzzle, if you will, that decides whether the Federal Reserve goes with 25 basis points or 50 for the rate hike due on March 22.
The CPI is expected to have expanded 6% year on year in February from 6.4% in January and 0.4% for the month versus a previous 0.5%.
Core CPI, a reading that strips out volatile food and energy prices, is forecast to have risen 5.5% for the year to February from the previous annual reading of 5.6%. Month-on-month, the core number is expected to be flat at 0.4%.
If all these are correct, the inflation data on March 14 will deliver no nasty surprises. That will be in line with the benign trend set by Friday’s non-farm payrolls, which came in just about 105,000 above expectations for February versus January’s beat of 332,000.
“We have a more benign jobs number for February that could lead to a kinder Fed on rates,” said John Kilduff, partner at New York energy hedge fund Again Capital. “The only mystery now is what the inflation numbers tell us on Tuesday.”
As the Fed has persistently found out over the past year, inflation in the U.S. has been stickier than gum found under the shoe.
So, until the February CPI reading is out, there’s no telling what we’re going to get hit with - both in terms of price pressures and the Fed’s commensurate response.
And why is all this important for the oil trade? Well, the past three months have shown the only reason crude prices aren’t breaking out to $90 a barrel and beyond is because of the inflation hangover in the U.S. - and the Fed’s menacing talk on how far and high it can take rates.
Crude prices finished the latest trading week down despite supportive U.S. inventory data as Fed Chair Jerome Powell said in testimony before Congress that the central bank was prepared to hike rates more than previously indicated if that’s what will bring inflation down.
U.S. crude inventories fell by 1.694 million barrels last week for their first weekly drop since December after 10 straight weeks of builds that added some 60 million barrels to inventories, the Energy Information Administration, or EIA, said in its Weekly Petroleum Status Report.
Market attention, however, was more on Powell and the growing chance that the Fed will push the economy into a recession with its planned rate hikes.
“The terminal rate is likely to be higher than we expected,” Powell said, referring to the point at which the Fed would stop rate hikes, a level traders were speculating to be as high as 5.75% versus the current 4.75% peak for U.S. interest rates.
Notwithstanding the global tightness in oil supply - and China’s anticipated consumption surge with the end of COVID controls in the country - the Fed decision on interest rates has its own profound impact on crude prices, said analysts.
“The financial world is consumed with inflation worries as the US 2-year yield spikes to 5.06%,” economist Adam Button said in a post on the ForexLive forum.
On Friday, Button reflected that just a year ago, U.S. crude’s West Texas Intermediate settled at a 14-year high of $123.70. “From the $130.15 peak, it's down 41%,” he said.
Inflation, as measured by the Consumer Price Index, hit a 40-year high of 9.1% in the United States during the year to June. It has moderated since, to an annualized growth of 6.4% in January, but remains well above the Fed’s target of just 2% per year.
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Fed Chair Jerome Powell said in testimony before the US Congress this week. “Recent economic data, particularly inflationary pressures, have been stronger than expected.”
To clamp down on runaway price growth, the Fed added 450 basis points to interest rates since March last year via eight hikes. Prior to that, rates stood at nearly zero after the global outbreak of the coronavirus in 2020.
The Fed’s first post-COVID hike was a 25-basis point increase in March last year. It then moved up with a 50-basis point increase in May. After that, it executed four back-to-back jumbo-sized hikes of 75 basis points from June through November. Since then, it has returned to a more modest 50-basis point increase in December and a 25-basis point hike in February.
As of Friday, Investing.com’s Fed rate monitor tool - an indicator of money market expectations for upcoming rate decisions - has assigned a near 60% chance of a 25 basis point hike at the central bank’s March 22 meeting. That could, of course, change to 50 basis points if the CPI throws a nasty surprise for February.
Oil: Market Settlements and Activity
New York-traded West Texas Intermediate, or WTI, did a final trade of $76.68 per barrel on Friday.
It settled the official session up 96 cents, or 1.3%, at $76.80 per barrel. For the week, the U.S. crude benchmark finished down 3.8%.
London-traded Brent crude did a last trade of $82.64 per barrel on Friday.
It ended the regular session up $1.19, or 1.5%, at $82.78. Like WTI, Brent was down 3.8% on the week.
Oil: Price Outlook
Technical charts for WTI, at least, suggested that crude prices needed to regain the $80 level they hit earlier in the week to resume their bullish wave, Sunil Kumar Dixit, chief technical strategist at SKCharting.com, said.
“This yet another week of sideways action with potentially bearish engulfing weekly close,” Dixit noted.
Going into the week ahead, he said WTI may witness some positive trades initially to retest the 5-week EMA, or Exponential Moving Average, of $77.50, followed by $78.40.
“Bearish momentum is likely to drag prices down from the resistance zone to $74.80, below which the $72.80 and $72.20 levels may be witnessed,” Dixit added.
Natural gas: Market Settlements and Activity
The most-active April gas contract on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.436 per mmBtu, or million metric British thermal units, Friday.
It earlier closed the official session at $2.43, down 11.3 cents, or 4.3%, on the day.
For the week, April gas was down nearly 19%.
Gas futures rose a compounded 30% in the prior two weeks, hitting a 5-week high of $3.027 on March 3, on expectations of late winter chill after months of unseasonable warmth.
But like a curse to the bulls, this week’s weather models were back to pointing at higher temperatures, triggering another market crash that proved the rally of the past two weeks to be nothing more than a “dead cat bounce”.
Fundamentally, the outlook for gas has undergone a paradigm shift after this week’s change in the weather model readings, said Houston-based energy markets advisory Gelber & Associates.
“Production is still strong at 100.5 billion cubic feet per day,” Gelber said in a note that affirmed gas output back to late January highs after recent declines below 100 bcf. “NYMEX natural gas prompt month price, as a result, has largely traded sideways.”
An unusually warm winter has led to considerably less heating demand in the United States this year, leaving more gas in storage than initially thought.
Storage of natural gas stood at a total 2.030 tcf, or trillion cubic feet, as of March 3 - up 32% from the year-ago level of 1.537 tcf and 19% higher than the five-year average of 1.671 tcf, the EIA, or Energy Information Administration, reported.
Responding to the warmth and lackluster storage draws, gas prices plunged from a 14-year high of $10 per mmBtu in August, reaching $7 in December before hitting a 2-½ year bottom of $1.967 in late February.
“When is natty returning to $3? Or will we plumb a new low for this year before that happens? That’s what everyone wants to know,” said Kilduff.
Natural gas: Price Outlook
The recent positivity in natural gas appears to be fading away with the front-month contract breaking below crucial support after rejection from the $3 perch, said Dixit of SKCharting.
“If the $2.54 support fails to act as effective support, expect a quick retest of swing low $2.15 followed by $1.98,” he said.
A weekly close below the $2 psychological handle could lead to a lasting downtrend, he added.
“Here from this bearish phase, we prefer to wait for signs of RSI, or Relative Strength Index, divergence to appear, which once identified, will make us assume that the near term bottom is in place and a rebound towards the resistance zone can start taking shape. At that stage, the initial target will be $3.15, followed by $3.31.”
Gold: Market Settlements and Activity
Gold hit a one-month high Friday in a sign that it may be ready to break free of the mid-$1,800 range it has been trapped in the past four weeks after benign U.S. jobs growth for February signaled a smaller rate hike than initially thought.
Responding to the latest non-farm payrolls report, gold for April delivery on New York’s Comex did a final trade of $1,872.70 on Friday. It earlier settled the session at $1,867.20 an ounce, up $32.60, or 1.8%. The session high was $1,871.85, a peak since the $1,884.60 registered on Feb. 9.
For the week, April gold rose 0.7%.
The spot price of gold, more closely followed than futures by some traders, settled at $1,867.24, up $36.36, or 2% on the day. The session high for spot gold was $1,870.20.
Gold: Price Outlook
If gold keeps its upward trajectory in the week ahead, $1,878 and later $1,883 may pose minor resistances, followed by $1,890, said Dixit.
“If momentum shows signs of exhaustion due to overbought conditions, a short-term pullback towards support may be witnessed, pushing prices down towards $1,854 and $1,848 initially.”
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.