- Inflation, rate hike-wary markets likely to hold off on oil rebound till CPI, Fed
- Nov CPI forecast at 7.3% annual growth vs. October's 7.7% yearly rise
- Fed is seen raising rates by 50 basis points after 75-bps increases
Oil looks oversold on every technical chart, but a lasting rebound may only come after markets clear two major hurdles this week: Tuesday's CPI and Wednesday's all-important Fed decision.
While a 50-basis point hike from the Federal Reserve for December is all but baked in, investors will instead be focusing on indications of how high rates may ultimately rise. The best indication for that will, of course, come from Chairman Jerome Powell's news conference after the rate decision. Still, the precursor might actually be in Tuesday's Consumer Price Index report for November.
Economists expect the CPI report to say that the annual rate of inflation has slowed to 7.3% from a yearly growth of 7.7% in October.
The recent strong U.S. jobs data rekindled inflation fears after wage growth accelerated in November.
Data on Friday showed that U.S. producer prices rose slightly more than expected last month amid a jump in the costs of services, but the underlying trend is moderating as supply chains ease and demand for goods ebbs.
Veronica Clark, an economist at Citigroup in New York told Reuters:
"While core goods prices in CPI are still very likely to decline in November given falling used car prices, a renewed increase in core goods PPI highlights that there remain some underappreciated upside risks to goods prices into next year."
In its bid to control surging prices, the Fed added 375 basis points to interest rates since March via six rate hikes. Prior to that, interest rates peaked at just 25 basis points, as the central bank slashed them to nearly zero after the global COVID-19 outbreak in 2020.
The Fed executed four back-to-back jumbo rate hikes of 75 basis points from June through November. While the 50-basis point increase expected for December signals a pivot, the Fed has said it could be back.
Crude prices just finished their worst week in nine months, driven by headlines about recession and a price cap on Russian oil.
In Monday's Asian trading, London-traded Brent crude for February delivery was up 38 cents, or 0.5%, to reach $76.48.
The global crude benchmark was down almost $9.50 on the week or 11%. Brent's intraday low was $75.14 — a trough not seen since Dec 23, 2021, and less than 15 cents above the key $75 support.
Brent was off 1.4% on the year after being up 80% in March when it rose to just shy of $140 a barrel.
New York-traded West Texas Intermediate, or WTI, crude was up 56 cents, or 0.8%, to trade at $71.58 per barrel by 01:25 ET (06:25 GMT).
Last week, the U.S. crude benchmark fell $9.28, or 11.6%, making it its worst week since Mar 25. WTI's session low was $70.11 — a bottom not seen since Dec 21, 2021, and was practically a dime above the key $70 support.
As of Friday, WTI was down 4.8% for all of 2022. In comparison, the U.S. crude benchmark was up 73% in March when it traded just above $130 a barrel.
WTI attempted to test the psychological handle of $70 before settling the week at $71.50 — a tad above the 50-Month Exponential Moving Average (EMA) of $71.09, though below the 200-Month Simple Moving Average (SMA) of $72.50, Sunil Kumar Dixit, chief technical strategist at SKCharting.com, said.
"Though traditionally, these two major moving averages on a longer time frame bear significant impact and have enormous potential for a trend reversal, it is equally important to remember that the prevalent bearish trend can dig in deeper."
The oil trade, meanwhile, was bracing for more volatility in 2023 as the West's price cap on Russian oil and headwinds to global growth offset potential demand surges and supply crunches.
"Global doom and gloom outlooks have killed the crude demand outlook," Ed Moya, an analyst at online trading platform OANDA, wrote in a commentary published Friday.
"The short-term crude demand outlook has deteriorated significantly as no one has a strong handle on how bad a recession will hit the U.S. economy," Moya said. "China's COVID situation also remains a big concern as the end of their COVID-zero strategy could cripple their health system."
From a supply-dictated environment that sent a barrel of Brent to a 14-year high of almost $140 in March, the market is now dominated by demand concerns as traders worry about how the global economy will perform in 2023 if the Fed and the European Central Bank do not stop hiking rates to subdue inflation.
Thus, the price cap of $60-per-barrel imposed on Russia's crude isn't meant to only limit the earnings from oil that go into funding Moscow's war in Ukraine.
The proponents of the price cap — comprising the Group of Seven major powers, the European Union, and Australia — believe energy prices need to be curbed as well in order to offset the impact of a deep recession.
Of course, to oil producers like Russia, that logic just doesn't apply.
Russian President Vladimir Putin said, referring to the oil price cap:
"This will lead to the collapse of the industry itself because the consumer will always insist that the price be lower. The industry is already under-invested, under-funded, and if we listen only to consumers, then this investment will be reduced to zero.
All this will lead at some stage to a catastrophic surge in prices and to the collapse of the global energy sector. This is a stupid proposal, ill-conceived and poorly thought-out."
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.