The oil market does seem to have a general air of acceptance as to its current predicament of being boxed in. One really only needs to refer to technical analysis and the converging moving averages which signal a market that is prepared to travel left to right across the chart, trying its hardest to go unnoticed. However, we can see its artful design, its intent to lull all into a false sense of security before bursting forth or busting lower, whichever causes the most pain. The trouble for our oil fraternity is to work out what will be the deciding factor that hauls oil from its current morass. 

The ill-wind tidings being experienced in the Middle East in the aftermath of the Gaza/Israel war are being greeted with great circumspection by oil watchers, for the missile ping-pong being played out by the US led naval force and Houthis initially caused swings in crude prices with dollars in value, now each reporting barely registers a flicker in upward ticks because the fear of others bring dragged into the conflict dissipates almost as quickly as it is thought of. The last gasp winter freeze being experienced across the US is also being treated as something ephemeral and the strength in the WTI contract yesterday is probably due in part to the options expiry an in part of effects from weather and would have had little influence on the API data which saw Crude build by 0.5mb, Cushing draw by 2mb, Gasoline build by 4.9mb and Distillate build by 5.2mb.

Alternatively, the cool winds blowing through the investment suite brought about by the repricing lower of bets that predict cut after cut in interest rates this year, have caused the inevitable rally in the US Dollar which is always a barrier to commodity price advances. With abject economic data from China and Europe and a vestige of inflation that at present cannot be conquered, bears are still able to hanker after thoughts of oil prices testing the lows for it is hard to summon much of a demand argument. Yesterday, Fatih Birol ahead of the IEA monthly report, commented that oil looks set to be in a comfortable state in 2024, subject to the absence of geopolitical surprises as OPEC, in its own monthly report, remained resolute in its conviction of strong demand in 2024 (we will cover any differences in the next few days). 

The equilibrium that my colleague wrote on recently is probably the most sure-fire bet, and until our current influences become more acute in nature, oil will continue to its left to right chart movement and remain rangebound.
 

The US Dollar shows its teeth again as central bankers are in no Mood to be Dictated to

We discussed at the beginning of the year how the US Dollar Index (DXY) never really enjoys owning an ‘oversold’ status, and since achieving one with a reading of ‘30’ on the 14-day Relative Strength Index (RSI) twice at the back end of 2023, the US Dollar’s rally has been consistent and hurtful for all things priced in the world’s marker currency. Whimsically, it would be interesting to see if there were such an RSI reading for the CME FedWatch tool on how future interest rates are priced, for without doubt it would show an ‘overbought’ status, which would be representative of how far ahead of the market interest rate pricing had become. The moves of late in the FedWatch tool have been dramatic, are moving on a daily basis and show the sort of sensitivity akin to that of RBOB futures when experiencing refiner issues in the driving season.

This recent and aggressive phenomena by traders have caught the attention of the great and the good of central bankers. After agreeing that the ECB will likely cut interest rates in the summer, its President, Christine Lagarde, quoted on Bloomberg Wednesday, was at pains to point out that the bank remains data dependent, which at present are not as stable as preferred, and what is in fact making the situation more complicated are aggressive market bets that are “not helping our fight against inflation, if the anticipation is such that they are way too high compared with what’s likely to happen”, echoed by her colleague Klaas Knot adding, “markets are ahead of themselves, […] the end might become self-defeating.”

The concept of raised interest rates is to nullify the capacity for people to own ‘stuff’, simplistically put, borrowing money at 10% interest per annum to buy a car is way more prohibitive than say 5%. There is little argument that the best performing of assets have been equities, particularly those of technology so aptly represented by the fortunes of the Nasdaq. The double whammy comes from investors believing that tech-stocks, which are more sensitive to interest rate hikes because of their borrowing needs, will have a much easier ride if rates diminish and that more monies that were destined to service debt will be invested, with equity markets being the likeliest of recipients. Rallying stock markets offer signals of growth and demand, which when experienced in a looser fiscal backdrop can only encourage more buying of ‘stuff’, therefore inflationary and as ECB’s Knot points out, becomes self-defeating.

It is difficult to claim that this is the reason for a less than ebullient speech from the powerful voice that is Christoper Waller, but in a prequel to the ECB, the Federal Reserve Governor said the US central bank will probably elongate the period over which it will relax monetary policy. Warning against repeating mistakes of the past by relaxing FOMC policy too quickly and reactively, he offered a sober, conservative pathway of lowering ‘methodically and carefully’. Returning to the FedWatch tool, pricing of cuts had become so aggressive that there were expectations of 7 reductions for 2024, which suddenly lost a component and fell back to 6 after Waller spoke.

The upshot being is that the US Dollar is not showing strength in 2024 just because of a technical bounce away from an ‘oversold’ basis, it is aligning itself to current thinking from central bankers that the more the market instigates its own form of easing, the less likely central bankers will be compelled to cut rates. Mitigation to the dollar’s strength comes in the timing from the various central banks, if the US cuts before the other major trading areas, then it will obviously weaken first. In terms of oil, Wednesday’s fade lower was all about a rallying dollar, with a backdrop in 2024 that is littered with holes in demand, these sort of currency driven days will occur more often if overexuberant pricing of interest rate cuts forces policy makers to stay their hands in fiscal loosening.

Overnight Pricing

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