Crude Oil Price Slips but Structurally Supported Ahead of the Fed. Where to for WTI?


Crude Oil, OPEC, US Dollar, Fed, RBA, China, Yuan, LNG – Talking Points

  • Crude oil prices dipped ahead of the all-important Fed meeting
  • The RBA turned hawkish while the PBOC looked past solid data
  • All eyes on the Fed with US CPI upping the ante. Is 75 basis points enough?

Crude oil is softer ahead of the Federal Open Market Committee (FOMC) meeting today.

OPEC’s monthly oil market report has an increase in their demand forecast of 3.1 million barrels per day for the rest of the year. This takes it to 101.8 million barrels per day.

Supply and capacity constraints aside, the market is starting to focus on potential economic activity slow down with super-charged rate hikes imminent around the globe.

The Fed is anticipated to raise rates by 75 basis points (bps) at today’s meeting, up from 50 bps expected at this time last week. The headline CPI number of 8.6% year-on-year to the end of May outstripped the 8.3% forecast.

Reserve Bank of Australia Governor made surprisingly hawkish comments last night, citing 2.5% as a cash rate that Australians should be prepared for this year. It is currently 0.85% and the market is consequently pencilling in several 50 bps hikes at the next few meetings.

The Aussie is slightly firmer today as a result. The Yen has also seen some gains as speculation swirls on the ability of the Bank of Japan to sustain their ultra-loose monetary at this Friday’s meeting.

Offshore Chinese Yuan found some buying after the PBOC didn’t lower the Medium-Term Lending Facility rate. Chinese data beat forecasts with industrial production coming in at 0.7% year-on-year instead of -0.9%. Retail sales was -6.7% for the same period rather than -7.1%.

European natural gas prices surged on the back of a US LNG plant outage being extended. Bitcoin remains under pressure, trading below US$ 21,000 in the Asian session and equity markets have been relatively stable today.

After French and Swiss inflation data, the US will see mortgages, housing and retail sales numbers. The Fed will follow all that and will remain the focus.

The full economic calendar can be viewed here.

WTI Crude Oil Underlying Structure

Crude oil remains at elevated prices, and it is supported by higher-than normal backwardation levels.

Backwardation is when the next futures contract to expire is higher in price than the contract that will expire after it. This indicates a willingness of the market to take immediate delivery rather than have to wait.

Interestingly, oil market volatility remains at subdued levels and this could indicate that the market is comfortable with the current rally so far.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter





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