Head of Commodity Strategy, Saxo Bank Group
Summary: The key drivers of crude oil markets today are the EIA and the Fed.
The trade negotiation saga between the US and China rolls on with some market jitters emerging after US officials said they feared a Chinese pushback. The prospect of a deal has been one of the key reasons for continued market strength since January. While both presidents, for separate reasons, are keen to seal a deal, the eventual outcome may not be strong enough to support continued risk appetite.
Yesterday’s stock report from the American Petroleum Institute showed another week of falling inventories in both crude oil and products. The 2.1 million barrel drop in crude oil will if confirmed by the EIA later be the second counter-seasonal drop in a row. Apart from stock levels, the market will as usual also keep a close eye on foreign trade as well as the current level of refinery activity.
• Hold interest rates steady
• Announce plans for the end of the asset roll-off from its balance sheet
• Lower projections for the number of interest-rate hikes this year.
Anything but a lowering of the projections for the number of future rate hikes from the current two will be taken as negative. Not least considering the current market expectations (using Fed funds futures), which have seen the probability of a rate cut before year-end rise to 26%. However, the reduced stress across global financial markets following weeks of surging stocks have potentially reduced the FOMC’s willingness to play ball with market expectations.
The current link between crude oil and the Fed’s action and outlook is through the potential impact on equities and the general level of risk appetite, as well as the dollar's reaction.
WTI crude oil trades lower for the first time in nine days after finding resistance at $59.63/b, the 50% retracement of the October to December sell-off. Should the US Federal Reserve fail to satisfy the dovish expectations, some additional profit-taking may emerge.
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