WTI WEEK IN REVIEW
Crude Oil looks on course to end the week in loss following mixed price action and the absence of Chinese traders. Chinese markets were celebrating the Lunar New Year with early data set to provide a boost to demand optimism heading into next week.
Early data released from China showed an increase in tourism and box office spending with a 120% jump in trips out of the country in the first 6 days of the Lunar New Year compared to the same time last year. This will serve to reinforce the markets confidence in the world’s biggest oil importer moving forward.
The dollar index has now been rangebound for the past 10 days without any clear direction which no doubt helped oil prices this week. Next week’s risk events which include the FOMC meeting will no doubt be eyed as a catalyst for the dollar index as it searches for a clearer direction moving forward.
OPEC+ are expected to meet online next week in order to review oil policy. Delegates expect the advisory committee of ministers to recommend keeping production levels unchanged as global demand shows signs of a potential recovery.
The biggest sticking point at present remains the level of recovery out of China with tourism figures hinting at the potential for a strong recovery. A further point of contention for OPEC+ is the effect of sanctions on Russian supply which have yet to be fully felt. The path to a demand recovery for China as well as the effect of sanctions on Russian supply create a host of uncertainties moving forward which is likely to see OPEC+ remain conservative at its upcoming meeting. This would be in line with the recent rhetoric of top OPEC+ officials with Secretary-General Haitham Al-Ghais recently stating that he is cautiously optimistic on the global economy while Saudi Energy Minister Prince Abdulaziz bin Salman said that OPEC+ will remain proactive and preemptive when it comes to keeping markets in equilibrium.
Given the current conditions of firmer prices, tight supply and economic uncertainty the course looks set to be one of little to no change until more clarity is evident on the demand recovery front.
The first Fed meeting of the year takes place next week and promises some volatility even if clarity may not be forthcoming. There seems to be a growing disconnect between the Fed rhetoric and markets at present. It would seem market participants are taking the recent Fed rhetoric of higher rates with a pinch of salt. US data remains strong which supports the Fed narrative, however this week’s move by the Bank of Canada has given market participants fresh impetus in their belief that the Fed will pause the rate hiking cycle sooner rather than later.
Markets have already priced in the majority of a potential 25bps hike for next week meaning without further bullish commentary from the Fed the dollar may remain susceptible to further losses. There are no new economic projections scheduled for release at next week’s meeting, which places further emphasis on the press conference for cues on the path moving forward. Interesting times ahead for the Fed and markets as a whole.
ECONOMIC CALENDAR FOR THE WEEK AHEAD
Next week brings a host of Central Bank meetings with the economic calendar set to enjoy a busy week. Over the course of the week, we have manufacturing PMI data out of China which could give a further indication of a potential demand recovery. This will be followed by 5 high rated data releases from the US which include the FOMC meeting and NFP data release and of course the OPEC+ meeting which is scheduled for February 1.
TECHNICAL OUTLOOK AND FINAL THOUGHTS
The daily chart below sees us trade between the 50 and 100-day MAs right now with the pair enjoying a relatively indecisive week. A pullback to retest the 50-day MA looks likely before continuing higher. A daily candle close above the 100-day MA could see a test of the 61.8% fib level of the 2022 down move. However, given the recent rangebound nature this seems a bit of a stretch at the minute with too many uncertainties ahead.
The reason I am neutral on oil for the week ahead lies in the event risk next week coupled with some indecisive price action. There remains a strong possibility even with the major event risk that we remain confined to a range for a while longer.
WTI Crude Oil Daily Chart – January 27, 2022