Crude Oil Price Outlook Bullish on Ukraine War, US NFPs, China Data

CRUDE OIL OUTLOOK, US NONFARM PAYROLL DATA, UKRAINE WAR, CHINA ECONOMIC REPORTS - TALKING POINTS

• Brent outlook bullish on geopolitical tension and chronic supply chain bottlenecks
• US nonfarm payroll data and Chinese PMI figures could amplify crude oil’s rise
• Crude oil prices pushing towards $123.71, but will the bulls keep pressing on?

COLOMBIAN ELECTION UPDATE

On Sunday, Colombians went to the ballot box to cast their vote for president, but none of the candidates were able to secure a majority. Left-wing populist Gustavo Petro gained 40% of the vote, while his right-wing counterpart and industrial magnate Rodolfo Hernández won 28%. Since neither were able to secure a majority, they will face off again on June 19th.

Ahead of the first round of votes, the Colombian Peso slipped approximately 0.3% against the US Dollar, though these losses quickly reversed on Monday. COP surged against a range of currencies and rose over 3.4% against the Greenback in a single day. This marked the biggest one-day increase against USD since December 2014.

UKRAINE WAR: WHAT IS HAPPENING?

EU leaders continue to struggle over an agreement on banning Russian oil imports, while Ukrainian President Volodymyr Zelensky is pushing for additional Western-led sanctions. To reconcile Europe’s energy needs with its geopolitical interests, a compromise may be reached. This would involve banning seaborne imports first and pipelines later.

Hungary has been the main obstacle holding up negotiations and forcing the compromise, arguing that landlocked countries would have no access to oil if pipelines were stopped first. European Commission President Ursula von der Leyen commented on the negotiations and indicated that her “expectations are low that [the impasse] will be solved in the next 48 hours”.

Because of the implications this could have on crude oil prices, traders have been closely monitoring developments. As it stands, the Brent benchmark is eyeing a test above $123/barrel. Additional supply restriction against the backdrop of global inflation could severely undermine regional economic activity.

Furthermore, with the European Central Bank (ECB) still planning on tightening credit conditions, concerns about stagflation are likely to be reinforced. The impact of foreign policy on domestic economic activity needs to be carefully watched, for what could be politically profitable in the short-term could be economically costly over the long run.

READ MORE: How to Trade the Impact of Politics on Global Financial Markets

Meanwhile, Russia is continuing its attack on Severodonetsk and parts of the Donbas region with rockets, airstrikes, and tank deployments. Zelensky has begged the US to deliver the long-range MLRS missile system, but President Joe Biden denied his request. Supplying missiles which have the ability to reach Moscow could escalate the conflict, potentially putting European NATO members at risk.

The Atlantic alliance continues to wrestle with Turkey, who is holding up negotiations for Sweden and Finland’s admission. Ankara made it clear to Washington that they want “concrete steps” on addressing the ‘Nordic sisters’ hosting what Turkish officials are calling “terrorist organizations”. A more extensive breakdown of the issue can be found in my prior report.

CHINESE ECONOMIC DATA

Official Chinese manufacturing and service-sector PMIs rose to 49.6 and 48.7, topping estimates of 49.0 and 45.5, respectively. Composite figures showed a sharp increase to 48.4, up from the prior reading at 42.7. Analog private-sector Caixin PMI data – which is tuned to highlight smaller enterprises than the state-owned enterprises (SOEs) dominating official surveys – will be released on June 1.

These figures and other growth-linked indicators will be key to monitor in light of China’s strict lockdown measures to combat COVID-19 outbreaks. Implementing these policies to throttle activity in the financial hub of Shanghai and the industrial powerhouse of Shenzhen is sending chills down the spines of investors who worry that broader headwinds could ripple out.

US NONFARM PAYROLL DATA

Traders will be closely watching a cascade of employment data out of the US at the tail-end of the week. On Friday, the key indicators will be nonfarm payrolls and the unemployment rate for May. The former is anticipated to show 325k jobs added, more than 100k less than April’s 428k figure.

Meanwhile the unemployment rate is expected to tick down to 3.5%, from 3.6% in April. Slightly weaker data may not significantly move markets, given the Fed’s strong stance on tackling inflation. Economic conditions would have to severely deteriorate before monetary authorities considered revising or slowing down their rate hike plans.

The Fed will also start unwinding its $9 trillion balance sheet, of which over $5 trillion was added during the past two years. Monetary authorities will reduce their holdings by $47.5 billion a month until September, when the monthly drawdowns will increase to $95 billion. It is unlikely this process will slow down, and most investors seem to know it.

For more updates on geopolitical risks, follow me on Twitter @ZabelinDimitri.

Interest rate futures for June indicate traders are anticipating another 50 basis point (bps) rate hike from the current federal funds rate. If employment data beats expectations, the outlook for interest rates will likely edge in a still-more hawkish direction. The US Dollar may rise against its G10 and emerging market counterparts as its prospective yield advantage solidifies.

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CRUDE OIL TECHNICAL OUTLOOK

Crude oil prices are up over 20% since it retested February’s rising-support channel. As I wrote in my report in April, the Brent benchmark has tested and broken past one of three key layers of resistance. With $114.79 cleared, it is now seemingly heading for the ceiling at $123.71. The fundamentals appear to support its ascent, but could momentum slow?

Crude Oil - Daily Chart

Crude oil chart created using TradingView

Given the macroeconomic environment, bullish overextension followed by a cooling period and a resumption of the prior uptrend is not an unlikely trajectory. The relative strength index (RSI) is showing momentum reaching so-called ‘overbought’ territory. This along with a test of important resistance at $123.71 may come together to mark the onset of a cool-off period.