Crude Oil Prices May Turn as Markets Weigh Inflation, Fed Outlook

CRUDE OIL OUTLOOK:

• Crude oil price rally stalls as US jobs data flags ‘stagflation’ worries
• Monetary policy bets in focus on upcoming Fed-speak, US CPI data
• WTI advance stalled near $80/bbl, upward momentum may be fading

Crude oil prices retreated from a six-week high on Friday, tracking lower against a broadly risk-off backdrop after December’s US jobs report crossed the wires. Headline payrolls disappointed but wages grew at a faster pace than economists anticipated, even as the pace cooled a bit from the prior month.

That seemed to fuel familiar worries about sticky inflation coupled with moderating economic growth. In fact, PMI survey data suggests that US expansion has slowed significantly since peaking in May. Priced-in near- to medium-term inflation expectations have barely budged from 16-year highs.

Interestingly, this is even as shipping costs have sharply fallen. The benchmark Baltic Dry Index – which soared to the highest levels since the Great Recession last year amid supply chain disruptions – turned sharply lower in the third quarter to finish the year at pre-pandemic levels.

Together, this seems to imply that markets see inflation holding up even as the base effects from the onset of the Covid-19 pandemic fade and global commercial networks are mended. In fact, over the past three months, consensus 2022 US GDP growth forecasts notably fell while the price growth outlook firmed.

Worries about “stagflation” – a scenario where weakening growth and stubbornly high inflation pull Fed policy into opposing directions – have understandably inspired bouts of risk aversion. More of the same is a threat for sentiment-sensitive crude oil prices in the week ahead.

CRUDE OIL AT RISK AS FED OUTLOOK REMAINS IN FOCUS

Comments from Atlanta Fed President Bostic begin a busy week of scheduled chatter from US central bank officials. Confirmation hearings for Chair Powell and Vice Chair Brainard on Tuesday and Thursday respectively are highlights, but many more are on the docket. They may continue to drive a hawkish narrative.

On the data front, Wednesday’s release of December’s US CPI report is likely to take top billing. Core price growth is seen accelerating to 5.4 percent on-year, the fastest in 30 years. The headline number is seen hitting 7 percent on-year for the first time since 1982.

A bit of consolidation may be in store in the very near term however. Bellwether S&P 500 stock index futures have steadied amid a lull in fresh news-flow after Friday’s blood-letting, suggesting that markets may shift into consolidation mode for now until another potent catalyst presents itself later in the week.

CRUDE OIL TECHNICAL ANALYSIS

Prices stalled against resistance capped at 79.60, with very early signs of negative RSI divergence cautiously hinting that momentum might ebbing. Initial support is anchored at 75.27, with a break below that setting the stage for a test of the congestion zone running down into 72.52. Breaking resistance may clear the way to extend upward toward last year’s high at 85.41.

Crude oil price chart created using TradingView

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--- Written by Ilya Spivak, Head Strategist, APAC for DailyFX

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter