Weekly oil market outlook

Last week, we outlined the possibility for oil prices to benefit from a reversal in the dollar’s fortunes on the back of a worse than expected payrolls print:

“Short term direction in oil prices is likely to be reliant on the much anticipated NFP report, with the focus being on private payrolls. A much better than expected number above +200k would probably see greenback strength and lower oil – the positive US data/USD correlation has come back into play as of late. The risk, however, is for a disappointing print below +150k which would see the greenback give back some of its recent gains and drive oil prices back above the $90 /bbl level. We think that such aforementioned price action is a likely possibility due to two main factors. Firstly, the correlation between ADP and NFP has been weak, if that. Furthermore, the employment component of the December ISM non manufacturing release actually declined to 50.5 from 52.7 – about 270k of the +297K increase was attributed to the services sector and merits taking the positive ADP data surprise with a grain of salt.”

Front month WTI crude futures recaptured the $90/bbl mark this week to highs around $92.58 as the recent wave of greenback strength reversed course. The buck’s sharp turnaround can be attributed to a dichotomy of factors.

The first being the impact on expected Fed policy direction from the recent spate of negative data surprises out of the US labor market. Prior to Friday’s disappointing NFP print (103k vs. expected 150k), the implied probability for a December 2011 +25bp hike to the Fed funds target rate stood around 36.5% (according to Bloomberg). As of yesterday, the probability for a December ’11 hike declined to 31.3%. It fell even lower today to 30.7% following the worse than expected weekly jobless claims print (Initial jobless claims rose +445k vs. expected +410k).

The second factor comes from encouraging developments out of the Eurozone. Relatively smooth Portuguese, Spanish, and Italian bond auctions bolstered risk appetites keeping pressure on the greenback. Additionally, Trichet’s post-ECB rate decision remarks of ‘short term inflation pressures’ sent EUR screaming higher and the buck lower across the board. In addition to support from a softening dollar, oil prices also benefitted from continued tightening in the supply picture. Weekly US stockpiles dropped more than expected by -2.154M – the 6th decline in as many weeks.

However, oil upside may be capped in the short term. Supply concerns have played a key role in oil’s ascent from the $80/bl level but are showing signs of abating as of late. The shutdown in the Trans Alaska Pipeline, a major distributor to the west coast, seems to be resolved and is likely to allay fears of any long term supply disruptions. Furthermore, although weekly US crude oil inventories declined more than expected, higher than expected distillate and gasoline inventories may offset any bullish sentiment from the decline in crude stockpiles.

Additionally, the precipitous decline in the dollar this week may be over stretched. Although the Portuguese, Spanish, and Italian bond auctions were well bid; all three saw an increasing trend in funding costs which is unsustainable in the long run. As for Trichet’s hawkish rhetoric and its implications for policy tightening, it is a tactic that the ECB has employed before – the ECB talked up exit strategies last year which have not yet been implemented. The ECB is unlikely to tighten any time soon as the Eurozone periphery is not out of the woods just yet.

While we believe oil prices are likely to continue higher in the medium term, we think there are short term risks to higher oil. A possible return of USD strength alongside abating supply concerns may see oil prices correct lower in the week ahead. However, we believe prices will be supported into the $87/bbl level (WTI) on converging technical support (55-day sma and horizontal trendline from early December ’10 to present) and continued demand strength from emerging market economies.

Источник: FOREX.com

14.01.2011