Crude oil faces perfect storm if US inflation pours gasoline on uncertainty flame

WTI crude oil prices fell 2.55% on Monday as market volatility remained elevated in the fallout of last week’s collapse of Silicon Valley Bank. Since last Wednesday, the commodity is down about 3.3%.

Sentiment-linked crude oil was and may continue to remain vulnerable in the coming days/weeks/months as traders assess the likelihood of the United States economy entering a recession. Despite steps taken by the government to shore up confidence in the banking system, investors punished regional bank stocks on Monday.

However, a closer glance reveals that the market reaction on Monday seems to place much more emphasis on expectations of a Federal Reserve pivot than worries about a recession (for now). In fact, traders have priced in about 150 basis points in rate cuts by the Fall of this year. In response, the haven-linked US dollar sank, and traders piled into tech stocks. The Nasdaq 100 outperformed the Dow Jones.

During Tuesday’s Asia-Pacific trading session, sentiment woes continued deteriorating crude oil prices, with WTI falling almost 1.25% by 3 GMT.

Over the remaining 24 hours, market uncertainty could be pushed further. All eyes are on the 12:30 GMT US CPI report. In February, inflation is seen slowing further to 6.0% y/y from 6.4%. As a reminder, January’s print was stickier than anticipated. Another surprisingly strong print could bring back Fed rate hike expectations, placing crude oil at risk.

Crude oil technical analysis

On the daily chart, crude oil is fast approaching the floor of a Bearish Rectangle chart formation. The price seems to be around 72.27. However, immediately below is the December low at 70.10 – 71.13. Confirming a breakout under the latter exposes lows from May 2021.

Crude oil daily chart

Crude oil sentiment analysis - bearish

Looking at IG Client Sentiment (IGCS), which tends to be a contrarian indicator, about 82.78% of retail traders are net-long crude oil. Since most of them are biased to the upside, this hints that prices may continue falling. Meanwhile, upside exposure increased by 9.56% and 30.63%, respectively.

With that in mind, the combination of overall positioning and recent changes in exposure offers a stronger bearish bias.

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