Market update: Crude oil prices sink on strong dollar as Fed-cut bets are off

Surprise surge in US employment

Crude oil prices were significantly impacted on Monday by the stronger United States dollar, spurred by last week's impressive jobs report from the world's largest economy.

January's increase of 353,000 in non-farm payrolls nearly doubled economists' expectations and has led to any prospect of lower interest rates from the Federal Reserve in March being completely discounted by futures markets. This development has benefited the Dollar across the currency complex but has made life difficult for commodities priced in it, with crude oil being the most notable.

Economic growth vs. energy demand

It is, of course, arguable that an economy creating jobs at the pace the US is currently experiencing is unlikely to be terrible news for energy demand. However, we live in a monetarist world, and with the Fed leading the economic direction, markets' interpretations of interest rate trajectories will always take precedence.

The energy sector also faces the prospect of a quite plentiful supply from countries both within and outside the Organization of the Petroleum Exporting Countries, meeting uncertain global demand as industrial economies battle inflation and the disruptions on supply chains caused by Covid-19. Leading crude importer China remains a particular source of anxiety in this regard.

Geopolitical risks loom large

Oil prices will continue to be vulnerable to geopolitics, as potential conflicts in Gaza and Ukraine both pose the risk of causing supply disruptions at any time. However, we now enter a relatively quiet couple of weeks for economic data, leaving any central bank speakers, especially those from the Fed, in the spotlight. Atlanta Fed President Raphael Bostic is scheduled to speak on Monday, with Cleveland’s Loretta Mester following on Tuesday.

Technical analysis

Bulls seem to have abandoned any thought of reclaiming the two-month high of $79.16 per barrel seen on 29 January. Indeed, they are now attempting to defend the third Fibonacci retracement of the rise up to that point from the lows of 13 December, located at $72.27. If this level cannot hold on a daily close this week, it may well signal further declines, potentially bringing the psychological support level at $70 into focus.

Prices have dipped below the previously respected uptrend channel support at $72.44. However, it is possible that the market is currently overestimating the bearish outlook, with prices now well below their 50-day moving average, which stands at $73.13.

IG’s own data shows traders are overwhelmingly long at current levels, to the extent of some 87%. While such an extreme might suggest a contrarian, bearish play, given the recent scale of market falls, it might instead indicate that this market is at least due some time for reflection, if not a meaningful recovery.

US Crude oil daily chart

_{This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.}