Market update: Crude oil prices sink on strong dollar as Fed-cut bets are off
Discover how the robust US dollar and a surprising jobs report have rocked crude oil markets, with insights into future rate expectations, supply concerns, and geopolitical tensions shaping the energy sector.
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
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