Powell’s remarks impede WTI’s ascend

This week WTI saw its winning snap after the head of the Federal Reserve opened the door for a larger magnitude rate hike in the upcoming March meeting, sending energy traders back to the drawing board. Also capping potential gains for oil, were China’s modest growth targets for the year ahead which downplayed optimistic bets in regards to the nation’s reopening. In this report we aim to shed light on the catalysts driving WTI’s price, assess its future outlook and conclude with a technical analysis.

Powell’s hawkish remarks strike fear in markets

Yesterday, Fed Chair Powell testified before the Senate Banking Committee and his hawkish remarks reverberated across the markets. The Chair cautioned that interest rates are likely to head higher than what central bank policymakers had anticipated, opening in sense the door for a larger magnitude rate hike in the upcoming March meeting. “The data from January on employment, consumer spending, manufacturing production, and inflation have partly reversed the softening trends that we had seen in the data just a month ago” stated the Chairman and added “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”. The Chair has also underscored the bank’s resolute commitment to its dual mandate obligations, ensuring price stability and facilitate favorable employment market conditions and through his comments, analysts picked up that he appears to be willing to sacrifice growth and employment in exchange for price stability, since the US labour market has consistently defied expectations for deterioration over the past few months. As the bank acknowledged that it is still far away from its goal and a higher terminal rate is now a reality, the markets rushed reassess their outlooks and a shift in projections took place in the swaps markets. A volatile reaction was also observed in the energy markets, as WTI fell sharply after the Chair’s comments, since the prospect for more hikes, strengthened the dollar and since crude is denominated in USD, a stronger greenback would lead to oil being more expensive for overseas buyers. Therefore ,that inadvertently caps demand for oil and hence that contributes to the fall of oil prices.

China’s trade surplus widens from slump in imports

Furthermore, China’s Trade Balance figures released on Tuesday implied a strengthening of the Chinese economy as the nation’s trade surplus exceeded expectations. More specifically, the actual figure stood at 116.9B higher than the 81.08B which was widely forecasted and also significantly higher than last month’s 78B result. Despite this, imports for China on a Year-on-Year basis were significantly lower than expected, with the actual figure being reported at -10.2%, whereas the expected figure was -5.5%. Exports on the other hand, exceeded expectations falling less than originally anticipated. The slackening of imports from China, the largest oil consumer in the world, could therefore be indicative of a possible reduction in demand for crude, which could potentially affect negatively WTI prices. Last week’s favorable Composite PMI data provided support for the commodity and lifted optimism in energy traders assessments that expect a strong rebound from year’s long suppressed economic activity. Furthermore, the Non-Manufacturing PMI data for February was reported at 56.3, higher that the 55.0 base case expectations, which boosted further confidence that the reopening of the Chinese economy and production levels could reach pre-covid levels faster than expected, supporting oil prices.

Downplayed growth targets from China hurt crude

It should also be noted that the Chinese National People’s congress is still in session throughout this week and has been addressing key policy issues within the Chinese mainland and more importantly has shed valuable clues for energy traders in regards to the country’s forward looking plans. According to news releases, Chinese officials have set an economic growth target rate of 5% for the year 2023 which is substantially different than what analysts had previously anticipated. Last week, an exclusive report from Reuters showcased that Chinese officials’ growth forecasts range between 5% to 6%, with more than half of the sources placing their forecasts near the upper bound of 6%, whereas the rest varying between 5% and 5.5%. Therefore, analysts expect the deviation to impact negatively the outlooks of crude traders, since a “modest” growth target of 5% can falls below expectations. Overall, a less optimistic increase in demand for crude could hurt oil prices and lead to their fall to lower ground.

Phân tích kỹ thuật

WTICash 4H Chart

• Support: 75.65 (S1), 73.85 (S2), 71.70 (S3)
• Resistance: 78.40 (R1), 80.75 (R2), 82.70 (R3)

WTI has been in a downwards motion since the 7th of March following Fed Chair Powell’s hawkish testimony before the Senate. As a result, the bears were able to control the commodity’s price and sent it below the resistance of $78.40 previous support level now turned resistance (R1). We hold a bearish outlook for the commodity and supporting our case, is the RSI indicator which is holding below 50 reading and moves closer to the 30 oversold level. Furthermore, we note the widening of the Bollinger bands following Powell’s comments and more specifically the price tends to flirt with the lower bound of the band, which adds more confidence to our bearish assessment. Also, the break below the 50 and 100 period Moving Averages constitutes as another bearish signal. If bears remain in control, we may see the break below 75.65 (S1) support and should the push lower persists, we may see the test of the 73.85(S2) support base. If the bulls take over, we may see the break above the 78.40 (R1) resistance level and if they are able to break through, then we may see the bulls retesting the 80.75 (R2) resistance barrier, which serves as the closest ceiling.

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Disclaimer:
This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.

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