Crude oil hitting the buffer ahead of key resistance

Brent and WTI crude oil are both taking a breather while awaiting the Energy Information Administration’s weekly stock report at 14:30 GMT as well as the the result of the Federal Reserve’s policy meeting at 18:00 GMT. While fundamental support remains strong due to tightening supply, some profit-taking has emerged after both contracts retraced 50% of their October to December sell-off. At the same time, the psychological barriers at $70/barrel on Brent and $60/b on WTI are also likely to have attracted some profit taking. 

The trade negotiation saga between the US and China rolls on with some market jitters emerging after US officials said they feared a Chinese pushback. The prospect of a deal has been one of the key reasons for continued market strength since January. While both presidents, for separate reasons, are keen to seal a deal, the eventual outcome may not be strong enough to support continued risk appetite. 

Yesterday’s stock report from the American Petroleum Institute showed another week of falling inventories in both crude oil and products. The 2.1 million barrel drop in crude oil will if confirmed by the EIA later be the second counter-seasonal drop in a row.  Apart from stock levels, the market will as usual also keep a close eye on foreign trade as well as the current level of refinery activity. 

Turning our attention to the FOMC meeting, the expectations for what Powell and company decide to do have become an almost foregone conclusion – a development that could leave some markets exposed should they fail to deliver on the three points highlighted here:

• Hold interest rates steady
• Announce plans for the end of the asset roll-off from its balance sheet
• Lower projections for the number of interest-rate hikes this year.

Anything but a lowering of the projections for the number of future rate hikes from the current two will be taken as negative. Not least considering the current market expectations (using Fed funds futures), which have seen the probability of a rate cut before year-end rise to 26%. However, the reduced stress across global financial markets following weeks of surging stocks have potentially reduced the FOMC’s willingness to play ball with market expectations. 

The current link between crude oil and the Fed’s action and outlook is through the potential impact on equities and the general level of risk appetite, as well as the dollar's reaction.  

WTI crude oil trades lower for the first time in nine days after finding resistance at $59.63/b, the 50% retracement of the October to December sell-off. Should the US Federal Reserve fail to satisfy the dovish expectations, some additional profit-taking may emerge.