Crude Oil Slips, Markets Eye US Inflation, Fed Minutes

US crude has posted losses on Tuesday, as March futures are trading just under the $29 level in the North American session. Brent crude futures are trading at $32.62. On the release front, another US manufacturing report pointed to contraction in the manufacturing sector. US Empire State Manufacturing Index posted a weak reading of -16.6 points, well off expectations. We’ll get a look at some key US data on Wednesday, with the release of Building Permits and PPI. As well, the Federal Reserve will publish the minutes of its January policy meeting.

Crude oil supplies continue to far outstrip demand, as the world remains awash in oil. The Chinese slowdown has pushed oil prices sharply lower, as the Asian giant is the world’s second largest consumer of oil. Low oil prices continue to contribute to financial turmoil around the globe and have also led to considerable volatility in the currency markets. This situation is unlikely to improve anytime soon – a recent report by the International Energy Agency downgraded its forecast for oil demand and noted that the global oversupply will continue for most of 2016. Oil producing nations are scrambling to cut back production, which would lower supplies and raise oil prices, currently are at their lowest levels in 10 years. However, internal bickering has resulted in a situation of “every man for himself”, as production remains at record levels. In the latest twist, Russia and Saudi Arabia announced that they have agreed to freeze output levels, but said the agreement was contingent in other producers joining in. It would indeed be surprising if oil exporters could actually get their act together, as we’ve seen similar chatter before with no concrete results.

Is the Federal Reserve considering negative interest rates? Such a concept bordered on the unthinkable just a few months ago, when the US economy was firing on all four cylinders and the Fed raised interest rates for the first time in nine years. Fast forward to Yellen’s appearance before Congress last week, where the Fed chair refused to rule out negative interest rates. The Fed has rejected making such a move in the past, and this is unlikely to change. Still, Negative Interest Rate Policies (NIRP) has become a relevant tool for central banks. The Bank of Japan shocked the markets in January when it adopted negative rates, and the ECB has had this policy in place for some time on deposits, and has hinted that it could adopt this scheme to its benchmark rate, which is currently at 0.05%. Such a scheme is supposed to combat deflation and boost economic growth by pressuring banks to increase lending. In her testimony, Yellen noted that inflation rates in the US have remained very low due to the strong dollar and weak oil prices. Given the current economic situation, many experts expect no more than two rate hikes this year, perhaps in June and December. At the same time, any improvement in key US numbers will heat up speculation about a possible March hike. If the markets smell a March rate hike, we could see the US dollar posts broad gains.

WTI/USD Fundamentals

Tuesday (Feb. 16)

• 8:30 US Empire State Manufacturing Index. Estimate -10.5 points. Actual -16.6 points
• 10:00 US NAHB Housing Market Index. Estimate 60 points. Actual 58 points
• 16:00 US TIC Long-Term Purchases
• 19:30 US FOMC Member Eric Rosengren Speaks

Upcoming Key Events

Wednesday (Feb. 17)

• 8:30 US Building Permits. Estimate 1.21M
• 8:30 US PPI. Estimate -0.2%
• 14:00 FOMC Meeting Minutes

*All release times are EST

WTI/USD for Tuesday, February 16, 2016

WTI/USD February 16 at 11:20 EST

Open: 29.14 Low: 28.82 High: 29.29 Close: 28.96

WTI/USD Technical

• WTI/USD was flat in the Asian session. The pair posted strong losses in the European session and the downward trend has continued on North American trade.
• There is resistance at the round number of 30.00.
• 26.64 is providing support

Further levels in both directions:

• Below: 26.64, 22.88 and 17.05
• Above: 30.00, 32.22, 35.09 and 37.75