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  • Crude oil markets have slipped back a little from session highs in the $58.70s on Wednesday.
  • WTI is set to snap an eight-day run of gains, its streak since early 2019, as bulls take a breather.
  • The fundamental backdrop remains supportive for the crude oil complex.

Crude oil markets have slipped back a little from session highs in the $58.70s on Wednesday, despite gains being seen across global equity markets (S&P 500 +0.4%, Stoxx 600 +0.3%) and no meaningful changes to what has so far been a supportive fundamental backdrop; front-month futures for the American benchmark for sweet light crude oil, West Texas Intermediary (or WTI), have slipped back from fresh 13-months highs in the $58.70s in recent trade to around $58.30, down about 0.2% on the day. Thus, WTI looks set to snap an eight-day run of gains, which has been the best such streak since early 2019. Even though the crude complex is a little softer on Wednesday, WTI is still up over 12% since the start of the month.

Driving the day

As noted, the fundamental backdrop remains supportive;

Markets continue to price in more US fiscal stimulus and recent indications from the Democrats in Congress is that they are pushing for US President Joe Biden’s full $1.9T package to be adopted, thus it looks like whatever fiscal stimulus is passed in the coming weeks, its is going to be a big one. Meanwhile, on the central bank stimulus front; slightly softer than anticipated US Consumer Price Inflation data just released at 13:30GMT (the headline YoY rate of CPI remained unchanged from the month prior at 1.4% in January, versus expectations for a rise to 1.5%) does not change much for the Fed and Chairman Jerome Powell is expected to reiterate the bank’s ultra-accommodative monetary policy stance in a speech to the Economic Club of New York at 19:00GMT, a stance which continues to underpin risk asset valuations.

There has been some debate recently about whether all the (fiscal and monetary) stimulus already enacted, plus Biden’s incoming spending package, might cause the economy to overheat later in the year/in 2022. Markets have been pricing in higher inflation in the years ahead, seen in the recent rally in break-even inflation expectations (10-year break-evens rose above 2.2% for the first time since 2014 this week). Some analysts had argued that a stronger than anticipated inflation reading on Wednesday might trigger some fears about potential earlier than expected Fed tightening, which could lead to a hawkish market reaction (stocks, commodities, bonds down, USD up).

Obviously, that did not happen. Indeed, with inflation missing expectations, markets saw the opposite reaction (stocks up, bond up, USD down). Commodities such as crude oil were a little more mixed. Either way, the US economy was still in the throws of the worst moment of the pandemic so far in January and suffered accordingly, keeping inflationary pressures in check. Beyond the transitory rise expected due to base effects in the coming months, much more interesting will be observing how upwards price pressures build in the latter half of the year.

Elsewhere, and turning back more specifically to crude oil markets; pandemic developments remain largely supportive to the complex. Infection rates continue to drop in the US, UK and other major developed economies (though the rise of the prevalence of the more transmissible UK variant in mainland Europe is a concern and could trigger some lockdowns). Vaccine rollouts continue at a pace and are likely to further accelerate in the weeks/months ahead, with the World Health Organisation (WHO) expected to recommend the use of the AstraZeneca vaccine on Thursday (amid concerns regarding its efficacy versus the South African variant of Covid-19).

OPEC+ is yet to show any signs of temptation to increase output amid the recent rise in prices; Iraq (a historic poor complier to OPEC+ pacts given sectarian divisions within the country) is set to continue to ump oil at a much-reduced rate of 2.9M barrels per day in February to make up for under compliance in 2020. Crude oil markets have not paid much attention to comments from the Iraqi Oil Minister that 1) he expects the Saudis not to continue their additional 1M barrel per day in voluntary cuts beyond March (this is in line with market expectations) and 2) that Iran could return to the oil market before the final quarter of the year. This would depend on what happens with Iran, the US and whether the two can revive the JCPOA. At present, neither side wants to be the first to make a concession and get the ball rolling to a return to the deal.