- WTI is currently stuck in a $65.60-66.20 range as the strong US dollar and higher yields weigh on risk assets.
- Market commentators attribute US fiscal optimism as the main driver behind the move higher in yields.
Crude oil markets trade a little softer on the final trading day of the week, weighed by the stronger US dollar and in tandem with weakness being seen across global equity markets as investors fret about a recent and seemingly accelerating rally in US government bond yields (10-year yields have surged nearly 10bps on the day to above 1.62%). Front-month futures contracts for the American benchmark for sweet light crude oil, West Texas Intermediary (or WTI), are currently locked within a (roughly) $65.60-$66.20 price range as traders mull what is next; a move back towards this week’s highs close to $68.00 or a drop back towards this week’s lows just above $63.00.
Driving the day
In terms of why US government bond yields have been rallying (and hence why the USD is up and risk assets such as stocks and crude oil are struggling), now specific news of fundamental development sparked the move. Yields started picking up midway through the Asia Pacific session and market commentators are attributing the move to “US fiscal stimulus”; in other words, to the fact that US President Joe Biden signed the $1.9T “rescue” package into law in the US on Thursday (stimulus cheques could arrive as early as the weekend) and amid increased chatter surrounding the next stimulus package, which is touted to be much larger and focused on infrastructure.
If more stimulus means a stronger US economic recovery and higher inflation than is currently being priced in by markets, then does that mean a swifter onset of Fed monetary policy tightening? If so (as some seem to be betting), that is bullish for bond yields. Note that crude oil is not a risk asset that is sensitive (in the medium to long-term) to increases in long-term interest rates, or at least not nearly in the same way as for example growth stocks (or Big Tech) are. If the yields move higher because the US economy is performing very well, that means demand for crude oil is going to be higher (bullish for prices). Moreover, if inflation goes up, this is also likely to support crude oil prices (after all, it is a physical asset).
Data released on Friday generally support the strong US economic recovery/higher inflation ahead narrative, and thus seem to be supporting US bond yields; the preliminary University of Michigan survey for March showed the US consumer in much better than expected shape (which should not be too surprising given every American received a $600 cheque in January) and the February Producer Price Inflation showed inflation running hot at 2.8% YoY (though most of this jump from 1.7% in January was down to weakness in producer prices this time last year as the US economy entered lockdown for the first time).
In terms of some other factors to take note of on Friday; news out of the Eurozone regarding the pandemic has not been good and this could weigh on crude oil demand. In France, the Minister warned that the situation in Paris is particularly concerning, with the infection rate is close to pre-second wave levels. Elsewhere, there is talk of a nationwide lockdown in Italy over Easter and German health officials are talking about the fact that the country might be at the start of the third wave of Covid-19. In terms of supply-side news, this story has not caused traction or caused a move in crude oil markets yet, but according to the Mexican President, a very large oil discovery has been made in Tabasco. He gave no further details.
Looking ahead, the rest of the session is likely to be quiet as traders wrap up for the weekend. Any comments US President Biden makes on stimulus might be worth watching, however, and bond yields look set to remain in the driving seat.
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