After rising toward Brent $87.00 bbl on Monday, oil prices have made an about-face, leading investors to exit China’s reopening trade again, despite fundamentals moving broadly in line with expectations.
As we advance, we believe that the price path in oil will remain challenging to navigate, caught between now misaligned macro drivers – a stronger China and persistent Fed – and exacerbated by disappointment over the lack of a pro-growth stance in the Two Sessions policy event.
Oil is once again snared in the Fed rate hike loop. At the start of the year, oil prices and most risk assets were driven by a cooling US economy, a resurgent China, and a recovering Europe. These are ideal conditions for a commodity rally as a cooling US economy would allow for a Fed pause, leading to a weaker dollar and clearing a path for more robust Chinese fundamentals to dominate commodity trading. The subsequent rally in the dollar has hurt all the commodities, and while we have reached a stalemate, it is still too early to call checkmate.
However, after another setback, traders will become even more wary, demanding fresh macro evidence to invest in the structural bull thesis. So until China’s economic data lights up or the Fed turns less hawkish, it could spell trouble for oil prices over the short term, especially if the FOMC is forced to double down in March as the US economic data runs too hot.
Daily Energy Markets