WTI/USD – US Crude Takes Breather After Dismal Week

US crude prices have steadied on Monday, as WTI/USD futures are trading at $44.89 per barrel in the North American session. Brent crude is trading at $46.18, as the Brent premium is at $1.29. On the release front, the sole US event on the schedule, the Labor Market Conditions Index, posted a decline of -1.9 points. As well, FOMC Esther George will speak at an event in Missouri.

It was a week to forget for US crude, which sank about 8 percent. Most of the slide occurred on Thursday, as the commodity reacted negatively to the EIA Crude Oil Inventories report, although the reading was close to the forecast. The indicator declined 2.2 million barrels last week, and this was much stronger than the API Crude Oil Stock report, which had forecast a decline of some 6.7 million barrels. The actual decline was much smaller than many market players had anticipated and this led to a sharp drop in crude prices. Crude is also under pressure after reports that US drilling activity continues to increase. According to Baker Hughes, an oilfield services provider, the number of rigs drilling for oil in the US continues has been steadily increasing in recent weeks. Stronger domestic production will exacerbate the current oversupply and could push crude prices down even further.

US employment numbers were generally positive on Friday, led by the key Nonfarm Employment Change report. The indicator surged to 287 thousand in June, crushing the estimate of 175 thousand. This followed a dismal reading of 37 thousand a month earlier. There was further encouraging news as the work participation rate improved, following two straight declines. At the same time, Average Hourly Earnings remains weak, as the wage growth indicator posted a weak gain of 0.1%, shy of the forecast of 0.2%. The unemployment rate rose to 4.9%, above the estimate of 4.8%. The employment picture remains bright, but weak wage growth continues to be the Achilles heel of the US labor market.

There were no surprises in the Federal Reserve minutes, released last week. In the June policy meeting, policymakers expressed concerns about a slowdown and hiring and the health of the US economy, and the underlying tone was one of prudence and caution. The June meeting took place just one week before the Brexit referendum vote, and in the minutes showed that Fed policymakers adopted a “wait and see” attitude about Brexit. The vote by Britain to leave the EU stunned the markets, causing turmoil in the markets and sending bond yields to record lows. The minutes indicated that Fed members projected two rate increases before the end of the year, but that forecast is likely out-of-date following the shock waves from the Brexit earthquake. Given the current economic climate, the markets are pessimistic about any rates moves before 2017. Investors have priced in no chance of a rate increase at the next Fed meeting on July 26-27, and just an eight percent chance of a hike in 2016. However, if US employment and inflation numbers improve in the second half of the year, the likelihood of a rate hike will certainly increase.

WTI/USD Fundamentals

Monday (July 11)

• 10:00 US FOMC Member Esther George Speaks
• 10:00 US Labor Market Conditions Index

*Key events are in bold

*All release times are EDT

WTI/USD for Monday, July 11, 2016

WTI/USD July 11 at 12:30 EDT

Open: 45.13 Low: 44.54 High: 45.76 Close: 44.89

WTI / USD Technical

• WTI/USD was flat in the Asian session. The pair posted gains in the European session but has retracted in North American trade
• There is resistance at 46.49
• 43.45 is providing support

Further levels in both directions:

• Below: 43.45, 39.32 and 35.25
• Above: 46.69, 50.13 and 53.50

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