US Crude Punches Past $50, June Rate Hike Doubtful

US crude is showing little movement on Tuesday, as the commodity trades at $49.90 in the North American session. Brent crude is trading at $51.00, for a premium of $1.10. US Crude has touched a high of $50.35 on Tuesday, marking the commodity’s highest level since July 2015. In economic news, there are no major US releases on the schedule. US employment indicators continue to sag, as Revised Nonfarm Productivity posted a decline of 0.6%, matching the forecast.

With a rate hike from the Fed up in the air, a speech from Fed Chair Janet Yellen on Monday was closely watched by the markets. Speaking at the World Affairs Council in Philadelphia, Yellen said she remained optimistic about the US economy and hinted that the Fed would raise interest rates, but crucially, she gave no indication as to when that might occur. This omission was in sharp contrast to her remarks just over a week ago, when she declared that a hike would likely be appropriate “in the coming months”. Yellen was cautious in her tone on Monday, saying “[i]f incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective as I expect, further gradual increases in the Federal Funds Rate are likely to be appropriate”.  Yellen played down the dismal Nonfarm Payroll report, saying that the markets shouldn’t attach too much significance to one soft report. The markets had lowered expectations for a June rate hike, and Yellen’s speech has all but priced out a June move. However, a rate increase in July or September remains on the table, and any decision by the Fed to raise or maintain rates will be data-dependent, particularly inflation and employment data.

A very soft Nonfarm Payrolls report on Friday caused sharp volatility in the currency markets, but oil was having none of it, as crude prices were almost unchanged in the Friday session. The April release fell to just 38 thousand, stunning the markets. This was the lowest reading since August 2010. The estimate stood at 159 thousand, which was almost identical to the previous release. The dust hasn’t settled yet, and the NFP report could mean that a June rate hike by the Federal Reserve is no longer on the table. Some of the plunge in the NFP release is attributable to a strike by workers at Verizon, a major communications company. Still, even without this component, the indicator would have posted a gain of only 72,000, well short of expectations. In other US employment news, Average Hourly Earnings, which measures wage growth, posted a weak gain of 0.2%. The unemployment rate fell to 4.7%, but workforce participation dropped to 62.6%.

OPEC members met in Vienna last week, but failed to reach any agreement on production targets. This follows a meeting in Qatar back in March, which also ended without an agreement. Given Iran’s consistent refusal to agree to any type of reduction or freeze, analysts had not expected any breakthroughs at the Vienna summit. With the world’s major oil producers continuing to function under the mantra “every man for himself”, it is the market that will determine the price of oil rather than any cartel of oil producers. That could mean a drop in crude prices, given the huge oversupply across the globe. After two failed meetings, OPEC’s credibility has been seriously shaken. One analyst went even further, with Oppenheimer senior energy analyst Fadel Gheit declaring “OPEC is finished. OPEC is over”. Meanwhile, Crude Oil Inventories posted another decline last week, the third drop in the past four weeks. However, the reading of -1.7 million was considerably stronger than the forecast of -2.7 million. These declines have helped bolster the price of US crude, which remain close to the symbolic $50 level.

WTI/USD Fundamentals

Tuesday (June 7)

• 8:30 US Revised Nonfarm Productivity. Estimate -0.6%. Actual -0.6%
• 8:30 US Revised Unit Labor Costs. Estimate 4.0%. Actual 4.5%
• 10:00 US IBC/TIPP Economic Optimism. Estimate 49.1. Estimate 48.2
• 15:00 US Consumer Credit. Estimate 19.1B

Upcoming Key Events

Wednesday (June 8)

• 10:00 US JOLTS Job Openings. Estimate 5.69M

*Key events are in bold

*All release times are EDT

WTI/USD for Tuesday, June 7, 2016

WTI/USD June 7 at 11:20 EDT

Open: 49.65 Low: 49.47 High: 50.35 Close: 49.90

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
•  50.13 remains a weak resistance line
• 46.69 is providing support

Further levels in both directions:

• Below: 46.69, 43.45, 40.00 and 37.75
• Above: 50.13, 53.50 and 56.79

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