Market analysis: no let-up in pressure on oil price

First resistance at the channel between $35 and $35.50 expected with second resistance at $36.90 levels, writes Gaurav Kashyap.

The US benchmark West Texas Intermediate contract slipped to near 12-year lows at US$33.72 per barrel in January. Eddie Seal / Bloomberg

From falling energy markets to a mixed bag of central bank policies, January was filled with key moments that will continue to drive volatility and dictate risk appetite this month.

Perhaps the biggest mover was crude oil. The US benchmark West Texas Intermediate contract slipped to near 12-year lows at US$33.72 per barrel. After shedding more than 26.85 per cent of its value through the first three weeks, it recovered about 60 per cent of that loss to close the month 10.5 per cent lower.

From a longer-term view, the fundamentals of the energy mar­kets remain unchanged – undermined by a global supply glut and coupled by diminishing demand as a result of declining output, crude prices will remain under pressure this month. Although we do not expect a move below $30 per barrel again, we expect first resistance at the channel between $35 and $35.50 with second resistance at $36.90 levels. With volatility expected to remain high through February, we will certainly see some bounces to these levels – especially if the usual US data docket shows continued signs of improvement.

Crude has formed a strong correlation with US equity markets and we expect this relationship to further solidify through the month ahead. The monthly US non-farm payrolls report due this Friday (190,000 expected) will be keenly watched. It may be recalled that December’s number were strong – 292,000 jobs added – and we would again need to see a gain above 200,000 to maintain the positive risk on mood in February.

The weekly crude inventories due tomorrow will also drive sentiment in crude prices in the short term. With the volatile nature of oil prices, it would be wise to wait for the bottom to fully establish before executing any long strategies.

The US dollar was higher last month, with the US dollar index, a measure of the greenback against a basket of currencies, closing the month 0.93 per cent higher. Perhaps the largest development out of the US, following the impressive US payrolls report, was the inaction of the Federal Reserve at its most recent meeting on January 27 in which it held steady on rates.

Following December’s interest rate rise and rather hawkish rhetoric, markets are gearing up for up to 100 basis points in increases in 2016.

While this might seem a little too optimistic on behalf of the Fed, the development of the US data over the month will be key in the lead-up to the Fed’s next meeting on March 16.

We have seen the dollar index find resistance at the key psychological level of 100 and we expect this level to hold through the month with the US dollar index remaining neutral with a slight positive bias.

The euro was little changed against the dollar, closing the month just 40 points lower against the greenback. Although the euro has had more success against commodity currencies such as the Australian and Canadian dollars because of falling energy prices, euro-US dollar should continue to trade in the current range, with support coming in at 1.0710 and strong resistance coming in at 1.1 levels.

This past month the European Central Bank held its benchmark refinancing rate and deposit rate unchanged at 0.05 per cent and -0.3 per cent respectively, as expected. And although the ECB president Mario Draghi did not pull the trigger and announce a fresh round of stimulus, markets will now look to the meeting in March as a potential window for further quantitative easing for the euro zone.

And finally, the Bank of Japan took markets by surprise when it unexpectedly cut rates last Friday.

The BoJ announced that it would apply a negative rate of -0.1 per cent on current account deposit that banks and financial institutes keep deposited with the central bank, in essence, charging these banks an interest for parking funds with the central bank.

The move acts as a countermeasure against the deflation threat in Japan, as inflation data in December came in at 0.1 per cent. The yen tumbled on the news, with the dollar-yen pair appreciating 1.94 per cent to close the month at 121.09.

Gaurav Kashyap is the head of futures at AxiTrader ME DMCC.

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