WTI recovers from brief trip below $61.00 following dovish Powell remarks

Crude oil markets entered Tuesday’s Asia Pacific session on a bullish note, with front-month futures contracts for the American Benchmark of sweet light crude, called West Texas Intermediary (or WTI), rallying to within a whisker of the $63.00 level. However, global stock markets sold off at the start of the European trading session and are still trading in the red as European trade draws to a close. This has exerted downwards pressure on crude oil markets, with WTI having dropped back below the $62.00 level and even to briefly underneath $61.00.

Fed Chair Powell resolutely dovish

Equity indices have recovered from post-cash open lows in recent trade, seemingly aided by dovish reassurances from Fed Chair Jerome Powell, who has been speaking via video conference in his Semi-annual testimony before Congress and this has helped lift WTI back into the mid-$61.00s. As expected, Powell stuck to the script regarding the Fed’s policy plans; QE is to continue at the current pace until substantial further progress has been made towards the bank’s employment and inflation goals and interest rates will not rise until full employment has been reached and inflation is sustainably back above the Fed’s 2% target.

On inflation, Powell pushed back against concerns of a problematic rise, reiterating that the US remains in a longer-term deflationary environment and the Fed is prepared to look through transitory upticks, be they caused by base effects or a sudden pickup in consumer spending post-economic reopening later in the year. This is a dovish take on the inflation outlook compared to many market participants and seems to have helped stocks (and crude oil) recover, though crude oil would likely do well in a high inflation environment.

Asked about bond yields, Powell’s response might have disappointed some who might have been hoping for him to attempt to “jawbone” bond yields lower as ECB President Christine Lagarde did earlier in the week. Powell merely attributed the rise to higher economic growth and inflation expectations. However, Powell did push back against the recent hawkish shift in money market interest rate pricing, which placed a 70% chance on the Fed hiking by the end of 2022 despite Fed guidance of zero hikes through 2023; Powell said that the Fed’s current guidance is appropriate, implying that markets might have gotten a little ahead of themselves here.

Crude oil factors

Fedspeak and stock market price action aside, demand-side fundamentals continue to look broadly positive; vaccine rollouts continue in major economies (US is getting huge vaccine deliveries from Pfizer and Moderna over the next few weeks) and both the US and UK look to be on the road back towards reopening. UK PM Boris Johnson unveiled the country’s “Roadmap to Recovery” could see most economic restrictions lifted by June and could bode well for international European travel (meaning higher jet fuel demand), Covid-19 variant concerns permitting. Stimulus hopes as Congress moves forward with US President Joe Biden’s $1.9T package and starts discussions on the follow-up multi-trillion infrastructure investment bill, combined with growing expectations for a rapid, synchronised global economic recovery later in the year continue also to be bullish factors.

Supply-side factors are a little more mixed; Texas crude oil production appears to be returning more slowly than market participants had anticipated and the impact the recent weather disruption will have had on weekly crude oil inventory data is yet to be seen. Meanwhile, crude oil markets are preparing themselves for next week’s OPEC+ meeting and the potential prospect for a clash between the Saudis and Russians over how much to increase output. Most expect that the cartel will ease production quotas by about 500K barrels per day.