Crude Oil Price Analysis for February 28, 2018

Crude oil prices were trading under pressure on Tuesday as the dollar gained traction during new Fed Chair Gerome Powell’s bi-annual testimony in front of congress. Powell stated that the economy was moving along at a good clip and inflation was on the rise potentially moving to an overheating economic situation.  Trader’s began to price in a 4^th rate hike which pushed yields higher lifting the dollar which put pressure on crude oil prices.

Technicals

Crude oil prices moved lower down 1.3%, but bounced off the lows of the session, despite a stronger dollar that was generating headwinds for prices. Since crude oil is quoted in dollars, a stronger dollar makes crude oil more expensive in other currencies.  Support is seen near the 10-day moving average near 61.97. Resistance on crude oil is seen near a downward sloping trend line near 65.20. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses above the MACD signal line (the 9-day moving average of the MACD line). The MACD histogram is printing in the black with an upward sloping trajectory which points to higher prices.

Hedge Funds are Very Long

Hedge fund traders remain very long futures and options according to the most recent commitment of trader’s report released for the date ending February 20, 2018. According to the CFTC, open interest that is long in the managed money space remains at 474K compared to short positions that are 29K.

Eurozone ESI economic confidence fell back

The dollar is rallying for several reasons beyond the Powell testimony. This includes declining sentiment in Europe and weaker than expected inflation numbers. Eurozone ESI economic confidence fell back to 114.1 in February, while the January number was revised up to 114.9 from 114.7 reported initially. Industrial confidence dropped back to 8.0 from 9.0, services confidence to 17.5 from 16.8, and consumer confidence was confirmed at 0.1, down from 1.4 in the previous month. This is the second consecutive decline in the headline reading, but at 114.1 the ESI remains far above the levels seen throughout last year and firmly above the long term average of 101.2. So like the other confidence reading this month, the ESI fell back, but remains at very high levels consistent with ongoing robust growth.

German state inflation numbers weaker than expected

German state inflation numbers weaker than expected, with annual rates from Saxony, Brandenburg, Hesse, NRW and Bavaria dropping 0.1-0.2 percentage points. We had been expecting a steady annual rate for HICP and CPI, but the median consensus predicted a slight dip in HICP to 1.3% year over year from 1.4% year over year.

Eurozone M3 money supply growth held steady

Eurozone M3 money supply growth held steady at 4.6% year over year in January, as expected. Lending to households rose 2.9% year over year, lending to companies picked up 3.4% year over year. The headline M3 numbers have pretty much been demoted in the ECB’s monetary policy tool kit, but the fact that lending growth is looking solid now will back the arguments of the hawks, which argue that the Eurozone can live without further asset purchases, at least as long as rate hikes are not on the immediate agenda.

Spanish HICP inflation jumped to 1.2% year over year from 0.7 year over year in the previous month. At 1.2% year over year the annual rate remains far below the ECB’s target for price stability, but the sharp rebound still suggests that the recent set back in headline rates was temporary and that inflation is starting to nudge higher. Even the ECB now admits that underlying inflation indicators are starting to pick up and with labor markets continuing to improve wage growth is also expected to move higher.