Market analysis: Volatility to force crude prices lower

Markets started the week sharply lower, with oil, commodities and commodity currencies opening lower following the inconclusive summit in Doha over the weekend.

Opec and other major oil producers failed to reach an agreement on freezing oil output levels, which dragged energy markets lower through yesterday’s trading session.

On the Dubai Gold and Commodities Exchange, the US benchmark West Texas Intermediate contract dropped by 4.8 per cent in the Asian session, falling below $38.50 a barrel, this after opening $2 lower following Friday’s closing. Similarly, the Canadian dollar and Australian dollar, two such currencies whose economies are highly reliant on, and as a result sensitive to, commodity prices, dropped by 0.9 per cent and 0.7 per cent, respectively, in early trading. In the past month, crude oil prices have remained highly volatile. After peaking at a three-month high of $42.47 on March 18, crude then sold off $6 over two weeks to fall below $35. It then reversed and pared those losses to retest those March 18 highs.

Following the failed summit, crude could test $35 levels once again. Fundamentally, the movement of crude prices in the lead up to the Doha developments have been farcical at best – markets rallied through the beginning of the month on allayed hopes of an output-freeze deal between Opec members who have yet to show any form of alignment in their respective agendas.

In extension to this rather complex geopolitical scenario, the fact remains that there is still a massive glut in crude markets. Last Wednesday’s crude inventories in the US showed a build-up of 6.6 million barrels, taking the overall inventory count to 14.6 million barrels over the past five weeks.

Crude prices will remain under pressure in the weeks ahead – the lower target remains at this month’s low of $35.40. But expect volatility to return, especially following any form of rhetoric from Opec members and their respective ministers. The weekly US crude inventory report tomorrow will also yield volatility.

In the currency markets, the US dollar index slid through the first half of this month, breaking through several key support levels to drop to seven-month lows at 93.6 before retracing back above 94.5 yesterday morning.

The US dollar has remained anaemic since the beginning of the year and has dropped more than 5 per cent since the February highs.

Technically, the dollar still remains susceptible and we expect support to hold at the April 12 lows at 93.6 levels. Fundamentally, the dollar will remain sensitive to the US data docket, which will drive market expectations of future Federal Reserve action on interest rates.

It is quite clear the Fed does not have the necessary ammunition to justify a rate hike before June at the very earliest. However, the mantra of “bad news is good news” will continue through the month ahead and any signs of strength in the US data docket will weigh down dollar prospects going forward and vice versa. The inflation data for last month, a key component of upcoming Fed action, came in at 0.1 per cent month on month. Core inflation (less food and energy prices) also slowed to 2.2 per cent from 2.3 per cent in February, and this pushed the dollar index up to highs this month of 95.2, which also remains the upper target.

And finally, after dropping 10 per cent since the start of the year, the dollar-yen found support above 107.50 levels. The downwards move has been another major factor in the weakening dollar index and these levels would need to hold for the dollar index to stabilise between 93.60 and 95.20 in the weeks ahead.

The headline economic event to close out this month will be the federal open market committee meeting, which begins on April 26. And although there is no chance of a rate hike, we expect a rather dovish Fed, which will weigh down dollar prospects.

Gaurav Kashyap is the head of futures at AxiTrader ME.

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