Trade War Fears and Equity Performance Weigh Heavily on Crude

Market Overview

Trade war tensions continue to mount as China issues tariffs on US exports worth $3 billion following the issuance of tariffs on Chinese goods in excesses of $50 billion by the US. In prior weeks, the energy complex appeared little phased by further talk of trade wars with WTI posting a significant rally to $66 and intraday buyers stepping in on any price weakness. Early trading this week has seen a bit more fear enter the marketplace as WTI has fallen roughly 4.5% from recent highs and is testing a form of major support around $63 per barrel. The pullback was most likely triggered by systemic market risk that has steadily been increasing in recent sessions. Tesla and Amazon have helped pull US equities lower which has led to a flight to quality as treasury yields fall and commodities depreciate. Tesla is facing increased scrutiny after a fatal crash in a Model 3 while autopilot was engaged. Tesla has recalled over 100,000 vehicles following the accident. Amazon has sold off significantly after drawing the attention of President Trump, who is calling for increased scrutiny over Amazon and its business practices as the company approaches monopoly territory.

Overall, risk trends are coming under pressure and crude prices are suffering as a result. The economic calendar should be watched closely this week as we have key CPI data out of the Eurozone and labor data out of the United States. We’ve already had a bit of a disappointment in US figures today with ISM manufacturing and employment coming in softer than expected. Non-farm payroll along with the unemployment rate will be released this Friday at 8:30 am EST. Non-farm is expected at 189k versus the previous reading of 313k. The unemployment rate is forecasted to drop from 4.1% to 4.0%. Later in the day at 1:30 pm EST, Fed Chairman Powell is scheduled to give a speech on economic outlook.

Technicals

WTI Futures

WTI has pulled back nicely after challenging horizontal resistance at $65.50 and upper channel resistance near $66 per barrel. $63 and lower trend line support under $62 are levels to watch in the coming sessions. If risk trends continue to worsen, the $63 level will be breached and could see us slide to $62 or lower. Price has some room to work to the upside before we start looking again at bullish positions. Ideally, anything below $64 would point us to further losses unless risk appetite comes back into play.

ULSD Futures

Heating Oil has sold off from highs after challenging resistance at $2.04 but has yet to breach support at $1.98. We’ll have to see if the momentum from current risk-off sentiment has enough drive to push us lower. After $1.98, the next level of support exists at $1.95.

RBOB Futures

RBOB futures are showing a bit more substantive weakness compared to ULSD as price has clearly broken through support at $2.00 and appears to be eyeing the next level of support at $1.95. If risk trends continue to fall, we expect price to stay below $2.00 with $1.95 as a general target.

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