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Fed Speak and Tariff Threats Spook the Energy Complex

Market Overview

US crude oil and products bucked the trend following a week of high volatility containing statements from Chairman of the Fed, Jerome Powell and tariff threats out of the White House. Last Tuesday, Jerome Powell signaled business as usual for the Fed, which marks a continuation of Janet Yellen’s preferred strategy of gradual rate increases if the economic backdrop remains supportive. That said, some market participants walked away with a hawkish read following the congressional testimony causing a rise in the dollar which saw the US Dollar Index (DXY) break above resistance at $90.50. On the short-term, the market’s bullish intent was premature as Powell’s testimony did not indicate a substantive change in monetary policy. While a fourth rate hike was hinted at, it was contingent upon a pickup in inflationary pressure after idiosyncratic events worked themselves out. Additionally, Powell pointed to a tightening labor market and the Republican tax bill as being supportive of inflation going forward, but while these can most definitely be a boon for the economy and lead to higher inflation figures, any outlook remains purely speculative as we have yet to see their quantifiable impact. The following Thursday, Mr. Powell dispelled the potential hawkish sentiment by telling the Senate he saw no reason to think the economy was “overheating”. Not long after Powell’s statement, President Trump announced that he was pursuing a 25% tariff on steel imports and a 10% surcharge on aluminum imports. Both US parties were quick to condemn the move saying it could spark a trade war and cause significant stress to the US economy. The equities market quickly sold off in the wake of these announcements with crude oil and products following close behind.

Scheduled event risk remains at lower levels this week with rate decisions out of Japan/Canada and unemployment data for the United States taking center stage. We’re expecting increased chatter regarding tariffs and NAFTA negotiations this week which could see higher levels of volatility enter the market.

Event Risk

CAD Bank of Canada Rate Decision: Wednesday @ 10:00 am EST

JPY Bank of Japan Rate Decision: Friday @ TBD

CAD Unemployment Rate: Friday @ 8:30 am EST

USD Unemployment Rate: Friday @ 8:30 am EST

A stronger dollar last Tuesday coupled with market expectations for a build in commercial crude saw a significant correction in ULSD that caused price to break well below channel support and head toward lows made on 2/14. Price is currently consolidating around $1.88 as the dollar and equities attempt to recover earlier losses from Powell’s and Trump’s statements. Analysts appear to expect another build in commercial crude inventories this week which could see ULSD prices push toward recent lows near $1.86. On the other side, President Trump appears to be defusing his tariff threats which is currently supportive of price. Earlier today, the President tweeted that “tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.” The market is starting to believe that Trump’s position on tariffs may just be a negotiating tactic that he has no genuine intent to implement. That said, we’ll have to see how the situation unfolds throughout the week.

Speculative Sentiment

Hedge funds continue their eager bid for higher oil prices as the number of long contracts in NYMEX WTI futures increased to 480,874 from 460,261. The number of shorts contracts fell to a new low of 20,537. Net hedge fund exposure increased to 460,337 from 437,931 and is just under recent highs of 482,780. The Hedge Fund Ratio has increased for the fourth week in a row and stands at 23.42. Given rising US production we are still concerned with the markets net long exposure. We are seeing increased downside volatility on fundamental weakness that is slow to recover. Going forward, any increase in global risk aversion and a widening supply/demand differential could see another wave of heavy selling pressure.