TOCOM Energy

Crude oil futures Friday extended the week’s losses as US inflationary fears continued to unnerve investors. The price swings in the market last week strongly suggest that the crude oil market has become more economic data dependent as broader economic woes remain a concern.

The dollar index has rallied again since early February, and it all starts from report indicating January US labor market remains very tight.
One reason the U.S. economy has not yet entered an actual recession is that the labor market remains strong as the pandemic has accelerated the gap between the supply and demand of labor in the United States, thus supporting wages and mitigating a slowdown in aggregate demand.

However, higher prices require higher wages for workers to keep up, creating a loop that essentially locks in inflation. During the process of interest rate hikes, firms will first feel the pain as corporate earnings are being squeezed by higher raw material, labor and capital costs. This will be followed by higher unemployment rate. Until this happens, higher prices may be more of an annoyance than a game changer for the economy that leads to a crippling recession.
Throughout last week, including high-than-expected CPI and PPI report, hot economic data has been signaling to traders that the Federal Reserve has to continue to raise interest rates or risk losing control over inflation.
As markets settle on the “higher for longer” scenario, it raises another question-whether oil price will go higher to trigger a recession earlier than expected or oil prices may stay at current high levels which will trigger a long-lasting recession than expected.

Markets largely ignored the latest monthly report from OPEC and the IEA, as the two organization both raised its forecast for oil demand growth this year by 100,000 bpd from its last estimate. Supply and demand balance sheet from the two organization indicates a tightened fundamental as growth in Asia demand may offset weak demand from the west.

Sentiment may have also been influenced by a massive build in U.S. crude oil stockpiles reported on Wednesday. But the surge in inventories is not a sign of plunging US demand. Part of the reason for this massive inventory build is the adjustment of data which can be seen simply as a “balancing item,” as the EIA describes it.
This adjustment reflects the combined uncertainty around each of the crude oil data elements illustrated below that the EIA uses to assess the balance between U.S. crude oil supply and its disposition.

EIA does not collect weekly production or export data, so estimates are developed based on monthly data and information regarding seasonal and industry trends. The quality of these estimates can later be assessed by examining their relationship to monthly data once it becomes available.

In these times of volatile pricing and changing trade flows that resulted from the Russia-Ukraine war, a key component of the critical and visible U.S. balance, i.e. crude oil export, has varied significantly as well.
Large swings in the EIA data is expected in the coming weeks. It isn’t very helpful for the direction of the market but can also lead to volatility in the oil market as traders digest it.