Here's The Problem I Think We Should All Acknowledge About The Oil Market
Please read yesterday's write-up, "Here's The Problem I'm Still Seeing In The Oil Market."
Oil prices were steady today until Fed Chairman, Jerome Powell, dropped the "higher rates" and "not enough" bomb on the market. The broader market cascaded downward and with it, the oil market.
From a macro standpoint, it appears that the Fed is hellbent on not pivoting anytime soon. Remember that the market is already expecting the Fed to pivot, but following the lessons of the 70s, it appears the Fed is much more cautious this time around.
If we entertain the fact that the Fed is serious and will keep pushing the terminal rate higher to prevent inflation from feverishly bouncing back, then that's, in essence, a huge cap on oil prices and consumer spending.
On the economic data front, while US data continues to come in slightly stronger than expected, the reality is that US oil demand is weaker than expected.
Total Demand
Gasoline, Distillate, Jet Fuel
These are concerning data points no matter how you slice and dice them. From a trader's perspective, you start to ponder a few things. For starters, oil prices have dropped materially since June of last year, yet despite lower gasoline prices, we have yet to see a response in oil demand. Is the drop in demand the result of the Fed tightening policy? If so, does this mean that demand will persist at these low levels until the Fed starts to loosen up?
I don't know and I don't have the answer to this question. But what I do know with certainty is that demand is weak and has been trending weak despite lower oil prices. This to me indicates that something is pressuring demand lower and it appears to be Fed-related.
What can change this?
If the Fed is controlling inflation by destroying demand via higher interest rates, then OPEC+ can counterbalance this via lower supplies.
But here's the problem we are seeing!