Commodities Week Ahead: Chinese, U.S. Data to Spin Different Tales for Oil

At another holiday-shortened week in a row for U.S. markets since the start of the year, oil bulls will be looking for more gains to put crude back into the positive for 2023.

But the China rebound story that provided last week’s octane for oil to reset the 8% loss from the opening week of the year could take a backseat this week. This is due to the dismal numbers released by Beijing on Monday for full-year GDP, and December retail sales and industrial output.

The trend isn’t expected to be very different in the United States, where markets reopen on Tuesday from Monday’s Martin Luther King holiday in anticipation of weak economic data. US retail sales posted their most significant decline in 11 months in November — a drop of 0.6% — and Wednesday’s update for December is forecast to show an even more significant 0.8% decline.

This week’s US economic calendar will also feature producer price inflation, existing home sales, and initial jobless claims along with regional reports on manufacturing output.

Typically, weak GDP, employment, and retail sales numbers tend to weigh on oil as they are structurally-important data that support higher energy consumption when they come in on the positive side.

While this week’s China data is undoubtedly bearish, oil bulls can still put a positive spin on some of the forthcoming U.S. data by tying them to the likelihood that the Federal Reserve will impose the smallest rate hike in eight months if the numbers turn out to be weaker than expected.

Money market participants see a near 92% chance that the Fed will raise rates by just 25 basis points at the conclusion of its Feb. 1 policy meeting. Prior to that, the central bank hiked rates by 50 basis points in December after four increases of 75 basis points from June through November.

Data late last week showing that U.S. consumer prices fell for the first time in over two-and-a-half years in December added to hopes that inflation is on a sustained downward trend that could give the Fed room to slow rate hikes.

For those long oil, keeping the market on the positive side was a challenge after the weak demand seen over the past three months, said Craig Erlam, an analyst at online trading platform OANDA. He added:

“It’s tough to get a true gauge of the disruption the current wave is having on the economy. There’s no shortage of optimism for the rest of the year.”

In Tuesday’s trade, New York-traded WTI, or West Texas Intermediate, crude for February delivery was at $79.58 by 01:45 ET (06:45 GMT), down 53 cents or 0.7%. The US crude benchmark rose 8.4% last week, recouping in percentage terms all that it lost in the opening week of 2023. Notwithstanding that rebound, WTI is still down about 40% from the March 2022 high of $130.50.

London-traded Brent crude for March delivery was at $84.69 per barrel, up 23 cents, or 0.3%, on the day. Last week, the global crude benchmark gained 8.5%, making up for the prior week’s drop. Like WTI, Brent is also nursing a drop of almost 40% from last year’s highs - when it rose to as much as $139.13 in March.

Oil prices collapsed from last week’s highs amid fears about China’s COVID-crisis relapse and worries about a global recession.

Traffic levels in China are rebounding from record lows after the easing of COVID-19 restrictions, resulting in stronger demand for crude and oil products, ANZ analysts said in a note.

But reports over the weekend highlighting an increase in COVID-19 deaths tempered sentiment.

Bart Melek, Head of Commodity Market Strategy at TD (TSX:TD) Securities, said in comments carried by Reuters:

“The narrative that Chinese growth is going to add to demand is playing a very large part here. There could be as much as a million barrels per day of demand returning.”

U.S. interest rates aside, investors will be keenly awaiting the conclusion of the Bank of Japan’s two-day policy meeting on Wednesday amid speculation that it could make further adjustments to its yield curve control policy, the first stage of phasing out its massive stimulus.

The BOJ stunned markets last month by widening the band around its 10-year bond yield target, a move that investors saw as a prelude to a future rate hike. Signs of broadening inflationary pressures have bolstered expectations that the Japanese central bank will eventually normalize monetary policy.

Core consumer prices in Tokyo, a leading indicator of nationwide trends, rose at the fastest pace in four decades in December, exceeding the central bank’s 2% target for a seventh straight month.

Investors are closely watching earnings results to see if U.S. companies can beat estimates amid concerns that higher costs are squeezing profit margins.

Year-over-year earnings from S&P 500 companies are expected to have declined 2.2% for the quarter, according to Refinitiv data. That would be the first U.S. quarterly earnings decline since the third quarter of 2020 when companies were still grappling with the start of the coronavirus pandemic.

The U.S. stock market’s leading indicator, the S&P 500, is up by almost 4% since the start of 2023 after falling more than 19% last year, its biggest annual decline since 2008.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.