WTI Crude prices reversed earlier gains as the dollar surged following better-than-expected economic data that supported the idea that the economy can handle rapid Fed rate hikes. No one is questioning how tight the oil market remains, but there is some exhaustion after making fresh seven-year highs and that has led to some profit-taking.
The developments in Ukraine have been constructive as diplomacy continues and while progress has not been made, a period of calm could perhaps have energy traders refrain from resorting to their buy every oil dip strategy.
The focus for many in the oil space will shift to the OPEC+ policy meeting next week which should be an easy meeting that delivers another modest production increase. The political pressure is growing for OPEC+ to deliver more barrels of crude, but they will likely stick to the expected increase of 400,000 bpd for March. With some OPEC+ members struggling to reach their quotas, any oil weakness should be limited.
Natural Gas
US natural gas prices surged over 70% for February delivery as short sellers may have gotten squeezed out ahead of February expiration. Many hedge funds were betting natural gas would go up as frigid weather sent demand soaring, but money managers were short.
Gold
Gold’s pain gets worse as investors grow pessimistic over how non-interest bearing assets may perform this year now that the Fed seems poised to deliver four or five rate hikes this year. Another round of economic data supported the tightening arguments as the US economy had the strongest year in decades, while omicron likely had a short-term impact on durable goods and pending home sales.
Gold is vulnerable to further technical selling now that the $1800 level has been breached, with $1760 providing key support. Risk aversion will eventually lead to some flows back into bullion, but that won’t happen until this selloff is over.
Bitcoin
Bitcoin’s rollercoaster ride is not over yet as risky assets take a hit on growing expectations that the Fed could be more aggressive tightening policy this year. The Fed got inflation wrong and the scramble to deliver interest rate hikes this year is sending the best performing assets during the pandemic tumbling. The Fed’s aggressive fight against inflation will ease once financial conditions are threatened and that is far away. The next couple of months will remain very choppy for crypto markets but the fundamentals still support a broadening formation for the top performing cryptos.