Oil: Rate Rattle

Oil prices are getting rattled as the fear that rising interest rates will slow down surging U.S. and global demand. High yielding auctions and Fed minutes, that stated the obvious, was enough to send stocks and oil and the ten-year note on a wild ride. At first, the market took the Feds promise of gradual rate increases as a positive but later deemed that the Fed was still hawkish. Yet, the real surprise is that the market is surprised that the Fed can read economic data.

The Fed did seem to dismiss the recent jump in inflation as temporary and said it felt it would level out around their target of 2%. That is a goal the Fed has been trying to achieve for some time. They also said that while wages have improved they are still not seeing a broad-based pickup in wage growth. In other words, the fear that the Fed needs to get to aggressive or thoughts that they have fallen behind the rate curve remains to be seen. In fact, some Fed officials say they still see slack in the labor market.

So, really the market’s reaction at first was positive for stocks but rising yields as so-so auctions of a record amount of Fed supply freaked traders out. Yet, the Fed stressed again and again that rate hikes would be gradual, so it is likely that despite the spike and reversal on stocks we will probably reverse and rally again, then break, then rally. In other words, enjoy the volatility. Position traders buy the break as we should end the volatility with a test of stock market highs within 2 months.

Oil prices are caught up in the yield curve, dollar, and stock market madness and almost ignored a very bullish American Petroleum Institute (API)weekly supply report. The API reported that crude supply fell by 907,000 barrels last week at a time of year when they should be rising. As we move deeper into the shoulder season, a draw should give oil bears some worries. We also saw another 2.644-million-barrel draw in the Cushing Oklahoma delivery point which is adding support to the WTI delivery point and helping to close the spread with the Brent crude.