Oil back in the red on fears over Fed hike, U.S. jobs report

Investing.com -- Oil bulls might have raised the glass a little too early.

Crude prices were back in the red on Monday, with a 1.5% drop that reclaimed almost half of Friday’s near 3% rally. 

Reason? Fear, again — fear that the Federal Reserve might not be done yet with rate hikes after Wednesday’s much anticipated quarter-point increase. This is especially so if U.S. jobs numbers for April, due on Friday, surprise to the upside.

New York-traded West Texas Intermediate, or WTI, for June delivery settled down $1.12, or 1.5%, at $75.66 per barrel. WTI fell 1.4% last week despite the 2.7% jump on Friday alone. 

U.S. jobless claims fell unexpectedly by 16,000 last week to reach 230,000, the Labor Department reported in what would be another challenge to the Federal Reserve, which needs unemployment numbers to rise to effectively fight inflation.

In key non-farm payrolls for April due on May 5, the Labor Department is expected to report a growth of 180,000 jobs. But if that again exceeds 200,000 like in March, it’ll be a sign the U.S. consumer is still resilient and will continue spending. It will also mean that the Fed might need to continue hiking rates to contain inflation.

Notwithstanding any upcoming rate hike or jobs numbers, technically itself, WTI might have more to lose if it does not get nearer to $80 per barrel, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Going forth, any further bullish rebound will have to clear through the challenge of $79.30, which may open the door for the 200-day Simple Moving Average, or SMA, of $81.80, followed by the 50-week Exponential Moving Average, or EMA, at $82.20,” said Dixit. “Major resistance will be at $85.10.”

Failure to progress beyond $79.30 will likely cause a renewed decline towards $74, below which sits the confluence zone of the 200-month SMA of $72.80 and the 50-month EMA of $72.20, Dixit cautioned.

WTI’s session low on Monday was $74.53, within the lower band he forecast.

“At this point, major support is seen at the 200-week SMA of $66.80 and the 100-month SMA of $60,” Dixit added.

London-traded Brent for July delivery settled down $1.02, or 1.3%, at $79.31, extending last week’s slide of 1.4%. The global crude benchmark’s session low on Monday was $78.12.

To fight inflation, the Fed has added 475 basis points to rates in nine increases since March 2022. Rates now stand at a peak of 5%, compared with just 0.25% at the start of the coronavirus pandemic in March 2020. Another quarter-point hike, anticipated on May 3, will bump up rates to a peak of 5.25%.

Inflation itself, as measured by the Fed’s favorite price indicator — the Personal Consumption Expenditure, or PCE, Index — grew by just 4.2% in the year to March this year from a four-decade high of 6.6% in the 12 months to March 2022.

Despite the cooling in prices, annual inflation remains at more than double the Fed’s 2% target. The central bank has, thus, embraced rate hikes as the only proven way to fight the upward trajectory in prices.

Fed officials and markets, however, remain at odds over the future path of interest rates, with the central bank expecting interest rates to remain around current levels through 2023 and investors betting on rate cuts before the year’s end.

Given renewed signs of stress in the U.S. banking sector in recent days, with problems at First Republic Bank (NYSE:FRC), some think Fed officials may signal a pause in June.

Some Fed policymakers have indicated that the tighter credit conditions could act like an additional rate hike, possibly reducing the number of hikes necessary to bring inflation back down to its target.

U.S. data of late has reinforced investor worries about a slowing economy.

The Commerce Department reported on Thursday that real gross domestic product, or GDP, grew at an annual rate of 1.1% in the first quarter of 2023 versus the 2.6% expansion in the fourth quarter of 2022. Economists tracked by Investing.com had expected a GDP growth of 2% for the first quarter.