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Oil Retreated on Profit-Taking; Market Holds Breath as FOMC Announcement Approaches Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue Dec 12 17 23:22 ET

Oil prices retreated on profit-taking, after Brent crude prices soared to the highest level in more than 2 years. The decline was contained after a report showing US inventory slumped last week. For the first time in 4 days, the front-month Brent crude contract fell -2.09%, settling at 63.34, at close. The corresponding WTI contract dropped -1.47% for the day. Base metals were mixed. While zinc and lead prices managed to climb higher, other metals under our coverage softened mildly. This coincided with the modestly higher US dollar, of which the DXY index climbed +0.25% for the day. As the market awaits the FOMC announcement, positive news on the tax reform plan came in as House and Senate Republicans are about to agree on a final version of the tax bill this week with a vote expected next Tuesday. Hopes of inflation have also been buoyed by stronger-than-expected PPI report. Wall Street, led by banking and financials, climbed to fresh new highs with the DJIA and S&P 500 indices adding +0.49% and +0.15% for the day. Treasuries were mixed, though, with 2-year yields flat at 1.827% and 10-year yields added +1 point to 2.4%.

The industry-sponsored API estimated that crude oil inventory slumped -7.38 mmb in the week ended December 8. For refined oil products, gasoline and distillate stockpiles gained +2.33 mmb and +1.54 mmb respectively. The EIA report probably shows a -3.76 mmb decline in crude oil inventory. Gasoline and distillate stockpiles might have increased +2.46 mmb and +0.9 mmb respectively.

On the dataflow, US PPI surprisingly accelerated to +3.1% y/y in November from +2.8% a month ago. The market had anticipated a milder improvement to +3%. Core PPI stayed unchanged at +2.4% y/y last month. The stronger-than-expected result has raised hopes of improvement in the downstream CPI inflation due to the feedthrough process. Separately, the NFIA small business optimism index rose to 107.5 in November form 103.8 in the prior month. The market had anticipated a milder increase to 104. The US budget deficit unexpected widened to US$ 138.5B in November from US$ 63.2B in October. This came in higher than expectations of US$ 135.2B.

In the Euronzone, the ZEW economic sentiment index for Germany slipped -1.3 points to 17.4 in December. This represented a miss of consensus of 17.9. The index for the Eurozone as a whole dropped -1.9 points to 29. The current situation index for Germany, however, added +0.5 point to 89.3 in December. UK's headline CPI rose to +3.1% y/y in November, compared expectations of and October's +3%. Core CPI steadied at +2.7%. We do not expected the overshoot in the headline reading would trigger the BOE to hike for a second consecutive time in December.

The focus today is undoubtedly the FOMC meeting announcement. While a rate hike has been fully priced in, the dot plot for the next year would be of high interest. We expect the median forecast to continue projecting three rate hikes next year. Moreover, policymakers would likely turn more upbeat on the growth outlook given ongoing improvement in the job market. They should, however, remain cautious over the inflation outlook, despite the upside surprise on the November PPI. UK's employment data would be released. Jobless claims probably rose +0.4K in November, down from +1.1K a month ago. The ILO unemployment rate might have slid to 4.2% in the three months through October, from 4.3% previously. Average weekly earnings might have expanded +2.5% during the period, accelerating form +2.2% previously.


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