The Big Picture: May 3, 2017

My working theory for oil price forecasting got a big boost yesterday. Regular readers will recall that we’ve had some very accurate calls over the past 15 months — ever since calling the low on Feb 11 [see: USDJPY Finally Relents.]

My premise back then was that algos had become so focused on the price of oil that it needed to rebound in order to prevent the collapse of stock prices below critical support. It also gave USDJPY, previously the most important driver of algos, a chance to fall back to earth lest Japan develop “inconvenient” inflation.

Since then, however, the focus has shifted to micro-managing inflation numbers. The dollar had dropped almost 9% in only 5 months, and desperately needed support. All the jawboning in the world wasn’t helping. But, when CPI topped 2% and kept going — largely on the back of rising oil prices — the FOMC’s rate hike narrative finally sounded plausible.

WTI rose from 26.05 on Feb 11, 2016 to 55.24 on Jan 3, 2017, allowing CPI and PCE to finally break out. But, all good things come to an end. With PCE finally topping 2% and CPI at 2.7%, it was time to put the brakes on — lest investors begin to worry about stagflation.

And, that’s exactly what happened. In March, the EIA reported gas prices increased 18.364% YoY versus February’s 32.48%. This allowed CPI to drop a little: 2.4% versus 2.7% in February. It was a little hard to swallow, given the actual price increases observed in the real world. But, it was hardly surprising, given that many government economic data is made to order.

For any Kool-Aid loving believers in the veracity of government statistics, just know that the April YoY increase in gas prices came in at the same level. The exact same level: 18.364%.In other words, inflation is being very carefully managed via the very careful management of gas prices — or at least the reporting of same. This gives the Fed plenty of room to put the brakes on any further rate increases for the time being — should they so choose. And, it means that WTI’s drop through important support, yesterday, could be quite meaningful.

I’ll be watching RBOB like a hawk with today’s EIA inventory report. It finally tagged our 1.5259 target from Mar 3 [see: What is the Fed Trying to Tell Us?] And, like WTI, it is slipping below important support.We remain short from yesterday with our downside targets intact.