WTI crude is up over 13 percent year-to-date, and traders can thank a combination of a rebound in cyclicals and subdued volatility across asset classes. However, oil bulls will need to remain flexible as SPX earnings forecasts are falling below expectations, from 5.9 percent (Nov.) to 1.7 percent, currently. Q2-19 expectations have been lowered to 3.6 percent from 6.8 percent.

The concerted effort to drag the cyclical bodies from no-man's land is stagnating:

SPX (pink); Oil (orange); Copper (yellow); Industrials (blue); Financials (white)

(see TACVOL sniffing out the Dec. 24 bottom here).

Oil has also seen a dramatic decline in volatility with the OVX down 35 percent over the last month versus an eight percent decline in the VIX. But, prices are beginning to stagnate across cyclical drivers as the macro data out of China and Europe continue to decelerate.

In October:

There is currently a 19.8% premium versus the 20-year seasonality , and
there's over a 24 percent gap from where crude currently stands and the
5- and 10-year seasonality , respectively. Looking at the futures market,
large speculators positioning (on a 5-year percentile) has been sloping
lower as price diverges.

However, now growth is expected to slow along with inflation which is a bad mix. I have been pointing out since early summer, my DRIP-model (disinflation/reflation/inflation proxy in pink) has been pointing to lower-lows in U.S. inflation . In turn, consumer prices fell from a five-year high of 2.9% to 2.3%

Given how market conditions are building, and the recent action in crude, the U.S. could be facing inflation under 2% and that has serious implications when concerning Fed policy.

The 20-year seasonality for WTI is negative from September to January with October and November being to steepest at -1 and -1.2 percent, respectively. January's seasonality performance is -.7 percent with current prices trading at a 13.1 percent premium to the 5-year average.

Furthermore, today's EIA inventories report saw a massive build of 7.97 m/bl build v. 42,000 drawdown expectation and 2.68 m/bl draw in the following week. This was the largest build since November 15.

Crude Oil Futures (top); OVX (bottom)

TACVOL Ranges:

Near-term: 56.68/43.81; 1.02 score - moderately bullish

Intermediate: 80.79/36.96; -.58 score - slightly bearish

If oil is unable to gain momentum above $56.68 without support from broader cyclical components, the recent rebound would shape up to a lower-low and give reason for shorts to re-engage to the downside.

 

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