This week, U.S. crude oil fell back after rising 16.89% last week, down about 5%, and some of the gains from last week were reversed. Brent oil also fell by about 4.5%, keeping pace with U.S. crude oil. The pessimism of the economic recession dominated the international oil market this week, and oil prices fell. At 17:13 on October 14, Beijing time, U.S. crude oil was quoted at $88.68 per barrel.
OPEC+ said last week it would cut its oil output target by 2 million barrels per day. The announcement pushed up prices. But by the end of last week, the resulting rally in oil prices had lost steam, with prices slipping again on recession fears and the impact of the cuts appeared to have evaporated.
Demand side: pessimism of economic recession dominates international oil market this week
IMF Managing Director Georgieva and World Bank President Malpass warned markets this week that the risk of a global recession is growing. The IMF lowered its forecast for global economic growth in 2023. Fears of a recent recession have been a steady undercurrent in the oil market, with the lingering shadow of falling global demand.
The recent worsening of the outbreak in some Asian countries has reinforced this concern. Local authorities have ramped up testing for the outbreak, with some closing schools, tourist attractions and entertainment venues, as the number of infections there rose to the highest level in months, adding to market sentiment.
Both OPEC and the U.S. Department of Energy this week lowered their oil demand forecasts. OPEC cut its demand growth forecast for this year by 460,000 bpd to 2.64 million bpd, citing renewed efforts by Asian countries to contain the virus and high inflation. The U.S. Department of Energy, which has cut its forecasts for U.S. and global oil production and demand, now expects U.S. consumption to grow just 0.9% in 2023, down from a previous forecast of 1.7% growth. The department expects global consumption to grow by just 1.5%, down from an earlier forecast of 2%.
Edward Moya, an analyst at OANDA, said: “Crude prices have had a rough week … the demand outlook has taken a hit as fears of high inflation forcing the Fed to tighten monetary policy excessively. Last week was about OPEC+ production cuts, this week It’s about the deteriorating global outlook and it’s hard for prices to stay firm.”
U.S. Inflation Firms Fed’s Hawkish Obsession
This week’s CPI data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI rose more than expected in September: inflation reached 0.4% in September, higher than the 0.2% expected by Wall Street and higher than the August data. The year-on-year CPI rose 8.2%, down slightly from 8.3% in August.
Core CPI, a more accurate measure of underlying price pressures, also came in above Wall Street’s expectations, reaching 0.6% MoM in September, rising to 6.6% YoY in September from 6.3% in August. The core CPI data ignores changes in food and energy prices (because these two prices are more volatile), and it appears to be a better indicator of broad-based inflation, which the Fed has given in its revised forward guidance for monetary policy. The reason for its more weight.
Since core CPI is the most important factor used by the Fed in its decision to raise interest rates, it is now believed that the Fed will raise rates more aggressively than expected prior to the release of this CPI data. According to CME’s FedWatch tool, the Fed is likely to execute two simultaneous 75 basis point rate hikes at the FOMC meeting in November and December. The minutes of the Fed’s September meeting also showed that the Fed will adhere to the pace of rapid policy tightening.
The U.S. PPI data for September also seemed to echo the CPI data for the same month: 8.5% yoy in September, 8.4% higher than expected, and 8.7% in August.
The increase in interest rate hikes in the Fed’s new interest rate hike expectations will undoubtedly make the dollar strengthen again, thereby suppressing oil prices. All of this will make the market sentiment even more sluggish, and it’s not an exaggeration to call it worse. In fact, the near-term outlook for the global economy is not optimistic, and when the economic outlook is poor, so is the outlook for oil prices.
Jun Rong Yeap, market strategist at IG, said: “While OPEC+ production cuts may provide some support for oil prices, the upside appears limited as economic conditions face the risk of further slowing and the Fed is tightening monetary policy further.”
Supply side: there are still problems
Fears of a recession are hanging over the oil market, but the risk of oil shortages remains. The bad news on the supply side is also pouring in, and global oil inventories are falling and will be difficult to reverse. Analysts pointed out this week that U.S. oil inventories have fallen by 480 million barrels in the past two years, reaching the lowest level for the same period since 2004.
The situation in fuel inventories was even more worrying, with U.S. distillate inventories falling to their lowest levels since records began in 1982 and European distillate inventories falling to their lowest levels since 2002. Distillate stocks in Singapore are also at multi-year lows, falling by 9 million barrels over the past two years.
The decline in distillate inventories may be more of a concern than a drop in crude oil inventories, as distillates are used to make diesel, which is used for freight, which is critical to every economy. Depletion of reserves means rising prices, and rising prices means inflation.
Some analysts have pointed out that OPEC+’s production cuts will make an already tight oil market even more nervous, especially when combined with the EU’s embargo on Russian oil and an oil price cap.
Citi Research expects NYMEX crude to average $96 a barrel in 2022 and Brent to average $101 a barrel due to tight supply due to production cuts. The agency also said: “While the OPEC+ cuts look large on paper, the actual cuts will be even smaller. We expect the final cuts to be less than 900,000 bpd.”