What could slow or stop the bear onslaught in oil?
It’s a question crude traders are likely to be asking earnestly as the market dips on China COVID headlines and as oil prices slump again at the start of a new week that will be shorter due to the US Thanksgiving Holiday.
Wednesday’s Federal Reserve meeting minutes—coming just ahead of the Thursday holiday—are the main highlight for markets and could keep traders on the edge as they look out for any indication that the central bank’s pace of rate hikes may slow. If indeed there are such signals, then “King Dollar” might lose further ground, providing relief to dollar-denominated commodities such as oil.
Also, the most important shopping period of the year kicks off on Friday in what will be a key test for US retailers: the Black Friday event that traditionally follows a day after Thanksgiving and unofficially kicks off the start of the retail sector’s shopping bonanza ahead of Christmas.
The latest world economic forecasts from OECD on Tuesday along with global PMI data will provide another important insight into the health of the world economy.
Oil prices fell on Monday, extending steep losses from last week as concerns over rising Chinese COVID infections and a potential global recession dampened the outlook for demand.
Reports also suggested that crude supply in Europe had stabilized, with refiners steadily building up stocks ahead of a Western ban on Russian crude exports. But the ban is still expected to tighten crude supplies in the coming months, particularly if inventories deplete at faster-than-expected levels.
New York-traded West Texas Intermediate (WTI), the benchmark for US crude, was down 50 cents, or 0.6%, at $79.61 per barrel for its December delivery contract by 02:20 ET (07:20 GMT). WTI finished last week down 10%, adding to the previous week’s deficit of nearly 4%.
London-traded Brent was down 61 cents, or 0.7%, at $87.01, after a near 9% drop last week and a slide of 2.6% the week prior to that.
"Apart from the weakened demand outlook due to China's COVID curbs, a rebound in the US dollar today is also a bearish factor for oil prices," Tina Teng, a CMC Markets analyst, said in comments carried by Reuters.
Rising COVID cases in China invited new lockdown measures in some of the country’s biggest cities, drumming up concerns over slowing crude demand in the world’s largest oil importer. The country is currently struggling with its worst COVID outbreak since April, which had seen several cities placed under lockdown.
China's COVID crisis has severely weighed on oil prices in recent weeks. A report earlier this month said that several Chinese refiners asked Saudi Aramco (TADAWUL:2222) to supply lower amounts of oil in December, which could point to slowing oil shipments to the country. China has also ramped up its refined fuel export quotas, potentially indicating a surplus in crude stockpiles due to waning demand.
"Risk sentiment becomes fragile as all the recent major countries' economic data point to a recessionary scenario, especially in the UK and euro zone," CMC’s Teng said, adding that hawkish comments from the Federal Reserve last week also sparked concerns over the likelihood of higher-for-longer US rates.
The Fed is set to publish the minutes of its November meeting on Wednesday with investors eager for any sign that policymakers may be considering slowing the tightening process after hiking rates more rapidly this year than any time since the 1980s.
Fed Chair Jerome Powell and other policymakers have signaled that the central bank could shift to smaller rate hikes next month to avoid tightening more than necessary and sending the economy into recession.
At the same time, Powell has said rates ultimately may need to go higher than the 4.6% that policymakers thought in September would be needed by next year.
Inflation, as measured by the Consumer Price Index (CPI) expanded by 7.7% during the year to October, growing at its slowest pace in nine months. Prior to that, the CPI grew by 9.1% during the 12 months to June, its fastest in four decades.
The easing CPI had heightened expectations that the Fed could follow through in slowing the pace of its rate hikes too. But St. Louis Fed President James Bullard, widely regarded the central bank's "superhawk," poured cold water on speculation of a meaningful rate pivot when he said higher-for-longer rates will be the only way for the Fed to effectively bring inflation back to its 2% per year target.
The Dollar Index, which peaked at a 20-year high of 114.78 in September, hit three-month lows lately. However, in Monday's Asian trading, the dollar was up for a third session in a row, responding to the potential change in the Fed’s mood for a rate pivot.
Still, the dollar is on track to post its biggest quarterly loss since the second quarter of 2017 investors are now asking whether it has passed the peak.
The rise of the dollar has been a dominant trading theme of 2022, thanks to the Fed’s rapid rate hikes, giving the currency an edge over its peers among investors.
Analysts from Goldman Sachs said Friday they think that a dollar top was "several quarters away," noting that they do not expect the Fed to embark on easing until 2024. US growth is also not expected to bottom out soon, they said.
That could spell more trouble for oil and other dollar-denominated commodities such as gold.
Crude prices also entered on Friday into a “contango” mode—a market structure that defines weakness—for the first time since 2021. Under this dynamic, the front-month oil contract in the futures market trades at a discount to the nearby month. While the difference itself might be small, it forces buyers wishing to hold a position in oil at the time of contract expiry to pay more to switch to a new front-month contract.
With such negativity in crude now, all eyes are on what the OPEC+ alliance of oil producers will do when it meets on Dec. 4.
OPEC+—the alliance that bands OPEC, or the 13-member Saudi-led Organization of the Petroleum Exporting Countries, with 10 other oil producers steered by Russia—agreed at its latest meeting to slash production by 2 million barrels per day in order to boost Brent and US crude prices that had fallen sharply from March highs.
Right after that OPEC+ decision, Brent went from a low of around $82 a barrel to almost $100 within days (it had hit almost $140 earlier in March). WTI rose from $76 to $96 (WTI was at just over $130 in March). Both benchmarks have lost all those gains in the past two weeks, raising questions on whether OPEC+ will go for even more cuts to prop the market up again.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.