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Markets Today – Ukraine, Fed Minutes, CBRT, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Stock markets in Europe are mixed, while US futures are edging lower on Thursday, as uncertainty remains around Russia’s intentions in Ukraine.

It’s been a rather strange week that started with warnings of an imminent invasion – repeatedly denied by Russia – followed by claims of troops withdrawing following the completion of planned drills which has since been rejected by Ukraine and NATO, who have instead insisted that numbers are rising, not falling. It’s no wonder investors don’t know which way to turn.

Clearly, tensions are going to remain until we see a confirmed and substantial reduction of troops at the border but rather than abandon risk as they did late last week and early this, investors seem comfortable sitting on the fence. Of course, that could change if we see any escalation or as we head into the weekend if we have no further clarity.

The West remains convinced that an invasion remains highly likely and that flare-ups in Eastern Ukraine between Russian-backed separatists and Ukrainian forces could be used to justify crossing the border. Whether the intelligence is trustworthy or hysteria, as Russia has labelled it, will soon become clear but in the interim, efforts towards a diplomatic solution continue which will keep investors on edge.

Fed minutes offer little insight into March hike

Inflation remains the key focus for investors as they navigate a tightening environment like no other. The pandemic has delivered widespread price pressures that have lasted longer and far exceeded expectations. Central banks have been forced into action while markets continue to price in more and more hikes this year.

The Fed minutes on Wednesday offered little new information on that front and anything in them that came across as potentially less hawkish is probably out of date by now. The central bank will kick off its tightening cycle next month and a number of consecutive hikes will likely follow. Whether they’ll kick things off with a 50 basis point hike isn’t yet clear and will depend on the data in the coming weeks but there doesn’t appear to be consensus for it yet, despite markets pricing in a fair chance of it happening.

Lira steady as CBRT leaves rates unchanged

The lira continues to trade in a relatively tight range after the CBRT left the repo rate unchanged at 14% for the second consecutive meeting. A series of rate cuts late last year triggered a collapse in the currency and sent inflation soaring – reaching 48.7% in January – as President Erdogan imposed his unconventional beliefs on the supposedly independent central bank. The stability in the currency has come as the central bank has paused its easing cycle while it conducts a comprehensive review of its policy framework. What the outcome of the review will be is anyone’s guess given how the central bank has behaved under the “leadership” of  Governor Şahap Kavcıoğlu.

Oil slides as US and Iran near nuclear deal

There’s no shortage of volatility in the oil market at the moment, with multiple forces combining to create very lively conditions. The market is obviously extremely tight which is why we’re seeing some large moves on a daily basis and the price could already be in triple-figure territory if not for the nuclear talks between the US and Iran.

And it’s this that’s driving the declines today, with reports suggesting an agreement is days away. That would be huge as it could mean around 1.3 million barrels per day of crude quickly re-entering the market and easing some of those supply-side pressures. You can imagine the US has been very motivated to get this deal over the line ahead of the midterms later this year, given how ineffective its last efforts were to bring prices down.

Gold still has plenty of appeal

Gold is continuing to rally amid all the geopolitical uncertainty. Not only do the events on the Ukrainian border have investors seeking out safe-havens, but it also offers inflation protection at a time of surging prices and the prospect of higher oil and gas prices, if Russia does invade.

The latest move has seen gold hit its highest level since mid-June and there still appears to be momentum in the move so we could see $1,900 tested. That’s the next big test for the yellow metal and a big escalation in Ukraine could be the catalyst for such a move.

Bitcoin struggling at key resistance

Bitcoin is almost 2% lower on Thursday, appearing to lose a little momentum on approach to $45,500, a major barrier of resistance. It has shown real resilience in recent weeks but is struggling to generate the momentum needed to take the next step. The uncertainty in the markets probably isn’t helping, although it hasn’t held it back recently. A break above here could be a very bullish development for bitcoin.

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Crude Oil

Oil Prices Rally Amidst Russian Export Ban and Rate Hike Concerns

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Crude oil - Investors King

Oil prices saw an upward trend on Friday as concerns over Russia’s ban on fuel exports potentially tightening global supply.

This development overshadowed apprehensions of further interest rate hikes in the United States that could impact demand.

However, despite this bounce, oil prices were still on course for their first weekly decline in four weeks.

Brent crude oil gained 46 cents, or 0.5% to $93.76 per barrel while the U.S. West Texas Intermediate crude (WTI) oil surged by 65 cents, a 0.7% rise to $90.28 a barrel.

These gains were driven by growing concerns regarding tight global supply as the Organization of the Petroleum Exporting Countries and its allies (OPEC+) continued to implement production cuts.

Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd, commented on the volatile nature of the market, stating, “Trading remained choppy amid a tug-of-war between supply fears that were reinforced by a Russian ban on fuel exports and worries over slower demand due to tighter monetary policies in the United States and Europe.”

He further noted that investors would closely monitor OPEC+ production cuts and the impact of rising interest rates, predicting that WTI would trade within a range of approximately $90 to $95.

Russia’s abrupt ban on gasoline and diesel exports to countries outside a select group of four ex-Soviet states had an immediate effect as it aimed to stabilize the domestic fuel market. This export restriction prompted a nearly 5% increase in heating oil futures on Thursday.

Tina Teng, an analyst at CMC Markets, explained, “Crude oil bounced off a session low after Russia banned diesel exports, which included gasoline. The action reversed a downside movement in crude markets following the hawkish Fed decision.”

However, she also warned that mounting concerns about a recession in the Eurozone could continue to exert downward pressure on oil prices.

The U.S. Federal Reserve recently maintained its interest rates but adopted a more hawkish stance, projecting a quarter-percentage-point increase to 5.50%-5.75% by the year-end. This decision heightened fears that higher rates might dampen economic growth and reduce fuel demand.

Also, the stronger U.S. dollar, reaching its highest level since early March, made oil and other commodities more expensive for buyers using alternative currencies.

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Crude Oil

NNPCL’s Crude Commitments Create Hurdles for Dangote’s Oil Operations

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The Nigerian National Petroleum Company Limited (NNPCL) has found itself at the center of a growing challenge faced by the Dangote Petroleum Refinery, one of Africa’s largest industrial projects.

As the refinery gears up for full-scale production, it is grappling with unforeseen hurdles caused by the commitments made by NNPCL in the form of crude oil agreements with other entities.

Dangote Petroleum Refinery, a flagship project of the Dangote Group led by billionaire Aliko Dangote, is on the brink of becoming a game-changer in Nigeria’s energy sector. With a promise to significantly reduce the country’s dependence on imported petroleum products, the refinery holds the potential to bolster the nation’s energy self-sufficiency.

However, recent revelations have shed light on the complexity of the oil industry in Nigeria and how contractual commitments can disrupt even the best-laid plans.

According to Devakumar Edwin, the Executive Director of the Dangote Group, in an interview with S&P Global Commodity Insights, the NNPCL, which normally trades crude oil on behalf of Nigeria, has pledged its crude to other entities.

While Edwin did not disclose the specific recipients of NNPCL’s crude commitments, it was previously announced that the company had entered into a $3 billion crude oil-for-loan deal with the African Export-Import Bank. Under this agreement, NNPCL agreed to allocate future oil production to the bank as repayment for the loan.

This unforeseen twist has left Dangote Petroleum Refinery in a predicament, necessitating the temporary importation of crude oil.

Edwin, however, stated that this importation is only a short-term solution, as the refinery expects to receive crude supply from NNPCL starting in November 2023.

The refinery’s ambitious plans include producing up to 370,000 barrels per day of crude, which will be processed into Automotive Gas Oil (diesel) and jet fuel by October 2023. By November 30, 2023, the plant aims to produce Premium Motor Spirit (petrol), providing a much-needed boost to the domestic fuel market.

While the Dangote Group remains committed to its objectives, the delays caused by NNPCL’s prior commitments have raised concerns among oil marketers.

They believe that the prices of diesel and jet fuel, in particular, will only experience a significant reduction once the refinery begins receiving crude oil supplies from Nigeria rather than importing it.

Despite these temporary setbacks, Edwin reaffirmed the refinery’s readiness to receive crude oil, stating, “Right now, I’m ready to receive crude. We are just waiting for the first vessel. And so, as soon as it comes in, we can start.”

In essence, the shift in the refinery’s original timeline can be attributed to the prior commitments made by NNPCL, causing a momentary delay.

However, it remains a beacon of hope for Nigeria’s energy sector, promising a reliable supply of environmentally-friendly refined products and a substantial influx of foreign exchange into the country.

Devakumar Edwin also underscored that the revenues generated from the refinery’s operations would be reinvested in further developments, reaffirming Aliko Dangote’s unwavering commitment to Nigeria’s economic growth.

As the nation eagerly awaits the commencement of production at the Dangote Petroleum Refinery, it is clear that the complex web of oil industry contracts and commitments has played an unexpected role in shaping the refinery’s journey towards becoming a transformative force in Nigeria’s energy landscape.

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Crude Oil

Oil Prices Retreat as Markets Await Fed Meeting

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Crude oil - Investors King

Oil prices dipped by almost $1 on Wednesday ahead of the U.S. Federal Reserve’s anticipated interest rate decision.

Investors are grappling with uncertainty surrounding peak rates and the potential impact on energy demand.

Despite a substantial drawdown in U.S. oil inventories and sluggish U.S. shale production indicating a possible tight crude supply for the remainder of 2023, prices tumbled.

Brent crude oil, against which Nigerian oil is priced, slid 88 cents, or 0.9%, to $93.46 a barrel following Tuesday’s peak of $95.96, its highest level since November.

U.S. West Texas Intermediate crude oil also fell by 1%, or 97 cents, to $90.23 a barrel after hitting a 10-month high of $93.74 the previous day.

Edward Moya, senior market analyst at OANDA, said, “The oil rally is taking a little break as every trader awaits a pivotal Fed decision that might tilt the scales of whether the U.S. economy has a soft or hard landing.”

He emphasized that the oil market remains “very tight” in the short term.

Investors are closely monitoring central bank interest rate decisions this week, including the Federal Reserve’s announcement, to gauge economic growth and fuel demand. While it’s widely expected that the Fed will maintain interest rates, the focus will be on its projected policy path, which remains uncertain.

U.S. crude oil stockpiles declined significantly, with a 5.25 million-barrel drop last week, exceeding the 2.2 million-barrel decline expected by Reuters analysts.

Goldman Sachs analysts raised their 12-month ahead Brent forecast from $93 a barrel to $100 a barrel, citing lower OPEC supply and higher demand. They believe OPEC can maintain a Brent price range of $80-$105 in 2024.

Russia is considering imposing higher export duties on oil products to address fuel shortages, while U.S. shale oil production is set to reach its lowest point since May 2023. On the demand side, India’s crude oil imports declined for the third consecutive month in August due to maintenance and reduced shipments from Russia.

Exxon Mobil Corp has pledged to increase oil production by nearly 40,000 barrels per day in Nigeria, as part of a new investment initiative in the country, according to a presidential spokesperson.

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