Oil prices experienced a sharp decline of $2 on Monday as investors closely monitored the upcoming U.S. Federal Reserve meeting to determine the central bank’s stance on future interest rate hikes.
This uncertainty, coupled with mounting concerns about China’s fuel demand growth and increasing Russian crude supply, added pressure to the already volatile market.
Brent crude oil, the international benchmark for Nigerian oil, fell by $1.91 or 2.5% to $72.88 per barrel while at U.S. West Texas Intermediate (WTI) crude declined by $2.02 or 2.8% to $68.15.
Last week marked the second consecutive week of declines for both benchmarks, primarily driven by disappointing economic data from China, the world’s largest crude importer.
“The clash between bearish asset allocators and bullish oil speculators has trapped oil prices in a precarious situation,” noted Francisco Blanch from Bank of America Global Research in a recent report.
“Bearish allocators currently hold the upper hand as oil prices struggle to rally until the Federal Reserve eases money supply,” Blanch added, highlighting the importance of the Fed’s monetary policy decisions on the future of oil prices.
Bank of America Global Research maintains an average forecast of around $80 per barrel for Brent crude in 2023.
The rate hikes implemented by the U.S. central bank have bolstered the value of the dollar, subsequently making dollar-denominated commodities, including oil, more expensive for holders of other currencies. This factor has further weighed on oil prices in recent times.
While Saudi Arabia has reduced oil production on four occasions over the past year, Russian supply has remained resilient, partially due to the way sanctions were structured to minimize their impact on output, according to Blanch. Remarkably, Russian oil exports to China and India have continued to grow, even amidst the European Union’s embargo and the Group of Seven’s price cap mechanism, which came into effect in early December.
Goldman Sachs has revised its oil price forecasts downward due to higher-than-anticipated supplies from Russia and Iran. The bank also raised its supply predictions for these two producers and Venezuela by a combined total of 800,000 bpd. Consequently, Goldman Sachs now projects Brent crude prices to average $86 per barrel in December, a decrease from the previous estimate of $95, and WTI crude to reach $81 per barrel, down from $89.
As the oil market remains under the influence of various opposing factors, market participants eagerly await the conclusion of the Federal Reserve’s two-day monetary policy meeting on Wednesday. It is widely anticipated that the central bank will maintain interest rates at their current levels, thereby offering some clarity and potentially impacting the direction of oil prices in the coming days.
