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Must the BoE Now Consider Larger Rate Hikes? Fed on Course to Pause? Oil Bounces Back

The central bank has raised interest rates for the last 12 meetings in a row and yet the economy is showing the kind of resilience that few would have anticipated

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

A truly devastating jobs report for BoE policymakers

It’s not often that you would refer to a jobs report that delivers a drop in unemployment, record employment and a rise in wages as horrible, but that is exactly what the Bank of England will be feeling today.

The central bank has raised interest rates for the last 12 meetings in a row and yet the economy is showing the kind of resilience that few would have anticipated. This creates an enormous headache for the MPC as it desperately wants to avoid crashing the economy in order to weaken the labour market and get wages and inflation down to more sustainable levels but that’s looking increasingly possible at these levels.

A rate hike at the next meeting is now unavoidable – assuming it wasn’t already – but a 50 basis point increase could suggest the BoE is throwing in the towel in trying to deliver 2% inflation and a soft landing for the economy. And the withdrawal of any votes for a pause will be equally important as the scale of the hike – we’ve seen two for four consecutive meetings – ‚Äč and would be another strong sign that the BoE is very concerned.

Is a Fed pause as locked in as markets think?

What the BoE would give to now be in the Fed’s position. Inflation is falling and has been for almost a year, while core inflation is also on the decline even if it stands above 5% which is still too high. But progress is clear and there is plenty of optimism that the trend will continue, enabling the Fed to perhaps not just pause tomorrow – which markets are heavily pricing in – but maybe even bring an end to the tightening cycle altogether.

Not that they’ll be ready to acknowledge that yet but a pause will certainly be a step in the right direction. The BoE will be wondering where they’ve gone so wrong. Having been one of the first out of the traps, they may be the last to cross the finish line.

Oil bounces back amid more favourable developments

Oil prices are staging a comeback today, perhaps buoyed by the softer inflation data which may open the door to the end of the Fed’s tightening cycle and enable the soft landing it always hoped for. That said, there may be a technical element to it as well, with the price having traded around its 2023 lows in the run-up to the release.

There was always likely to be two bullish cases for crude and this only slightly aids one of those. Another unified move from OPEC+ could have been that but instead the Saudis were forced to go it alone. The other was a stronger economy which has looked increasingly unlikely recently but positive inflation reports from the US and eurozone and a rate cut in China certainly help that case. There’s still a long way to go.

Gold traders seemingly not so upbeat

Gold isn’t aboard the Fed pause train yet though, in fact, it slipped after the inflation report which may suggest not everyone is on the same page. This may be a reflection of the still stubborn core inflation number that while enabling no more hikes could keep rates higher for longer. But clearly, what the Fed does and says tomorrow could play a big role in whether we see a breakout from the range gold has traded in over recent weeks. Based on today’s response, traders may not be feeling so upbeat. The question is will the Fed change that or compound those fears?

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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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