Oil prices took a tumble on Tuesday as concerns mounted that fuel demand would take a hit due to major central banks standing firm on their decision to keep interest rates high, despite a backdrop of tightening oil supply.
Brent crude oil, against which Nigerian oil is priced, dipped by 87 cents to $92.42 a barrel at 07:30 a.m. Nigerian time while the U.S. West Texas Intermediate crude sheds 87 cents to $88.81.
The prevailing sentiment among analysts was that “Fears of an economic recession may again dominate the oil market’s movement due to surging U.S. bond yields following the Fed’s hawkish stance last week,” stated Tina Teng, a market analyst at CMC Markets in Auckland.
The world’s leading economic authorities, the U.S. Federal Reserve and the European Central Bank, have recently reaffirmed their commitment to combat inflation, signaling that tight monetary policy could persist longer than initially anticipated.
The higher interest rates associated with these policies typically stifle economic growth, in turn dampening oil demand.
Adding to the economic unease, rating agency Moody’s sounded the alarm on Monday, warning that a U.S. government shutdown would negatively impact the nation’s credit. This caution comes just a month after Fitch downgraded the U.S. by one notch amid concerns related to the debt ceiling crisis.
Furthermore, China’s ongoing property market troubles have cast a shadow on market sentiment. Tina Teng from CMC Markets noted that China Evergrande’s announcement of missing a bond coupon payment on Monday evening rekindled investor pessimism regarding the sector, which had long been a cornerstone of economic growth.
While supply constraints persist with Russia and Saudi Arabia extending production cuts until the end of the year, Moscow chose to ease its temporary ban on gasoline and diesel exports on Monday to stabilize its domestic market.
Looking ahead, China’s Golden Week holiday, beginning this Sunday, could provide some relief for oil prices. A potential surge in travel during the holiday period is expected to drive increased oil product demand from the world’s second-largest oil consumer.
Despite the turbulence, oil prices have surged by approximately 30% since mid-year primarily due to tightening supply conditions. This price increase, however, has come at a cost, with JP Morgan estimating that it has shaved off 0.5 percentage points from global GDP growth in the second half of the year.
Nevertheless, JP Morgan analysts reassure that this shock “is not large enough to threaten the expansion by itself.”
Baden Moore, Head of Carbon and Commodity Strategy at National Australia Bank, added his perspective, stating, “We forecast $94/bbl through the 4Q23 period, which is the maximum steepness of the curve we see before OPEC likely eases its supply constraints.”
As the oil market navigates these uncertain waters, the world watches closely, mindful of the intricate interplay between central bank policies, economic conditions, and supply dynamics that continue to shape the energy landscape.
Oil Prices Stable Amid OPEC+ Anticipation and Global Economic Concerns
Oil prices remained relatively unchanged on Thursday as investors awaited the outcome of an eagerly anticipated OPEC+ meeting, which could potentially result in deeper supply cuts in 2024.
Brent crude oil increased by 70 cents to $83.80 a barrel, while U.S. West Texas Intermediate crude inched up by 55 cents to settle at $78.41 a barrel.
The OPEC+ group, comprising the Organization of Petroleum Exporting Countries and allies like Russia, is scheduled to conduct virtual meetings on Thursday to discuss additional production cuts, potentially ranging from 1 million to 2 million barrels per day in early 2024.
Implementing these additional cuts may lead to an immediate surge in prices, but their long-term impact is viewed skeptically by industry experts.
Tamas Varga, an oil broker at PVM, expressed doubt about compliance and suggested that the global oil balance might be less tight than OPEC estimates.
Factors such as the latest U.S. commercial inventory data, revealing an unexpected increase of 1.6 million barrels, and persistently high interest rates in major economies could dampen oil demand.
Despite the surprise build in U.S. crude oil stocks reported by the Energy Information Administration on Wednesday, oil prices remained resilient, with investors focused on the OPEC+ meeting.
Adding to concerns about the demand side, China’s economic challenges persist, highlighted by recent factory data indicating contraction for the second consecutive month in November.
This economic backdrop adds a layer of uncertainty to the oil market, as China is a significant player in global oil consumption.
Investors are closely monitoring the OPEC+ decisions, and the outcome is expected to influence short-term oil prices, although underlying economic challenges continue to cast shadows on the broader outlook for the industry.
Oil Prices Hold Steady Ahead of Crucial OPEC+ Meeting Amidst Fed Rate Hike Signals
Oil prices maintained their significant gains as traders anticipate the outcome of a crucial OPEC+ meeting on supply while considering signals from the Federal Reserve regarding interest rate policies.
Global benchmark Brent hovered below $82 a barrel, having surged over 2% on Tuesday, while West Texas Intermediate traded under $77.
The OPEC+ meeting, scheduled for Thursday to set policies for 2024, is currently grappling with a dispute over output quotas for some African members.
The recent rise in crude prices is underpinned by a weakening dollar, with a Bloomberg gauge of the US currency reaching its lowest level since August.
Federal Reserve policymakers, including Governor Christopher Waller, have hinted at an impending pause in the series of rate hikes, contributing to the bullish sentiment in oil markets.
A softer dollar enhances the appeal of commodities for international buyers.
Yeap Jun Rong, a market strategist for IG Asia Pte in Singapore, commented on the interplay of factors, stating, “The US dollar was dragged lower on a build-up in dovish expectations, which was very much cheered on by oil prices.”
However, concerns persist about OPEC+’s ability to address the challenges in the oil market effectively.
Despite the recent gains, oil is on track for a consecutive monthly decline due to increased supply from non-OPEC countries, intensifying pressure on the cartel and its allies to consider more significant output cuts.
The International Energy Agency’s earlier assessment indicated a potential return to a global crude surplus in the coming year.
In the US, the American Petroleum Institute reported a 817,000-barrel decline in nationwide inventories last week, potentially marking the first drop in six weeks, pending confirmation from government data.
This development may add support to oil prices and impact the ongoing dynamics in the energy market.
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