All eyes on the Fed as oil markets gauge economy


The expected increase in lending rates when Federal Reserve policy makers meet this will dominate the news cycle and likely drive another slump in oil prices, analysts said.

Weak economic data pushed West Texas Intermediate, the U.S. benchmark for the price of oil, down nearly 2 percent last week, settling Friday at $85.11 per barrel.

Giovanni Staunovo, a commodities analyst at Swiss investment bank UBS, said the price of oil remains in a tug-of-war between those bracing for global recession and those expecting demand to remain strong amid tight supplies. On the upside, China is lifting some of its COVID-19 restrictions and its factory output and retail sales data came in better than expected — all pointing to greater oil demand in the world’s second-largest economy behind the United States.

On HoustonChronicle.com: Shell CEO steps down after 8 years, will be replaced by renewables chief

On the downside, analysts and traders still worry that aggressive interest rate increases to quell inflation in the United States and Europe will drive the economy into recession and undermine oil demand.

The prospect of “aggressive monetary tightening” prompted the World Bank last week to warn the global economy was in the grips of a sharp downturn. The bank said these policies are sure to reduce inflation, but with central banks raising rates at the same time, it could have global implications, putting more downward pressure on oil prices. creating even further headwinds for the price of oil.

The United Kingdom’s central bank is widely expected to its key lending rate by a half-percentage point to arrest inflation running at around 10 percent.

U.S. inflation, meanwhile, was running at 8.3 percent in August, down from 9.1 percent in June thanks to a big drop in retail gasoline prices. But price increases for other items – groceries, rent, health care and utilities – offset some of the relief.

Ole Hanson, the head of commodities strategy at Saxo Bank in Denmark, said the consensus is the Federal Reserve will raise its key short-term lending rate by three-quarters of a percentage point. A full percentage point increase is possible, Hanson said, but that would havoc for the outlook on oil demand.

On HoustonChronicle.com: Congress examines claims oil companies harassing climate activists

Another rate increase by the Fed would strengthen the value of the dollar, tut that means dollar-priced crude oil is more expensive for holders of other currencies, curbing demand and sending the price of oil lower.

“Should the Fed go big and commodities crater as a consequence,” Hanson said, “look out for an emergency OPEC+ meeting.”

OPEC+ refers to the core members of the Organization of the Petroleum Exporting Countries and their allies, including Russia. The group early this month said it would trim production by 100,000 barrels per day come October, but left the door open for extraordinary action should the market climate warrant further intervention.

“Short-term economic shock is certainly on the menu,” said Tamas Varga at London oil broker PVM, “but this is the only responsible way for tackling inflation head on and to prevent further and severe damage.”



Read More: All eyes on the Fed as oil markets gauge economy

2022-09-19 04:05:15

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More