Americas News
More Losses For Crude As U.S. Fed, Analysts Foresee Tough Times Ahead
After last week ballyhoo over rising oil prices trumping demand concerns, this week's steady decline of the commodity – for the third straight session on Wednesday – demonstrated that demand fears can't be suppressed for long, especially with news that a key U.S. inflation metric beat estimates.
West Texas Intermediate slipped $2.08 to settle at $87.27 per barrel and Brent fell $1.84 to settle at $92.45 per barrel after it was learned that prices paid to U.S. producers rose more than expected last month, indicating that more rate hikes are likely coming.
The Federal Reserve on Wednesday said they would raise rates to a restrictive level and traders think a 75 basis point increase will be announced next month; this caused Dennis Kissler, senior vice president at Bok Financial Securities, to remark, "With the economy still showing inflationary tendencies, ideas of higher interest rates are causing a move back to the sidelines, which is pressuring the front month futures."
Also, on Wednesday, the Organization of Petroleum Exporting Countries (OPEC) reduced forecasts for its required production in the fourth quarter by 440,000 barrels per day (bpd); the cartel in it latest monthly report also slashed estimates for global demand growth in the period by more than twice as much.
Still, analysts have pointed out that OPEC's reason for its recent decision to slash its crude production by 2 million bpd was to cause a rise in prices that would benefit its members and allies; the cartel therefore would presumably have been dismayed by RBC Capital Markets warning on Wednesday that Brent could sink into the low $60s in 2023 in the event of a deep recession.
Contributing to Wednesday's gloom was the U.S. Energy Department, which lowered its expectations for production and demand and now sees a mere 0.9 percent increase in domestic consumption in 2023, down from a previous forecast for a rise of 1.7 percent; the department forecast crude production to grow by 5.2 percent, down from 7.2 percent.
John Kilduff, founding partner at Again Capital, explained the circumstances behind the curious state of the market in which bullish sentiment runs concurrent with bearish fears.
He said, "One big aspect of the bull case for oil prices is a meaningful loss of Russian supplies, especially as we stare down that Dec. 5th deadline," a reference to when the European Union sanctions against the former Soviet Union take effect.
Kilduff added, "That's what's getting everybody kind of spooked; but to the extent we're going to see those supplies maintained and stay on the market - and it looks like we are - that's a big bearish element for the market."
In a similar vein, Phil Flynn, senior market analyst at Price Futures Group Inc., said, "In the short-term you can't fight the Fed, [but] at some point oil is going to disconnect from that, though – when you get into winter you're not going to care about inflation."
