This week begins on a bearish note as oil prices stumble $2 in anticipation of the forthcoming U.S. Federal Reserve meeting. Possible interest rate adjustments, Chinese fuel demand uncertainties, and increased Russian crude supply create a challenging landscape for investors.
Shifts in the Oil Market
Oil benchmarks, Brent crude futures, and U.S. West Texas Intermediate (WTI) crude witnessed a price slide on Monday. Brent dropped by $1.91 (2.5%) to settle at $72.88 a barrel, while WTI was down by $2.02 (2.8%), marking $68.15 per barrel.
This development continues the streak of weekly declines for the two benchmarks, a trend driven partly by worrisome economic data from China. Despite Saudi Arabia's commitment to reducing oil production, the weakening demand from the world's biggest crude importer casts a long shadow on the market.
Market Forces in Play: Bull vs. Bear
According to Bank of America Global Research's Francisco Blanch, oil prices are trapped between bearish asset allocators and bullish oil speculators in the tug-of-war. The former, he suggests, are concerned about the effects of monetary contraction, while the latter foresee a decrease in oil inventory by the second half of 2023.
However, the bearish view holds sway for now. Only when the Fed loosens its hold on the money supply may oil prices find it hard to rally, Blanch posits.
Impact of Fed's Rate Hikes on Oil Prices
The Federal Reserve's rate hikes have led to a strengthened U.S. dollar, which inadvertently makes dollar-denominated commodities, such as oil, more expensive for those dealing in other currencies. This, in turn, places downward pressure on prices.
Market observers are currently eyeing the U.S. central bank's next move, with most predicting that interest rates will remain unchanged after the two-day policy meeting slated for Wednesday.
International Supply Factors: Saudi Arabia and Russia
On the supply front, Saudi Arabia's oil production has been cut four times in the past year to counterbalance the market. Conversely, Russian supply has proved resilient, seemingly unscathed by the sanctions designed to restrict its output.
Interestingly, Russia has expanded its oil exports to China and India despite the European Union's embargo and the price cap mechanism initiated by the Group of Seven in early December.
Revised Forecasts from Goldman Sachs
Goldman Sachs has revised its oil price forecasts downward, citing higher-than-expected supplies from Russia and Iran. The bank also increased the 2024 supply forecasts for Russia, Iran, and Venezuela by 800,000 bpd.
The revised price outlook pegs December crude at $86 a barrel for Brent, down from $95, and at $81 a barrel for WTI, a decline from $89.