The wave of interest rate hikes in many countries has triggered concerns about economic recession, and international oil prices have fallen sharply again. WTI crude oil and Brent crude oil have both hit new lows since January, basically giving up all their gains this year.
Analysts pointed out that the arrival of the interest rate hike craze will bring many risks to the crude oil market, such as demand and capital withdrawal. And if oil prices fall further, OPEC may continue to cut production to stabilize oil prices.
Interest rate hikes plunge oil prices
As of the morning close on September 24, Beijing time, the price of WTI crude oil futures for delivery in November fell by 5.69% to close at US$78.74/barrel; the price of Brent crude oil futures for delivery in November fell by 4.76% and closed at US$86.15. /bucket.
Figure / As of the close of crude oil on September 23, the US dollar hit its highest level in more than 20 years, and international oil prices fell to the lowest in eight months. Source: Xinhua News Agency
It is worth noting that the current price of Brent crude oil futures has fallen to a new low since January, and the price of WTI crude oil has fallen below the US$80/barrel mark for the first time since early January.
Recently, many European and American central banks have released signals to strongly combat inflation and raise interest rates. The market’s concerns about global economic growth have further intensified. Weak economic growth has weakened expectations for the outlook for oil demand and plunged crude oil prices.
This week, the Federal Reserve announced a 75 basis point interest rate hike, triggering a global wave of interest rate hikes. Central banks in the United Kingdom, Sweden, Switzerland, South Africa and other countries have followed suit. According to media reports, the Bundesbank said on September 23 that fighting inflation may temporarily drag down economic growth, but the European Central Bank needs to further raise interest rates; and once the original target is achieved, unconventional measures should be lifted.
Figure/Statistics on interest rate hikes in major economies as of 2:00 on September 22, Beijing time, source: 21 Data News Laboratory
On September 22, the Swiss National Bank raised interest rates by 75 basis points, from -0.25% to 0.5%. At this point, all central banks in Europe have left negative interest rates, and the era of negative interest rates in Europe has officially ended.
Edward Moya, senior market analyst at data and analytics company OANDA, said central banks may continue to aggressively raise interest rates, which will weaken economic activity and the short-term crude oil demand outlook. A strong dollar would reduce demand for oil because the fuel would become more expensive for holders of other currencies.
Monetary tightening cycle brings new risks
Xi Jiarui, a crude oil analyst at Jinlianchuang, pointed out that at present, except for Japan, which still maintains its ultra-loose monetary policy, other countries have entered a cycle of monetary tightening. With the advent of interest rate hikes, the crude oil market will also face three risks.
The first is that the global economy has entered a recession, which will suppress demand for crude oil. In the second half of this year, crude oil prices have dropped from the year’s highest point of US$130/barrel to US$80/barrel, a drop of nearly 40%. The biggest contributor is the collapse of the crude oil market mentality caused by concerns about economic cooling.
In addition, currencies are accelerating their withdrawal from financial derivatives markets, which technically puts pressure on oil prices.
Xi Jiarui said that raising interest rates means that currency will move from risky markets to stable storage channels, and during this period there will be a round of capital withdrawal from high-risk markets. This process will inevitably squeeze the market bubble, and the direct consequence will be a drop in prices. As of the end of August, total WTI positions had dropped to around 1.47 million lots, a decrease of nearly 30% compared with the same period last year.
Finally, the continued rise in the U.S. dollar exchange rate continues to suppress the prices of U.S. dollar-denominated commodities. Crude oil prices are priced in U.S. dollars, so the level of the U.S. dollar index also affects crude oil prices. Generally speaking, the two have a negative correlation.
Xi Jiarui said that the world’s entry into an interest rate hike cycle is not conducive to the crude oil market. Since the inflation rate of major global economies is still deviating from the target, continued and substantial interest rate hikes will be the main economic control method in the next period of time. Accompanied by concerns about the outlook for crude oil demand will continue to plague the crude oil market. Unless there are unexpected events to hedge, crude oil prices will continue to fluctuate downward.
OPEC+ may cut production to stabilize oil prices
As crude oil prices fall below the $80 mark, market sentiment is also undergoing subtle changes. On the one hand, the U.S. government may replenish crude oil inventories at low oil prices; on the other hand, the OPEC+ alliance of oil-producing countries is facing increasing pressure to cut production and rescue the market, which may limit the scope for further declines in oil prices in the future.
Nigeria’s Minister of Petroleum said in a recent interview with the media that crude oil prices are affecting the fiscal budgets of some OPEC member countries. When oil prices are too low, OPEC may be forced to reduce production.
In early September, OPEC+ reached a new resolution to cut production by 100,000 barrels per day starting in October. OPEC believes that the fundamentals of supply and demand are supporting the rise in crude oil prices, but the recent decline in oil prices has been evident because the current oil sell-off was triggered by wrong signals.
OPEC previously believed that the fundamentals of the oil market have not changed and oil demand will remain strong this year and next.
Huatai Futures Research Report pointed out that the EU’s sanctions against Russia will officially take effect on December 5. From the perspective of shipping schedules, December shipping schedules will be traded in October, so the impact of sanctions will begin in advance, and the EU’s attitude is relatively clear , that is, it is still necessary to eliminate about 1.5 million barrels per day of Russian crude oil imports, and to make up for the gap as much as possible by increasing crude oil imports from the United States and the Middle East.
However, in terms of Russia’s crude oil rebalancing, there is currently much greater uncertainty, that is, whether Asia-Pacific countries can continue to increase imports despite European and American insurance bans and price ceilings. If Asia-Pacific countries are to fully absorb the volumes of Russian crude that Europe has phased out, closer international cooperation may be needed.
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