As the European and American central banks “sounded like hawks”, the market’s concerns about the global economic recession resurfaced, coupled with the pressure of the strong US dollar, international oil prices resumed their decline, and the price of US crude oil futures once approached the US$80 mark.
As of the close on September 7, the price of light crude oil futures for October delivery on the New York Mercantile Exchange fell 5.69% to close at $81.94 per barrel, the lowest level since January this year. London Brent crude oil futures for November delivery fell 5.2% to close at $88 a barrel, falling below $90 a barrel for the first time since February this year. On September 8, international oil prices fluctuated within a narrow range.
Despite the recent slump in oil prices, oil prices in the mid-$80s are still well above average levels over the past many years. If the global economic outlook further deteriorates in the future, oil prices are bound to continue to be under pressure. But on the other hand, given that there are still many risks on the supply side of the oil market, international oil prices are likely to remain relatively high and are unlikely to return to the decadent state that lasted for many years before the epidemic.
Trends in international oil prices as of 20:00 on September 8
“Recession trading” momentum is back
As expectations of “hawkish” interest rate hikes in Europe and the United States continue to rise, market concerns about economic recession are also intensifying, and international oil prices continue to be depressed.
On September 7, local time, the Bank of Canada significantly raised its benchmark interest rate by 75 basis points to 3.25%. This was also the fourth consecutive unconventional interest rate hike. The Bank of Canada has raised its benchmark interest rate by a total of 300 basis points so far this year, starting with a 25 basis point increase in March, followed by four interest rate hikes of 50, 50, 100 and 75 basis points.
Next, the Federal Reserve will most likely raise interest rates vigorously. On September 7, Eastern Time, at a banking conference in New York, Federal Reserve Vice Chairman Brainard once again strengthened expectations that the Federal Reserve will raise interest rates by 75 basis points. Brainard said the Fed “has both the ability and the responsibility” to maintain public confidence in its ability to control inflation over the long term and that raising interest rates for a period of time is necessary to constrain the economy.
It should be noted that Brainard was previously widely regarded as a dove on monetary policy. Therefore, after her tough statement, the market increased expectations that the Federal Reserve will significantly raise interest rates in September. According to the CME Group Fed Watch tool, the market currently expects the probability of the Fed to raise interest rates for a third consecutive 75 basis points at the September meeting is about 80%, and the probability of raising interest rates by 50 basis points is only 20%.
(Source: CME Group)
Gary Clyde Hufbauer, a senior researcher at the Peterson Institute for International Economics (PIIE), told a reporter from the 21st Century Business Herald that the Federal Reserve is expected to raise interest rates by another 75 basis points at the September meeting. “A 50-basis-point interest rate hike is inconsistent with Powell’s hawkish remarks at the Jackson Hole annual meeting of global central banks. Unless the August CPI data released in September drops sharply beyond expectations, a 75-basis-point interest rate hike is inevitable.”
In terms of Wall Street investment banks, Goldman Sachs also raised its expectations for the Federal Reserve to raise interest rates. It is expected that the Federal Reserve will raise interest rates by 75 basis points in September and 50 basis points in November, which is higher than the previous forecasts of 50 basis points and 25 basis points. Goldman Sachs also predicts that the Federal Reserve will raise interest rates by 25 basis points in December.
Amid rising expectations for the Federal Reserve’s hawkish policy and weakness in non-U.S. currencies, the U.S. dollar index strengthened again this week, once exceeding the 110 mark. The surge in the dollar has also put pressure on commodity prices, making oil more expensive for buyers outside the United States.
As the Federal Reserve aggressively raises interest rates to fight inflation, the U.S. economy will also feel the pain. Hufbauer told reporters that according to the National Bureau of Economic Research’s (NBER) judgment indicators, the United States has not yet entered a recession because the labor market is very strong. But it is clear that the United States is “heading into recession.” Federal Reserve officials have also been mentally prepared. Economic recession will be the price of vigorously raising interest rates to fight inflation, and a mild economic recession is almost inevitable. Inflation will not be controlled until the Fed’s policy rate exceeds CPI, and there is still a long way to go.
In addition, with Gazprom announcing an indefinite suspension of “Beixi 1” natural gas transmission, Europe’s fundamentals have become increasingly precarious. Klaus Mueller, head of the Federal Network Agency, Germany’s energy regulator, warned last month that even if natural gas inventories reached 95%, they would only be enough to meet demand for two and a half months if Russia stopped supplying gas. . This winter, energy rationing in Europe seems to be becoming inevitable.
Stephen Brennock, an analyst at oil broker PVM, said that due to the impact of soaring inflation and interest rate hikes on consumption, the shadow of economic recession is getting closer and closer to Western countries. The market also inferred that OPEC+ production cuts signaled a deterioration in the demand outlook.
A lot of uncertainty hangs over the oil market
At a time when the global economic outlook is unclear and the central bank’s monetary policy is unpredictable, the oil market is still shrouded in many uncertainties.
Regarding the turbulent oil market, Wang Chengqiang, director of the New Era Futures Research Institute, told a reporter from the 21st Century Business Herald that the contradictions between supply and demand in the crude oil market are different.It is often prominent and determines the prospect of high market volatility. European and American sanctions against Russia and politicization of the energy economy have created hidden dangers of unstable energy supply, shortage of supply and demand structure, and soaring prices. On the other hand, the interest rate hikes in Europe and the United States to combat inflation have increased the risk of economic recession. High crude oil prices have their own demand side. vulnerability. It is expected that the crude oil market will be characterized by high prices and high volatility in the long term.
Although recession concerns have suppressed demand for crude oil, geopolitical conflicts and OPEC+ will remain important supporting factors for the oil market. The EU will suspend the purchase of most crude oil from Russia from December 5 this year, and the EU’s ban on Russian petroleum products will take effect from February 5 next year. In this regard, the International Energy Agency stated that as the EU import ban takes effect, the decline in Russian oil production will accelerate. By the beginning of 2023, Russia’s production will be close to 2 million barrels per day, a drop of about 20%.
The recent energy price ceiling issue brewing in Western countries deserves attention. U.S. Deputy Secretary of the Treasury Wally Adeyemo said on September 6, local time, that the United States has initially set a price ceiling for Russian crude oil at $44 per barrel. European Commission President von der Leyen said on September 7 that the European Commission will propose to set a cap on the price of Russian natural gas exported to the EU.
But the move could trigger Russian retaliation, disrupting oil market supply. Russian President Vladimir Putin said at the Eastern Economic Forum held in Vladivostok on September 7 that imposing a price limit on Russian natural gas was “absolutely a stupid decision.” Once the EU makes a political decision to violate the contract, “if it goes against Russia’s economic interests, we will stop supplying all energy, including natural gas, oil, diesel or coal.” Putin stressed that Russia will not supply crude oil, refined products or natural gas to any country that imposes price caps on the country’s commodities.
Ole Hansen, head of commodity strategy at Saxo Bank, said that with multiple uncertainties on both sides of supply and demand, it is expected that the oil market supply may be impacted again in the future, and the price ceiling may ultimately increase oil prices rather than lower them.
Moreover, Middle East oil-producing countries will not let oil prices continue to fall. On September 5, local time, OPEC+ held its 32nd ministerial meeting and decided to slightly reduce production by 100,000 barrels per day in October (an increase of 100,000 barrels per day in September), and crude oil supply returned to August levels. In the final communiqué, OPEC+ also emphasized that it is willing to hold another ministerial meeting at any time if necessary to respond to market dynamics.
While OPEC+ cut production by just 100,000 barrels per day, or just 0.1% of total global demand, the move showed that OPEC+ is seeking to stabilize global markets as economic turmoil triggers the longest oil price fall in two years. Regarding the decision to cut production, Saudi Energy Minister Abdulaziz bin Salman said, “This decision expresses our willingness to use all the tools in the tool box. This simple adjustment shows: We are We will remain vigilant, pre-emptive and proactive in supporting the stable and efficient operation of the market.”
Oil prices do not have the foundation to continue to fall sharply
From a fundamental point of view, oil prices do not have the foundation to continue to fall sharply.
On September 7, Eastern Time, the U.S. Energy Information Administration (EIA) released the “Short-Term Energy Outlook” report. In its report, EIA predicted that U.S. crude oil production and consumption will increase year-on-year this year, but EIA lowered its forecast for U.S. crude oil production in 2023 and raised its global oil demand forecast for the fourth quarter of this year and the first quarter of next year.
Specifically, EIA expects U.S. crude oil production to increase to 12.63 million barrels per day in 2023, lower than the previous forecast of 12.7 million barrels per day. The EIA also predicts that U.S. consumption of petroleum and other liquid fuels will increase from 19.89 million barrels/day in 2021 to 20.4 million barrels/day in 2022, and to 20.75 million barrels/day in 2023, which is close to historical highs.
From a global perspective, crude oil demand will continue to grow this year and next. EIA expects global crude oil demand growth to be 2.1 million barrels per day in 2022, compared with the previous expectation of 2.08 million barrels per day; global crude oil demand growth is expected to be 2 million barrels per day in 2023, compared with the previous expectation of 2.06 million barrels per day.
Overall, the fundamentals of the oil market remain solid, which also means that oil prices may remain relatively high in the future. EIA forecasts that Brent crude oil spot prices will average $98 per barrel in the fourth quarter of 2022 and $97 per barrel in 2023. The possibility of oil supply disruptions and lower-than-expected crude oil production growth increases the potential for future oil price increases, while the possibility of lower-than-expected economic growth adds downward pressure on oil prices.
OPEC Secretary-General Haitham Arghais said that concerns about a slowdown in consumption are exaggerated, and the risk of supply shortages in the global oil market this year remains high and spare capacity is decreasing. OPEC and its partners have about 2 million barrels per day to 3 million barrels per day of spare capacity, accounting for about 3% of global production.
For the future, years of underinvestment also mean the world is unlikely to return to an era of cheap energy. In Algais’ view, the supply crisis stems from years of underinvestment by the global oil industry, both in developing new supplies and building refineries and other infrastructure to process the oil.
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