Oil’s rally stalls on concerns Fed hikes will hurt energy demand
Oil eased as risks to energy demand stemming from tighter monetary policy halted a rally triggered by Opec+’s decision to cut supply.
West Texas Intermediate dropped below US$91 a barrel, with China’s markets reopening following a week-long nationwide break. Last week, the US oil benchmark soared 17 percent after the Organisation of Petroleum Exporting Countries and allies (Opec+) including Russia agreed on a two million barrel-a-day output cut.
Traders are concerned that major central banks including the Federal Reserve will push interest rates deeper into restrictive territory to quell inflation. US data last week showed a still-robust labor market, fanning expectations that the Fed will deliver yet another 75 basis point rate hike next month.
Oil along with other commodities and risk assets including equities remain pressured by the slowdown concerns, with crude giving up all of the gains triggered by Russia’s invasion of Ukraine. The move by Opec+ to reduce collective output drew a rebuke from the United States after President Joe Biden traveled to Riyadh in July to improve relations in a bid for greater flows of oil.
“The Opec+ cuts have mostly been digested,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank. “What’s less visible is the downside stickiness that Opec has introduced by digging its heels in.”
After their break, traders in China are taking stock of the outlook as local virus cases persist, with the authorities imposing curbs to tackle outbreaks, including some in the financial hub of Shanghai. On the horizon, the twice-a-decade Communist Party Congress is set to open on Oct 16.
Widely watched time spreads steadied after rising last week. Brent’s prompt spread, the difference between the two nearest contracts, was US$1.97 a barrel in backwardation on Monday, little changed from a week ago.
While Opec+’s decision “does hurt the US”, it should not have caught anyone by surprise, Mohamed El-Erian, Allianz’s chief economic adviser, said, while blaming the Fed for a very high risk of a recession. “Opec is looking to protect oil prices in the context of declining demand.”