The tightening storm is heating up again, and high oil prices may become the norm

International oil prices have fluctuated sharply as the balance swings between supply shocks and weakening demand. Although the Federal Reserve is likely to lower interest rates to…

International oil prices have fluctuated sharply as the balance swings between supply shocks and weakening demand.

Although the Federal Reserve is likely to lower interest rates to 50 basis points in December, the tightening wave continues. Federal Reserve officials continue to make tough remarks. The risk of recession in the United States has further intensified, and the economic prospects in Europe and other regions are not optimistic.

Affected by factors such as demand concerns and a stronger US dollar, international oil prices fell sharply on November 17, with Brent crude oil futures falling below US$90 per barrel. As of the close of the day, the price of light crude oil futures for December delivery on the New York Mercantile Exchange fell 4.62% to close at $81.64 per barrel; the price of London Brent crude oil futures for delivery in January 2023 fell 3.32% to close at $81.64 per barrel. Barrel $89.78. International oil prices continued to fall on November 18.

Fawad Razaqzada, a senior analyst at Jiasheng Group, told a reporter from the 21st Century Business Herald that supply concerns due to geopolitical tensions have temporarily receded into the background, and market attention has once again turned to the demand side. Economic challenges are becoming more severe and oil demand is expected to continue to decline. However, compared with 2020 and 2021, oil prices are still overall higher.

On the one hand, the extent of the global economic downturn next year is still unclear, and the extent of the impact on demand is uncertain. On the other hand, both the Russian oil price limit and the EU ban will be implemented on December 5, and the extent of the impact on supply is also unclear. Where will oil prices go next under the long-short game?

Austerity storm heats up again

The Federal Reserve is currently raising interest rates at the fastest pace since the 1980s. This year, the Federal Reserve has raised interest rates six times, including four radical increases of 75 basis points, with a cumulative increase of 375 basis points. It has raised the federal interest rate target range to 3.75 %-4%.

Although the U.S. CPI data for October fell more than expected, which is indeed a good thing, it ultimately failed to make the Fed quickly switch from hawk to dove.

Many Fed officials are still expressing a hawkish stance. St. Louis Fed President Bullard said on November 17 that the Fed’s benchmark interest rate will need to be further raised enough to bring the inflation rate down. Even under dovish assumptions, interest rates would need to rise to at least around 5%, and perhaps 7% under more stringent assumptions, to put downward pressure on inflation.

Echoing this, Minneapolis Fed President Kashkari also said that it is an open question as to how high interest rates should rise to balance supply and demand. “We need to make sure we’re not behind the curve before I support stopping raising interest rates, and we’re not at that stage yet.”

In fact, after the U.S. inflation data for October fell more than expected last week, the market’s overly optimistic reaction actually “harmed itself.”

Kristina Hooper, chief global market strategist at Invesco, analyzed to a reporter from the 21st Century Business Herald that the market expects the Fed to quickly turn dovish and reacts overly optimistically, which is counterproductive. The loosening of financial conditions may force the Fed to take greater measures. degree of austerity.

Now the market’s expectations for the Fed’s endpoint interest rate have returned to above 5%. In terms of major Wall Street banks, Goldman Sachs chief economist Jan Hatzius also raised his expectations for the Federal Reserve’s end-point interest rate, from the previous 4.75%-5% to 5%-5.25%. It is expected that the Federal Reserve will raise interest rates by 50 basis points in December, and then It will raise interest rates by 25 basis points in February, March and May next year.

Tightening policies that exceed expectations will also have a greater impact on the economy. JPMorgan Chase warned that due to the Federal Reserve’s interest rate hike policy, the U.S. economy will enter a mild recession next year, which may cause more than 1 million Americans to lose their jobs. JPMorgan also predicts that the Federal Reserve will turn to interest rate cuts in 2024.

The weak economic outlook in the United States and other regions is bound to drag down crude oil demand. In its latest monthly report released this week, OPEC lowered its forecast for global crude oil demand this year and next. Specifically, OPEC has lowered its forecast for global crude oil demand growth in 2022 by another 100,000 barrels/day to 2.55 million barrels/day. This is the fifth time OPEC has lowered its demand forecast since April this year. At the same time, OPEC also lowered its demand growth forecast for next year by 100,000 barrels to 2.24 million barrels per day.

In addition, OPEC also warned that in the fourth quarter of 2022, the world economy has entered a period of increasing uncertainty and challenges. Crude oil demand faces a series of downside risks, including high inflation, tightening monetary policies by major central banks, high sovereign debt levels in some regions, tightening labor markets and continued supply chain constraints.

Although OPEC once again warned about the demand outlook, Goldman Sachs’ global head of commodities Jeff Currie still supported oil prices. As the EU’s ban on Russian oil is getting closer and closer, Western countries are also close to reaching a Russian oil price ceiling, and oil supply shortages may becomes a problem for the future. If Russia retaliates against the price cap, oil prices could be pushed higher.

Under the long-short game, high oil price fluctuations may become the norm

Although the outlook for crude oil demand is gloomy, there is also huge uncertainty on the supply side.

According to the latest monthly report released this week by the International Energy Agency (IEA), oil inventories in developed countries have fallen to the lowest level since 2004. With sanctions on Russian oil exports about to take effect, the market is in danger.

“As we enter winter, the oil market maintains a delicate balance.” The IEA warned that the EU’s response to Russian crude oil and petroleum products�The imminent imposition of the embargo and ban on shipping services will put additional pressure on the global oil balance. Compared with before the outbreak of the Russia-Ukraine conflict, Russia may lose nearly 2 million barrels per day of production by the end of March next year, and next year’s production will be only 9.6 million barrels per day.

It is worth noting that diesel has been hit harder than crude oil. Diesel prices and the price difference between diesel and crude oil soared to record levels in October this year, with year-on-year increases of an astonishing 70% and 425%. In comparison, Brent crude oil futures prices rose only 11% during the same period.

A major driver of this year’s diesel shortage is the Russia-Ukraine conflict. Russia’s diesel exports have been more disrupted than crude oil exports. Russia’s reduction in natural gas shipments to Europe has also increased Europe’s refining costs, while pushing end users such as power plants from consumption. Switching from natural gas to diesel.

The IEA also warned about the recent turmoil in the diesel market. Competition for non-Russian diesel will become very fierce, and EU countries will have to go to the United States, the Middle East and India to compete for more fuel supplies. The current increase in refinery capacity will hopefully solve the problem, but if prices rise too high before the problem is solved, it will inevitably further undermine demand.

For oil prices, there are downside risks on the demand side and upside risks on the supply side. Under the game of long and short power, oil prices will fluctuate significantly in the future, and there is a high probability that they will fluctuate at a high level.

HSBC believes that in the fourth quarter of this year, the market’s pessimism about economic recession and the strong US dollar will limit the demand for crude oil, thereby limiting the rise in oil prices. However, as emotions are released and the U.S. strategic crude oil reserves are running out of bullets, oil prices will rise to 100% in the first quarter of next year. US$100/barrel.

According to Gui Chenxi, chief energy analyst at CITIC Futures, if there are no sudden major negative or bullish events, short-term oil prices may maintain a range of 90-100 US dollars per barrel. Risks for future oil price increases include OPEC’s increased production cuts, Russia’s initiative to cut exports, and the expansion of the Russia-Ukraine conflict. Downside risks include economic recession, global political and financial system crises, and the conclusion of the Iran nuclear agreement.

Given that the price ceiling for Russian crude oil has not yet been determined, there is also uncertainty about the future impact on the oil market. Gui Chenxi predicted that if the target price is set at US$80/barrel, the probability of Russia’s acceptance will increase, and the center of gravity of oil prices may fall by US$5-10/barrel. If the target price is below US$60/barrel and Russia refuses to accept or even reduce production, it may instead push oil prices upward.

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Author: clsrich