- Oil bulls seek to keep a barrel at a high $90 despite inflation on the rise
- Aside from Wednesday’s U.S. CPI, traders on lookout for OPEC, IEA reports
- Indication of demand will be key, with China's economy still in the woods
Surfing on Saudi-Russian production cuts, oil bulls will be seeking to defend the high price of $90 per barrel this week even with U.S. inflation data forecast to show a climb for a second straight month that could prompt the Federal Reserve to consider a more aggressive stance on interest rates.
Economists expect the August reading for the Consumer Price Index, due on Wednesday, to show a year-on-year increase of 3.6%. In July, the so-called CPI had risen to 3.2% from a previous reading of 3% for June.
Until then, inflation had been on a decline for most of the past year after hitting a four-decade high of 9.1% in June 2022.
Oil prices had risen from May lows of beneath $65 to above $88 for a barrel of U.S. West Texas Intermediate, or WTI, crude in last week’s trading.
Brent, the global benchmark for oil, rose from below $72 to above $92 within the same three-month span.
High energy prices are one of the biggest drivers of inflation. If the CPI continues to rise, it could embolden the Federal Reserve to do more rate hikes than initially anticipated by economists.
Recent signs of resilience in the U.S. economy — particularly in inflation and the labor market — pushed up concerns that the Fed will have enough headroom to keep interest rates higher for longer.
Markets fear that this trend could spur more cooling in the U.S. economy, potentially denting crude demand. U.S. fuel demand is also expected to cool in the coming months, with the end of the travel-heavy summer season.
The Fed has vowed to bring inflation back to its long-term target of 2% from the 3%-plus levels the CPI is hovering at. The central bank has already added 5% to interest rates over the past 18 months.
While most economists do not expect the Fed to apply a hike at its September 20 decision on rates, there is every possibility it could do so at its November 1 and December 13 rate decisions.
WTI is likely in the process of marking out a new higher range of between $83 and $93.50 in the weeks ahead, with concerns around demand in China and Europe capping further upside, IG analyst Tony Sycamore said in a note carried by Reuters.
In Tuesday’s Asian trading, WTI was down 55 cents, or 0.6%, at $86.96 per barrel.
The U.S. crude benchmark hit a 10-month peak of $88.09 last week. WTI rose 2.2% last week, extending the prior week’s 7.2% rally. Brent was off 27 cents, or 0.3%, at $90.38. The global oil benchmark rose 2.4% last week, extending the prior week’s 4.8% gain.
Brent's rise to above $90 came with less than three weeks left for summer, the season Americans like driving the most. With the fall season of lower oil usage set to begin on September 23, crude prices would typically retreat a little, sometimes meaningfully, in the world’s largest consuming country.
But that may not happen easily this time, given Saudi Arabia’s target of ultimately getting oil to $100 a barrel or beyond. The Saudis, who control much of the world’s oil exports, have been trying to bring oil black to triple-digit pricing since losing that advantage in August 2022, when Brent crude hovered above $105 a barrel.
Key to this is the 1 million barrels per day in additional cuts, on top of other existing production rationing, that the Saudis have been carrying out since July. By extending this till the year-end — and widening it with the help of Moscow, which will cut 300,000 barrels per day of Russian production — the kingdom is hoping to create a different sort of market phenomenon for pricing.
Analysts said that fear of less oil for the market to play with was playing on traders’ minds, particularly as the weekend approached, which tends to put the market on a hedging overdrive.
Craig Erlam, analyst at online trading platform OANDA, observed:
“Oil prices have consolidated a little as we’ve moved through the week but the trend remains very positive for crude, backed once again by the decision from Saudi Arabia and Russia to extend supply restrictions to the end of the year,”
“A lot more oil [is] off the market at a time when it’s clearly quite tight, albeit with a global economic outlook that is highly uncertain. Demand may still wane but traders appear to be working on the assumption of soft landings and mild recessions at worst. China is another unknown with slow and steady growth, by its standards, looking like the path ahead.”
Last Thursday, data showed overall Chinese exports and imports fell in August as sagging overseas demand and weak consumer spending squeezed businesses.
However, even in times of lackluster economic activity, China tends to bolster its storage capacity, particularly with the availability of cheap Russian crude. Last month, Chinese crude imports rose nearly 31%.
Aside from the CPI reading, market participants will also be on the lookout this week for oil market forecasts from the Vienna-based Organization of the Petroleum Exporting Countries, or OPEC, and the Paris-based International Energy Agency, or IEA.
The OPEC report will particularly be scrutinized for forecasts on more supply tightness that could push crude prices even higher, though the IEA could balance some of that by pointing out the potential for higher inflation that could ultimately weigh on demand.
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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.