September 26, 2022

FED interest rate hikes stop oil in it’s tracks

More Putin threats to the West, key interest rate hikes, falling inventories, U.K. tax cuts, OPEC mumbles cutting production and Wall Street forecasts of $125 oil in the fourth quarter all set the scene for another week of the oil market “Snakes and Ladders”! Oil prices took a hammering late in the week as interest rate increases by the American Federal Reserve Bank on Wednesday (with threats of more to come sooner than later) and by the Bank of England on Thursday attempted to throw a lasso around the markets, inflation and potential recession. The response to their actions was a fall in the value of just about every equity and commodity!d

However, not every economist and expert saw such interest rate rises as necessary leaving both financial giants under pressure from their critics. In the coming weeks and months they will face wildly differing reactions……approval and inevitably much criticism….many feel recent interest rate hikes are based upon the “sink or swim and let’s panic” style of policy-making…..that old standby ”act in haste, repent at leisure” springs to mind !!
Surprisingly a bullish, escalating and dangerous-sounding address from President Putin midweek threatening the West (again!) with using his whole military arsenal to protect Russia’s interests had less of an impact on the bulls than the announcement of those interest rate hikes. This is certainly a new phase in how oil prices behave.

In this seemingly never-ending crossfire of recycled news and the minute-by-minute scrum for the nugget of communication that will drive market prices higher or lower, there remains a Wall Street bank or three willing to forecast 4th quarter 2022 oil prices!
Goldman Sachs remains confident of $125.00 per barrel crude oil prices in the fourth quarter (as they have been all year!), J.P Morgan Chase & co go for a very precise $101.00 whilst Morgan Stanley plumps for $95.00. For a market that closed basis ICE brent at $86.15 on Friday Goldman as ever sits above the pack! Their forecast may well hinge around the possible escalation in tensions surrounding what Putin does next especially after land grabbing parts of Eastern Ukraine by this time next week and calling it Russia, he is baiting the West to come and do something about it. Goldman Sachs has been the most bullish of all the Wall Street banks this year, 6 days away from the beginning of 4Q 2022, their $125 call is beginning to sound like a broken record.

To expand on these forecasts, all three market principals go for the diminishing inventory argument and gas shortages (due to Russia closing pipeline supply to Europe) being replaced by oil and coal, thus increasing oil demand. At the same time, all three recognise lack of liquidity in oil markets is creating much of the volatility in paper and futures markets whilst physical oil trading companies like Vitol, Trafigura and Gunvor (who are in discussion with ADNOC to sell part of Gunvor) are reaping huge rewards from physical oil market demand as Europe continues to pick off every product barrel it can find.

In other news….
The U.K. had a mini-budget, cutting tax rates across the board but more interestingly scrapping the 6% corporation tax increase promised for April 2023, thus giving the industry a well-needed shot in the arm. The U.K. also re-introduced fracking (banned in 2019 by Boris) designed to boost the domestic energy supply. The US strategic reserve (SPR….oil stocks held in case of a national emergency) has come under some scrutiny recently. The SPR has now been depleted since President Biden took office from 640 million barrels to 450 million barrels. This depletion is consistent with recent history. Historically SPR volumes tended to grow during Republican administrations and fall during Democratic administrations. That pattern has held true since 1980.

In summary, given the way oil prices have so erratically shifted since April it would appear we are easing away from the traditional oil price drivers… ie war, lack of supply/oversupply, OPEC, political unrest, shock and awe etc and reached a new stage in how oil prices behave….with so many different opinions, unreliable price drivers, and unpredictable behaviours in play forecasting oil prices is not dissimilar to playing a massive game of snakes and ladders! Two primary reasons of course have been the economic aftermath of the Covid pandemic together with Vladamir Putin’s war with Ukraine and the impact of those two things on the World economy. As a result of these events, Europe’s energy imbalance has been thrown into a tailspin as the continent tries to reshape energy supply patterns versus recovering consumer demand and balance that against the upcoming European winter and the loss of Russian oil supply. That reshaping hurts economies as the higher-priced alternative is ready and waiting in the wings to seize the chance of selling at much higher prices to desperate buyers….meat and drink to Vitol, Trafigura and Gunvor et Al!

So much European import reliance has been placed over many years in the hands of a prickly supplier like Russia who will as a result of Putin’s ambitions will soon lose those guaranteed European buyers (crude oil from December 2022 and petroleum products from February 2023) and will have to redevelop their own arbitrage opportunities to a customer base in Asia to maintain the health of their balance of payments position. So where will oil prices be in the 4th quarter of one of the wildest years in history?
The answer may well be yours and my guess is as good as anybody else’s!!


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