Crude Oil Above $90 Fuels Inflation Concerns

Oil prices were seen retreating on Wednesday after previously hitting a fresh 10-month high above $92.60. The retreat in prices could also be a result of oil bulls taking some profits off the table ahead of Wednesday’s U.S. Federal Reserve's interest rate decision as uncertainty looms over the timing and impact of peak rates on energy demand.

The minor correction in oil prices on Tuesday and Wednesday has occurred despite a larger-than-expected reduction in U.S. oil stockpiles and a decrease in U.S. shale output, signaling tight crude supply throughout 2023. U.S. crude oil stockpiles experienced a notable decrease of approximately 5.25 million barrels last week, surpassing expectations of a 2.2 million-barrel decline.

Crude oil prices fell to levels below $90 on Wednesday, with the initial support sitting at $88. A more meaningful support is located at $85, which is a key level to defend in the near term for bulls. On the upside, the psychologically-important $100 is likely to act as a magnet for price action. 

All Eyes on Fed

Investors are closely monitoring various central bank interest rate decisions this week, including the Fed's announcement. While the U.S. central bank is expected to maintain current interest rates, attention is focused on its projected policy path, which remains uncertain.

"The oil rally is taking a little break as every trader awaits a pivotal Fed decision that might tilt the scales of whether the U.S. economy has a soft or hard landing," according to Edward Moya, Senior Market Analyst at data and analytics firm OANDA.

Federal Reserve officials are widely expected to keep interest rates unchanged. The bond market is suggesting that the Fed is likely done with raising interest rates in this economic cycle. Money markets are indicating a 99% likelihood that the Fed will maintain the current rates on Wednesday while assigning a 33% probability of a rate hike in November.

While the Fed’s mandate is also to support economic growth, the central bank has set its eyes firmly on controlling inflation. The Fed has been closely monitoring inflationary pressures and has previously implemented aggressive rate hikes in response. This is why the rising oil prices are seen as a fresh headache for central bank officials, as inflation is still well above the Fed’s 2% target.

“We continue to think that the FOMC will ultimately decide in November that it has made enough progress in the inflation fight to leave the funds rate unchanged,” Goldman Sachs (NYSE:GS) economists wrote in their FOMC meeting preview.

On the other hand, economists at Citigroup) believe that the Fed will be forced to deliver another rate hike in November as inflation is likely to stay higher for longer.

“Much stronger than expected growth, tight labor markets, and remaining upside risk to inflation keep risks skewed hawkish.”

Oil at $100 is Within Reach

The recent OPEC supply cuts and other developments prompted Goldman Sachs commodity strategists to raise their 12-month Brent forecast from $93 to $100 per barrel. The bank’s strategists cited more substantial inventory draws as a key reason behind the price target change, while also flagging lower OPEC supply and increased demand outweighing higher U.S. supply. 

Goldman strategists believe that OPEC will sustain Brent prices in an $80-$105 range in 2024 by leveraging strong Asia-centric global demand growth and assertive pricing strategies. The bank anticipated that the market would experience a deficit of approximately 2 million barrels per day (bpd) in this quarter, followed by a shortfall of 1.1 million bpd in the last three months of 2023. The firm notes that global consumption has reached record levels.

 “OPEC is unlikely to push prices to extreme levels, which would destroy its long-term residual demand,” analysts Daan Struyven, Callum Bruce, and Yulia Zhestkova Grigsby wrote in the report.

Similarly, Chevron Corp. (NYSE:CVX)'s Mike Wirth has suggested that oil prices reaching $100 again are within reach due to tighter supplies and diminishing inventories. This bullish forecast is contrary to the view of Citigroup (NYSE:C) commodity strategist Ed Morse, who has been advocating for lower oil prices for some time now. Morse believes the oil market is well supplied by producers outside of OPEC, therefore arguing that oil prices above $90 are “unsustainable.”

Elsewhere, Russia is considering imposing export duties of $250 per metric ton on all types of oil products – a significant increase from current fees – from October 1st until June 2024 to address fuel shortages.

On the supply side, U.S. oil output from top shale-producing regions is expected to reach its lowest level since May 2023, at 9.393 million bpd in October. This follows extensions of combined supply cuts of 1.3 million bpd by Saudi Arabia and Russia until the year's end.

On the other hand, Exxon Mobil (NYSE:XOM) has committed to boosting oil production by nearly 40,000 bpd in Nigeria as part of a new investment initiative in the country, as announced by Exxon's President of Global Upstream Operations.

In terms of demand, India's crude oil imports decreased for the third consecutive month in August due to refinery maintenance and reduced shipments from Russia. Discussing oil demand, Aramco CEO Amin Nasser dismissed the notion of “peak demand.”

"This notion is wilting under scrutiny because it is mostly being driven by policies, rather than the proven combination of markets, competitive economics and technology," Nasser said.

Saudi oil giant Aramco (TADAWUL:2222) sees demand growing to around 110 million bpd by 2030, about 10% above the current demand levels. OPEC’s projection for 2023 sits at 102.1 bpd.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.