Oil Prices Hit New High, Is a November Fed Rate Hike a Certainty?
What's Happening in the Oil Market?
Recently, there has been renewed attention on the oil market due to Saudi Arabia's production cut measures in July. The country reduced its daily output to9 million barrels in response to concerns about a global economic slowdown leading to a decrease in oil prices. This has put pressure on international oil prices, which have rebounded from their low point in June.
In early September, Saudi Arabia's Energy Minister announced an extension of these reduction measures until December, exacerbating the already tight energy market. Soon after, on September 19th, the international crude benchmark Brent crude oil price approached $95 per barrel, reaching a 10-month high and increasing 30% compared to the low point in June.
Interest rate hike expectation causes oil prices to drop again
However, on September 20th and 21st, oil prices experienced the largest drop in a month over those two trading days.
This was due to the Fed's Federal Open Market Committee (FOMC) meeting on September 20th. Although the Fed chose not to raise interest rates at the September meeting as expected, the market's attention turned to the quarterly Federal Funds rate forecast. According to the dot plot, twelve Fed officials have chosen to raise interest rates by another 25 basis points in November due to stronger-than-expected economic data.
Some people may question why international oil prices are tied to interest rate expectations.
To answer this question, it is important to know how oil prices impact the economy.
The most obvious impact of rising oil prices is on the cost of gas for consumers. However, oil prices also affect a variety of other industries beyond transportation. The petroleum industry has wide-ranging uses, as oil serves as the basic raw material for products such as lubricants, asphalt, and plastics.
The industry can bedivided into upstream, midstream, and downstream operations: upstream covers exploration and drilling, midstream covers crude oil transportation, processing, and storage, and downstream includes refineries and gas stations. As a result, increasing oil prices will generally impact global economic development.
From a data perspective, crude oil is closely related to multiple economic indicators. Gasoline consumption, for example, is an important driver of changes in new retail sales.
Energy is also included in the Consumer Price Index (CPI), which measures inflation. Significant fluctuations in oil prices are reflected in the data. For instance, during the current rate hike cycle, the substantial increase in international oil prices is one reason why US inflation has failed to reach the Fed's 2% target.
Therefore, the market generally believes that if oil prices do not fall soon, US inflation expectations will rise again, prompting the Fed to consider raising interest rates once more. The Fed's hawkish interest rate expectations on September 20th overshadowed the impact of falling oil inventories, leading to the biggest drop in oil prices in a month.
Rising oil prices pose a challenge for central banks worldwide, as they can reduce efforts to control inflation over the past year. Jorge Leon, Senior Vice President of Rystad Energy, noted that it is challenging to predict how oil production cuts may impact inflation and economic policy. However, increasing oil prices will likely increase the possibility of further US interest rate hikes to manage inflation.
What's Next for the Oil Market?
According to OPEC's monthly report, global crude oil inventories may decline by 3.3 million barrels per day in the fourth quarter due to supply shortages. This would be the largest global deficit since 2007.
With this situation, many analysts believe that crude oil prices may surpass $100 per barrel.
In the short term, Chevron CEO Mike Wirth stated that the tightening of supply and decreasing inventories will drive oil prices to soon exceed $100 per barrel.
JPMorgan analyst Christyan Malek believes that oil prices may fluctuate between $90 and $100 in the short term, and hover around $80 in the long term.
ANZ Research analysts have stated that strong demand and ongoing supply restrictions may tighten the oil market over the next two to three quarters.
Morgan Stanley's research report raised its quarterly forecasts for Brent crude oil prices in 2023 and 2024 on September 20th, indicating that Saudi Arabia and Russia's continuous production cuts may further support oil prices until 2024. The market deficit will keep oil prices well supported around current levels, the Wall Street bank said in a note, but added that prices above $100 a barrel would seem "stretched."
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