Crude oil prices dip but looming undersupply suggests increase coming

Jerome Powell, chairman of the U.S. Federal Reserve, from right, Lael Brainard, vice chair of the board of governors for the Federal Reserve System, and John Williams, president and chief executive officer of the Federal Reserve Bank of New York, during a break at the Jackson Hole economic symposium in Moran, Wyoming, on Aug. 26, 2022. The annual event kicks off this week.

Bloomberg photo by David Paul Morris.

Crude oil prices ended a seven-week streak of gains as concerns about China’s economy tempered broader optimism, but U.S. data and a Fed symposium this week could change the mood.

“The buoyant mood in oil markets has been reined in by a slowdown in China’s economic activity,” said Bill Weatherburn, a commodities analyst at Capital Economics in London.

China seems to be wading through different economic waters than its peers. Most Western economies are working to cool inflation, though China’s is deflating and may need some stimulus. Though the U.S. economy is not immune to scrutiny, investment bank Barclays downgraded its forecast for Chinese growth, and the country’s pristine A+ credit rating could be at risk.


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That was enough to take the wind out of the sails of crude oil prices. West Texas Intermediate, the U.S. benchmark for the price of oil, tried desperately to cling to the $80 mark last week but ultimately ended a seven-week winning streak.

“Policymakers in China should cut interest rates this week, but oil markets need more than this,” Weatherburn added. “Oil prices will only get a meaningful boost if fiscal stimulus is announced.”

Until now, crude oil prices were largely supported by supply-side restraint from Saudi Arabia and Russia, countries that both need a premium on oil to support their budgets. After the ruble cratered to a 17-month low, Russia’s central bank last week increased its key lending rate by a whopping 350 basis points to 12 percent.

Data out Wednesday on industrial production in Russia should provide further clues about how the economy is weathering the storm of sanctions, and any further contraction could support its resolve to continue with production restraint.


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Western economies, meanwhile, are on the mend, or so it seems. Consumer prices in the European economies increased 5.3 percent last month, after a 5.5 percent gain in June. Core inflation, which strips out volatile food and energy prices, was unchanged, however, at 5.5 percent in July.

In the U.S. economy, the Energy Department continues to show that demand is strong. Crude oil inventories are 1 percent below the five-year average for this time of year, and total motor gasoline inventories are 6 percent below average, even as retail gasoline prices march toward the $4 average at the national level.

A proxy for demand for refined petroleum products, meanwhile, came in 3.8 percent higher than year-ago levels during the seven-day period ending Aug. 11. We’ll see Friday if that’s indicative of the mood in general when the University of Michigan releases its final estimate on consumer sentiment for August.


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Western economies are not out of the woods, however. Retail sales in the United Kingdom disappointed, and the U.S. economy will be under the radar this week as Fed officials descend on Wyoming this week for the annual Jackson Hole symposium.

The Fed’s lending rates are at a 22-year high, which is already creating headwinds in the housing sector. Minutes from the latest Fed meeting show that significant inflationary risks remain, which could keep oil prices from rallying too hot.

Longanecker said his team sees WTI heading to a holding pattern around current levels, though the perception outside the United States varies. Swiss investment bank UBS sees oil demand hitting a record this month.

Giovanni Staunovo, a commodities analyst at the bank, said the market looks decidedly depleted as Chinese imports remain strong, Western economies show resilient demand, and Russian and Saudi barrels are at a premium.

“With the market expected to stay undersupplied, this should see prices trending higher,” he said. “Our WTI forecast is $91 per barrel.”


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Over the longer view, four storms brewing in the Atlantic could pose a threat to U.S. oil and gas infrastructure over the coming weeks.

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