Oil Gains as Traders Balance Supply Fears, Weak Demand

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved higher early Thursday as traders balanced concerns over short supplies this winter, stoked by threats from Russian President Vladimir Putin to cut oil exports to Europe, against sputtering demand fundamentals as central banks rush to jack up interest rates to fight inflation.

The global financial system has not seen a cycle of such aggressive monetary tightening since perhaps the early 1980s when central banks were forced to continue raising interest rates even as their economies sputtered.

The Bank of England this morning raised its benchmark lending rate by 50 basis points in a seventh consecutive hike this year to slow a relentless rise in consumer prices. Higher rates come as the United Kingdom faces an energy crisis and a recession forecast while the UK's new Prime Minister, Liz Truss, presses forward with a set of economic reforms.

The policy action follows similar rate increases from the central banks of Norway and Switzerland among others where consumer prices accelerated at the fastest clip since the creation of the European Union.

In parts of Central and Eastern Europe, inflation recorded a double-digit rise, with Estonia recording a 25.2% climb in consumer prices in August, followed by Latvia at 21.4% and Hungary with 18.6% gain from a year earlier.

On Wednesday, the Federal Open Market Committee delivered a 75-basis-point hike for the third consecutive meeting this year and admitted there will be below-trend growth in the medium term. Fed officials on Wednesday cut growth projections, raised their unemployment outlook and repeatedly spoke of the painful slowdown that's needed to curb price pressures that are running at the highest levels since the 1980s.

"Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they're not as painful as failing to restore price stability and having to come back and do it down the road again," said Fed Chairman Jerome Powell Wednesday afternoon following the two-day FOMC meeting.

Goldman Sachs economists have since raised their forecast for the Federal Reserve's pace of interest rate hikes amid Powell's hawkish comments. The investment bank now expects rate hikes of 75 basis points in November, 50 basis points in December, and 25 basis points in February for a peak target range for the federal funds rate of 4.5% to 4.75% compared with 4% to 4.25% before this week's FOMC meeting, economists led by Jan Hatzius said in a research note.

On the bullish side, traders continue to monitor developments in eastern Ukraine after Putin ordered the partial mobilization of reserve troops alongside renewing threats to use Russia's nuclear arsenal against any country that compromises Russian territorial integrity. During a televised address to the nation, Putin claimed "collective West attempts to break up Russia in many different pieces," comparing it to the breakup of the Soviet Union in 1991.

The new phase in the conflict follows an earlier announcement from the leaders of self-proclaimed republics of Donbass, Lugansk, Kherson, and Zaporizhiya to hold referendums on joining Russia as early as Friday, Sept. 23. The referendums are to be concluded by Sept. 27 without the proper oversight of international organizations, mirroring the annexation of Crimea that was quickly approved by the Russian government in 2014.

Referendums in eastern Ukraine could either serve as a precursor to a larger war with Ukraine as it gives Russia the ground to claim Ukraine attacked Russian territory, or a getaway to freeze the conflict by deterring further attacks.

Near 7:45 a.m. EDT, the U.S. Dollar Index, which has an inverse relationship with West Texas Intermediate, continued higher to 110.865 after reaching 111.360 on Wednesday -- the highest trade since May 2002.

WTI futures for November delivery advanced to $84.10 barrel (bbl), up $1.20, while the front-month Brent contract gained to $91.05 bbl. NYMEX ULSD October futures added 7.4 cents to $3.4078 gallon, and the front-month RBOB contract gained 4.97 cents to $2.5362 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges