ICE Brent Falls Below $85 on US Dollar Spike, Economic Weakness

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- ULSD futures and the U.S. and international crude benchmarks on the New York Mercantile Exchange and Intercontinental Exchange settled Monday's session with steep losses while the RBOB contract ended flat as investors reassessed demand for dollar-denominated commodities such as oil and metals as the U.S. dollar surged and central banks are seen accelerating interest rate hikes into an already softening global economy.

Surging U.S. dollar, which has an inverse relationship with West Texas Intermediate, coupled with a darkening outlook for the global economy again weighed on commodity and financial markets. Dow Jones Industrials dropped more than 300 points on Monday, extending a steep selloff into the final days of the third quarter, and S&P 500 notched a new low for the year with a 3,666.77 close.

The British pound plummeted another 4% at one point to an all-time low of $1.0382 against the U.S. dollar, with investors seeing a 50% chance of the pound reaching parity the greenback by year's end. The pound moved off an intrasession low on speculation the Bank of England may decide to raise rates more aggressively to tamp down inflation.

Last week, BOE jacked up interest rates for the seventh consecutive time this year, opting for a 50-basis rate hike compared with calls for a 75-basis-point increase.

Concerns over a UK proposal to cut taxes at a time when global inflation is surging and governments across the European Union are increasing their debt burdens pushed the U.S. currency to lofty levels on Monday, spiking to a fresh 20-year high 114.020.

"Such U.S. dollar strength has historically led to some kind of financial/economic crisis," explained Morgan Stanley's Michael Wilson, chief U.S. equity strategist, in a note to investors. "If there was ever a time to be on the lookout for something to break, this would be it."

The Organization for Economic Cooperation and Development on Monday lowered its economic growth projection for the reminder of the year and for 2023, citing the debilitating effects of Russia's war in Ukraine on supply chains and inflation. In "Paying the Price of War" released this morning, OECD downgraded global GDP growth next year to 2.2% from 2.8% seen in the prior outlook, with inflation spreading faster and deeper than previously estimated. Inflationary pressures are now seen broadening beyond food and energy almost everywhere, with businesses throughout the global economy passing through higher costs for energy, transportation, and labor.

"A risk to the Outlook is that reductions in energy supplies from Russia to the European Union prove much more disruptive than assumed in the projections," warned OECD in its September report, adding that "taken together, these shocks could reduce growth in the European economies by over 1.25% in 2023, relative to baseline, and raise inflation by over 1.5%."

Potentially lending support for the oil complex this week is a quickly approaching Hurricane Ian, currently located over the Caribbean Sea, and forecast to strengthen over the next 24 hours to become a major hurricane as it enters the Gulf of Mexico. According to DTN WeatherOps, Ian should reach peak intensity on Wednesday in the eastern Gulf of Mexico with sustained winds reaching 140 mph. If the current forecast is confirmed, Hurricane Ian could become the first hurricane of the 2022 Atlantic hurricane season to make landfall on the U.S. mainland.

At settlement, WTI futures for November delivery declined $2.03 to $76.71 per barrel, while the front-month Brent contract fell below $85 per barrel, down $2.09. NYMEX ULSD October futures took a 10.8-cent nosedive to $3.1291 per gallon, and the front-month RBOB contract edged higher by 0.12 cent to $2.3842 gallon.

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

Liubov Georges