Crude Contracts Continue Retreat on Souring Economy, Strategic Petroleum Reserve

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled lower for a second session Tuesday, with losses accelerating post-settlement. The losses came as the International Monetary Fund warns of a slowing global economy while the Biden administration expressed their readiness to continue tapping emergency reserves to "fight high petroleum prices."

Incensed by an Oct. 5 agreement by the Organization of the Petroleum Exporting Countries and Russian-led allied producers to cut their output 2 million barrels per day (bpd) beginning in November, the Biden administration said it is considering multiple responses to cap oil prices, including releasing more oil from the Strategic Petroleum Reserve.

On Friday, Oct. 7, the Department of Energy announced the winning bids for 10.15 million barrels (bbl) of SPR crude to be disbursed in November, having extended SPR sales in late September after they were set to end by Oct. 31. The Biden administration in March directed the sale of 1 million bpd of SPR crude for 180 days to offset lost supply from Russia amid sanctions levied against Moscow for President Vladimir Putin's invasion of Ukraine on Feb. 24.

The Biden administration said OPEC+'s decision to cut oil production last week meant Saudi Arabia, the de facto leader of OPEC, had sided with Russia and Putin's war in Ukraine. Riyadh dismissed those allegations, indicating the production cut was made to avoid a crash in global oil prices, while accusing Washington of playing politics ahead of midterm elections in November.

Multiple reports since last week's OPEC+ decision relay a determination by the White House to punish Saudi Arabia, including halting sales of military ware to the kingdom while it considers how it will recalibrate its relationship with Riyadh. The Saudis also have grievances with the Biden administration, including its determination to return to a nuclear agreement with Iran that would end sanctions on Tehran's oil exports.

Against the intensifying brouhaha, the IMF cut its 2023 outlook for the global economy 0.2% from July to 2.7% while maintaining its projection for annual growth of 3.2% this year.

"The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next," said Pierre-Olivier Gourinchas, IMF economic counsellor and director of research, in a blog following comments earlier Tuesday. "Overall, this year's shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession."

IMF expects the Federal Reserve's tightening monetary policy to slow U.S. economic growth in 2023 to 1%, while a weakening property sector and lockdowns under Beijing's zero-COVID policy caps China's economic growth at 4.4% next year. The growing energy crisis in Europe caused by Putin's war in Ukraine limits Euro area economic growth to 0.5% in 2023, with Germany and Italy forecast to fall into recession.

"Almost everywhere, rapidly rising prices, especially of food and energy, are causing serious hardships for households, particularly for the poor," said Gourinchas.

Global inflation is expected to peak this year at 9.5% and decelerate to 4.1% by 2024.

"Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability," said Gourinchas. "Central banks are now laser-focused on restoring price stability, and the pace of tightening has accelerated sharply."

The research director noted the risk of policy "miscalibration" that could allow inflation to become more entrenched or cause a severe recession. He also pointed to a global energy crisis, especially in Europe, adding this "is not a transitory shock."

"The geopolitical realignment of energy supplies in the wake of the war is broad and permanent. Winter 2022 will be challenging, but winter 2023 will likely be worse," said Gourinchas, adding "Price signals will be essential to curb energy demand and stimulate supply."

He said governments should eschew enacting price controls, untargeted subsidies, or export bans as they are "fiscally costly and lead to excess demand, undersupply, misallocation, and rationing. They rarely work."

NYMEX November West Texas Intermediate futures settled down $1.78 at $89.35 per bbl, and ICE December Brent futures fell $1.90 to $94.29 per bbl while oil products ended with modest gains. NYMEX November ULSD futures settled 1.61 cents higher at $3.9308 gallon, and November RBOB futures edged up 0.45 cent at $2.6273 per gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne