WTI Wobbles as US Dollar Drops to 2-Week Low on UK Budget U-Turn

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange erased early session gains in afternoon trade Monday. This came despite a sharp decline in the U.S. dollar after a fiscal U-turn in Great Britain, where embattled Prime Minister Liz Truss was forced to scrap her flagship tax cuts along with capping an energy price guarantee for UK households by a year to April 2023 to restore financial credibility and investor confidence in the UK economy.

The British pound rallied, and the Euro jumped 1.24% against the U.S. dollar, while the greenback retreated below the key 112-level after Britain's new Finance Minister Jeremy Hunt erased most of the 45-billion pound "mini-budget" on Monday, sparking a rally in U.S. and UK bond markets. In a statement to the House of Commons on Monday, Hunt stressed, "We are the country that funds our promises and pays our debts. When it is being questioned by the markets, as it has been in recent weeks, this government will take difficult decisions to ensure that there is trust and confidence in our national finances."

As part of the U-turn, the British government said it would keep the energy price guarantee, which caps utility bills for the average household to £2,500 a year, until April 2023 instead of the two-year period.

Some analysts estimate the absence of a government price cap on the average household energy bill in the United Kingdom could spike above £6,000 as early as this spring. In his statement, Hunt said it would be "irresponsible" for the government to continue exposing public finances to unlimited volatility in international gas prices. A price spike of this magnitude would surely translate into a sharp downturn for the UK economy with a consequent hit to fuel consumption.

More signs of demand destruction can be found in China, the world's second-largest economy, where the command-down government has thrown its unconditional support to its zero-COVID policy on Sunday.

During the opening speech of the 20th Communist Party Congress in Beijing, Chinese President Xi Jinping made it clear China would double down on its COVID approach in locking down citizens en masse for even the smallest number of infections. Xi has drawn a clear line of distinction between Beijing and other major economies that have allowed the virus to spread through communities while engaging in mass-vaccination programs.

High-frequency data shows mobility across China's largest cities of Hong Kong and Beijing remains subdued, and domestic air travel is still down 40% against pre-COVID levels. Not surprisingly, China's crude oil imports have consistently declined since reaching a record-high 10.85 million barrels per day (bpd) in 2020, with the pace of imports so far in 2022 averaging just 9.54 million bpd -- a full 1 million bpd below the import rate from the same month a year earlier.

Investors await the quarterly reading for China's Gross Domestic Product that was delayed by a week, with median consensus calling for economic growth of 3.5% during the third quarter, up from a negative 2.6% reading for the prior three months. Despite the expansion, a 3.5% reading details a sluggish rebound for the world's second-largest economy that grew at the average rate of 7.5% prior to the COVID-19 pandemic.

At settlement, NYMEX November WTI futures edged lower $0.15 to $85.46 per barrel (bbl), and ICE December Brent futures finished the session little changed at $91.62 per bbl. NYMEX November ULSD futures advanced 10.50 cents to $4.0852 per gallon, and November RBOB futures declined 3.78 cents to $2.5931 per gallon.

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

Liubov Georges