Oil Eases as USD Regains Ground Ahead of Midterms

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 extended losses into early morning Tuesday, pressured by a stronger U.S. dollar as investors positioned ahead of the midterm elections in the United States that could see Republicans taking control of one or both chambers of Congress, increasing the risk for policy gridlock over the next two years.

The likelihood of a Republican sweep in the midterm elections and a divided U.S. government over the second half of President Joe Biden's term in office helped the U.S. Dollar Index gain some ground Tuesday, while pressuring the front-month WTI contract. The U.S. dollar jumped 0.26% against the basket of foreign currencies to above 110.2, while WTI for December delivery, which has an inverse relationship to the greenback, slipped $0.68 to trade just above $91 barrel (bbl). Polls suggest Republicans will win a majority in the House where all 435 seats, 220 of which are currently held by Democratic lawmakers, are up for grabs on Tuesday, and pick up as many as three seats in the Senate, ensuring Republican control over both chambers of Congress.

Democrats losing control of Congress will almost certainly limit the room for proactive policymaking and lead to a muted response to the headwinds facing the U.S. economy. Bloomberg economists see a 100% probability for the U.S. to enter a recession over the next 12 months as the Federal Reserve is aggressively raising interest rates with inflation running at a four-decade high. While an economic downturn in 2023 is almost certain, the odds of a recession hitting sooner have also gone up. The model forecasts the likelihood of a recession within 11 months at 73%, up from 30%, and the 10-month probability rose to 25% from 0%.

Against this backdrop, investors will get an update on a key inflation metric this week, with the Bureau of Labor Statistics' Consumer Price Index for October scheduled for release on Thursday morning. Consensus calls for headline inflation to moderate to 7.9% from a year earlier, down from September's year-over-year increase of 8.2%. Core CPI, which excludes the volatile food and energy categories, is projected to come in at 6.5%, little changed from last month's 6.6%.

The U.S. economy added 261,000 jobs in October -- another robust employment figure that strengthened the case for yet another large interest rate increase at the Federal Open Market Committee meeting on Dec. 13 and 14. The central bank delivered a fourth consecutive interest rate hike of 75 basis points last week while hinting at a slower pace of hiking but a higher final rate.

Further pressuring the oil complex, China's health officials on Monday rebuffed the reports suggesting Beijing is prepared to loosen COVID-19 restrictions next year, dashing hopes for stronger demand growth in Asia.

The country reported 5,436 new cases on Sunday, up 27% from the day before and the most since May 2, when Shanghai was in the midst of its months-long lockdown.

"Previous practices have proved that our prevention and control plans and a series of strategic measures are completely correct," Hu Xiang, an official at the National Health Commission's Disease Prevention and Control Bureau, told reporters. "The policies are also the most economical and effective."

While this containment strategy has saved lives, it has also clouded China's outlook, exacerbated supply-chain disruptions, and kept millions under lockdown for months.

Speculations have sprung up in recent days that China will soon abandon its zero-COVID policy. The latest trigger came in the form of a transcript attributed to former state official Zeng Guang, who said at an investment conference organized by CITI Group that Beijing is prepared to make substantial changes to its zero-COVID policy next year.

China is said to first scrap a "circuit breaker" system that suspends international flights which brought infected passengers to the country and ease quarantine restrictions for international travelers.

Near 8:00 a.m. EST, ICE January Brent fell $0.45/bbl to $97.47/bbl. NYMEX December RBOB futures declined $0.0140 to $2.6391 per gallon, and December ULSD futures advanced $0.0294 to $3.8105 per gallon.

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

Liubov Georges