Oil Wavers as Economic Headwinds Counter Supply Risks

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Crude and gasoline futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange slipped early Monday as investors balanced concerns over the health of the global economy next year, clouded by inflation headwinds in the United States and Eurozone, against falling supplies from OPEC+ nations as Russia threatens to cut production in response to the G7's price cap on its oil.

Russian President Vladimir Putin threatened to cut the country's oil production "as much as needed" in response to a G7 plan to deny insurance and other maritime services to Russian oil shipments unless the oil is being sold at or below a $60-barrel (bbl) ceiling that took effect last week. Putin's comments were his first indication of the Kremlin's response to EU sanctions and the associated oil price cap.

Russian crude oil exports in early December remained as high as at any other point this year, according to private shipping data, with any drop due to the sanctions expected to be visible only later in the first quarter 2023. Even then, analysts forecast Russian oil production unlikely to decline by more than 1 million barrels per day (bpd) compared to earlier calls for 3 million bpd.

Putin acknowledged that for now Russia is relatively insulated from the price cap because "the ceiling they have suggested is in line with the prices we are selling it today."

Russian crude benchmark Urals is currently trading $27 bbl below the global benchmark Brent that fell Monday morning to $75.30 bbl.

Oil futures traded modestly higher overnight after a private survey found OPEC+ production fell by 700,000 bpd in November -- the sharpest drop since April 2020.

In financial markets, the U.S. dollar was mostly unchanged against a basket of global currencies and equity futures on Wall Street rose slightly Monday morning, with investors squarely focusing on the U.S. Consumer Price Index report due out Tuesday morning and the Federal Reserve meeting that concludes with a final rate decision of the year on Wednesday.

Headline and core CPI inflation rates are expected to have cooled off in November, but services prices may deliver an upside surprise for the markets. The Producer Price Index, a measure of wholesale inflation, rose 0.3% in November, according to the Bureau of Labor Statistics, 0.l% higher than economists had forecasted. The advance was once again driven by services prices that increased 0.4% from the previous month.

Most investors still bet the Federal Open Market Committee will lift the federal funds rate by 0.5% on Wednesday (12/14) after four consecutive 0.75% rate hikes. The move would bring the federal funds rate to a target range of 4.25% and 4.5%.

The FOMC's median projection is expected to show the policy benchmark peaking at 4.9% in 2023 -- reflecting a 4.75% to 5% target range for the federal funds rate compared to 4.6% seen in September. A Bloomberg survey showed most economists expect the central bank would keep rates at their peak throughout 2023. The higher terminal rate would deliver a hawkish surprise to investors, who currently bet that rates will be cut by 0.5% in the second half of next year.

FOMC will release its policy statement along with economic projections at 2 p.m. EST Wednesday that will be followed by a news conference by Federal Reserve Chairman Jerome Powell 30 minutes later.

Near 7:30 a.m. EST, January West Texas Intermediate futures slipped $0.30 to $70.75 bbl, February Brent futures on ICE falling $0.50 to $75.58 bbl. NYMEX January RBOB futures decline $0.0213 to $2.0348 gallon and January ULSD futures gained $0.0170 to $2.8107 gallon.

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

Liubov Georges