Commodities Week Ahead: Oil Bulls Seek Higher $90s Amid China, Fed Challenge

• Property crisis weighs again on market sentiment in top oil buyer China
• Fed speakers, including Chair Powell, on higher-for-longer rates messaging
• Russian fuel export ban puts floor beneath oil market

After the first weekly loss in four, oil bulls will be raring to push crude oil towards the higher $90s, while top buyer China again faces its recurring bogeyman — an ailing property sector — that’s weighing on its stock market.

Over in the United States, the spotlight will be on speeches by several Federal Reserve policy-makers — most notably Chairman Jerome Powell on Friday — to follow through with the central bank’s decision last week to hold interest rates where they are but add to them as necessary to keep inflation under control.

On the positive side of oil, Russia’s so-called temporary fuel export ban announced last week had put a floor beneath crude prices despite Friday’s start of fall, or autumn, where demand typically tapers after the peak summer driving season.

“Despite the Fed's intent on cooling consumer demand, just as the markets hit the end of US driving season, typically associated with a mini seasonal swoon in gasoline demand and help ease the current oil supply shortage, Russia decided to introduce a temporary ban on gasoline and diesel exports,” Stephen Innes, head of trading and market strategy at SPI Asset Management.

The Russian action will be “compounding scarcity just as the winter diesel rush looms large”, Innes added.

Diesel is the workhorse fuel of the global economy, playing a crucial role in freight, shipping, and aviation. Derivatives of diesel such as heating oil are particularly susceptible to winter price surges. Germany and the north-east of the U.S. are both heavily reliant on fuel for heating homes.

Russian refined fuel sales, particularly diesel, remain a critical part of global oil supplies. In August, Russia exported more than 30 million barrels of diesel and gas-oil — a diesel proxy — by sea, according to oil cargo tracker Kpler.

It is also the world’s second-largest seaborne exporter of diesel after the United States, according to Kpler, a freight data analytics company.

Prior to its conflict with Ukraine, Russia was also the single biggest diesel exporter to the EU. Since the European Union and the United States stopped buying Russian refined fuel in protest over the Ukraine matter, Moscow rerouted its sales to Turkey and countries in North Africa and Latin America.

In Monday’s Asian trading, New York-traded West Texas Intermediate, or WTI crude was up 39 cents, or 0.4%, at $90.42 per barrel.  The U.S. crude benchmark hit a 10-month high of $93.74 before finishing down 0.8% last week.

London-traded Brent crude was at $94.34, up 38 cents, or 0.4%. The global crude benchmark hit a 10-month high of $95.96 before finishing down 0.7% last week.

Notwithstanding last week’s slide, crude prices have been on a tear since early June, with the rally accelerating in the past month after major oil exporters Saudi Arabia and Russia said they would collude to remove a combined 1.3 million barrels from the market each day until the end of the year.

But while the Saudi-Russian cuts and other production reductions would remove a total of about 3.0 million barrels from supply — or about 3% of daily requirement — some who follow the trade warn that inflationary pressure brought on by oil’s 30% rally over just three months could limit the market’s upside.

The dollar hit a six-month high last week after the Fed projected another quarter-percentage point rate increase by the year-end, despite leaving rates unchanged for September itself at a policy meeting on Wednesday.

“We are prepared to raise rates further, if appropriate," Fed Chair Powell told a news conference. "The fact that we decided to maintain the policy rate at this meeting doesn't mean we have decided that we have or have not at this time reached that stance of monetary policy that we are seeking."

Powell said energy-driven inflation, led by the 30% rally in oil prices since June, was one of the Fed’s bigger concerns.

The Fed had raised interest rates 11 times between February 2022 and July 2023, adding a total of 5.25 percentage points to a prior base rate of just 0.25%.

Economists fear that the Fed’s renewed hawkish stance will dampen global growth though many also agree that a lid has to be put on oil prices if the Fed is to achieve its annual inflation target of 2%.

The Chinese real estate market experienced a significant downturn on Monday, following the distressing news from China Evergrande, one of the country's leading property developers.

Evergrande abruptly canceled crucial meetings with its creditors, stating it needed to reassess its financial restructuring strategy. This unexpected development had a ripple effect across the industry, leading to a 6% drop in a Bloomberg Intelligence index tracking construction shares - the most substantial decrease since late December 2022.

Evergrande was not alone in its downturn. China Aoyuan Group Ltd., another significant player in the index, also saw its shares plummet by an unprecedented 72% after resuming trading. This marked a record low for the company and significantly contributed to the overall decline of the index.

The abrupt cancellation of meetings by Evergrande and the record drop in Aoyuan's shares have sent shock waves through the Chinese real estate sector. The industry will keenly watch any further developments from these two major players and their potential impact on the broader market.

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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.