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Oil books 3rd weekly gain; market awaits Fed verdict on inflation

Published 09/15/2023, 09:16 AM
Updated 09/15/2023, 03:21 PM
© Reuters.

Investing.com — Oil booked a third weekly gain, with U.S. crude trading above $90 per barrel the first time in 10 months on better-than-expected data from top importer China, as markets awaited the Federal Reserve’s verdict on inflation in the United States.

The Fed’s policy-makers aren’t expected to raise interest rates when they meet on Sept. 20, after 11 hikes that added 5.25 percentage points to a base rate of just 0.25% in March 2020. But what Chairman Jerome Powell says at his news conference on Wednesday will be closely watched for clues on Fed think for the rest of the year, especially with two more policy meetings on the schedule for November and December.

For context, the headline reading for the U.S. Consumer Price Index rose a second month in a row in August, reaching a year-on-year growth of 3.7% from 3.2% in July. High pump prices of gasoline accounted for more than half of the increase — a phenomenon that could put renewed pressure on inflation fighters at the Fed. The central bank’s desired inflation remains at a max 2% per year and it has vowed to get there with more rate hikes if necessary.

“The Fed are highly unlikely to hike next week but are also unlikely to take the last hike out of their dot plot for later in the year,” economist Adam Button said in a post on the ForexLive forum.

New York-traded West Texas Intermediate, or WTI, crude settled at $90.77, up 61 cents, or 0.7%, on the day. The U.S. crude benchmark rose to $91.15 earlier in the session, its highest since November. For the week, WTI finished up 3.7%, adding to prior back-to-back weekly gains of 2.3% and 7.2%.

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London-traded Brent settled at $93.93, up 23 cents, or 0.3%. The global crude benchmark hit a 10-month high of $94.62 earlier. For the week, Brent was up 3.6%, adding to prior back-to-back weekly gains of 2.4% and 4.8%.

Crude prices have been on a tear since early June, with the rally accelerating in the past three weeks after major oil exporters Saudi Arabia and Russia colluded to remove a combined 1.3 million barrels from the market each day until the end of the year. 

U.S. fuel demand/inflation picture murkier than thought 

Notwithstanding the July-August rise in inflation, the surge in crude prices haven’t made their commensurate impact on U.S. fuel prices. Gasoline at pumps across America averaged at $3.866 per gallon this week, up just 5.8 cents from a week ago. Lower demand for fuel was the reason, especially after the Sept. 4 Labor Day holiday that marked the close of the peak summer driving period and the approach of the fall season, which begins Sept. 23. 

“The slide in people fueling up is typical, with schools back in session, the days getting shorter, and the weather less pleasant,” said Andrew Gross spokesperson at the American Automobile Association, which publishes weekly fuel price data. ““Oil costs are putting upward pressure on pump prices, but the rise is tempered by much lower demand.” 

The Fed, of course, is watching all these closely, including the global supply-demand picture for energy and how they could hit home.

China has two stories as well to oil demand, economic recovery

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In China’s case as well, its oil demand and economic data tell different stories.

China's industrial output grew 4.5% in August from a year earlier, versus a forecast 3.9%, and retail sales expanded by 4.6%, beating an expected 3% increase. Also, Chinese crude imports rose nearly 31% last month while refinery throughput hit a record 64.69 million metric tons as a function of summer travels. 

But these short-term upswings only mask China’s structural challenges, from worsening demographics to slowing productivity growth and an economy overly saturated on its property market. If lucky, China’s Gross Domestic Product, or GDP, growth will exceed 5% this year versus the record expansion of 11.8% in 2020, say economists. 

Essentially, what happens with the Chinese economy down the road is far more important than any energy, metals or grains rally of today. That’s simply because continuously underperforming Chinese GDP will come back to rear-end any commodities rally.

(Peter Nurse and Ambar Warrick contributed to this item)

Latest comments

I wonder how much greater of a chance for recession to occur if WTI hits $100 and stays elevated for an extended period of time.
Quite great, I'd say.
Arabia saudita is important or what happened … war with arabia near time
I am wondering if anyone remembers the Keystone xl pipeline from Canada to Gulf Coast. Who shut it down? When that pipeline was operational, oil price was below $50. After shutdown, oil price has stayed above $70.
@Rajesh: You don't know what you at talking about. The Keystone pipeline was not shut down. Get your facts straight, you are embarrassing yourself.
 Thanks, Brad. Essentially, I glossed over that so-called shutdown in my reply to Rajesh. The fact of the matter is that on June 9, 2021, the Keystone XL project was abandoned by its developer.
 is there some reason you aren't pointing out that Biden blocked the project with the stroke of his pen as soon as he was sworn in?
The US rate hike or pause can affect oil equities only and in small way, and it cannot affect the oil price. The latter is driven by global market deficit, the Fed can do nothing about this.
Yes you are right, it can not affect oil prices directly by supply side, but it affects demand side as the economy is shutting down due to higher interest rates that chokes eonomic activity while inflation suppresses consumption and that is why fed interest rate decision makes a difference in oil markets
 Thanks for your perspective, mate. Have a great weekend!
you too
Chinese optimism has nothing to do with supply and demand. This excuse has been milked to death over 3 dozen times by the oil traitors and nothing has happened.
The oil price is already positive. The uptrend is unstoppable at this point.
Crude oil to the moon 🚀 🚀 🚀
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