Oil tumbles 4% on worries over what Fed will do and OPEC might not

© Reuters.

Investing.com -- As anxiety-inducing as the drama over the U.S. debt ceiling was, it has faded from oil traders’ radar with the tentative deal reached between the White House and rival Republicans, leaving the market to agonize over two other things: Fed action over rates and OPEC’s decision on output.

Crude prices tumbled 4% on Tuesday amid mounting speculation that the Federal Reserve will raise rates for an eleventh time in 16 months when its policy-makers meet on June 14. The biggest signal for the central bank’s action will be in U.S. jobs data for May, due on Friday, that could show higher-than-expected payrolls growth that forces the Fed against pausing on rates.

Ahead of the Fed action will be the June 4 meeting of OPEC+, which groups the 13-nation Saudi-led OPEC, or Organization of the Petroleum Exporting Countries, with 10 other oil producers steered by Russia. Media reports over the past week have led to the notion that a Saudi threat to cut production further will be nullified by Russia’s lack of commitment in keeping to pledged cuts and committing to more reductions.

The Wall Street Journal, in a weekend article, said tensions were rising between Saudi Arabia and Russia as Moscow keeps pumping huge volumes of cheaper crude into the market that is undermining Riyadh’s efforts to bolster energy prices.

“Yes, the U.S. debt drama might have gone off traders’ radar but you have these two major things that are a bugbear for the oil market: What the Fed will achieve and what OPEC+ might not, giving the growing gulf on output between the Saudis and Russians,” said John Kilduff, partner at New York energy hedge fund Again Capital.

Also weighing on crude prices Tuesday was preliminary data indicating that the long Memorial Day weekend heralding the start of the U.S. summer driving season did not see as much fuel demand as thought. According to figures from GasBuddy, an app that tracks gasoline prices, demand for fuel paid for with the GasBuddy fuel card dropped by 1.3% last week.

With about three hours to settlement, New York-traded West Texas Intermediate, or WTI, crude settled down $3.21, or 4.4%, at $69.46 per barrel.

London-traded Brent crude, the global benchmark for oil, settled at $73.54 — down $3.53, or 4.6%, on the day.

Economists are forecasting U.S. non-farm payrolls to have grown by 180,000 in May. They predicted a similar payroll growth in May, against the 253,000 reported by the Labor Department. 

Should the department report another jobs growth number above 200,000, it could influence the Fed to hike rates again in June instead of pausing them. The Fed has identified job and wage growth as the two key contributors of inflation.

​All key metrics in the so-called Personal Consumption Expenditures, or PCE, Index that the Fed closely watches rose higher than expected last month.

From an economic perspective, stronger labor numbers are good for oil as more Americans moving about for work means higher fuel consumption. For gold, stronger economic numbers are usually a negative as less money will flow to safe havens.

But in an environment of Fed rate hikes, job numbers exceeding expectations typically bump up the dollar, weighing across the board on commodities priced in the U.S. currency. In Tuesday’s session, the Dollar Index, which pits the greenback against six other major currencies led by the euro, hit a near one-week high at 104.38. The index is due to close higher for May, for the first time in two months, after a U.S. banking crisis erupted in March. 

The Fed has added 500 basis points, or 5%, to rates since the end of the coronavirus pandemic in March 2022, bringing them to a peak of 525 basis points, or 5.25%. 

Fed Governor Chris Waller suggested last week that the central bank may skip a rate increase on June 14, but still lean towards a July hike depending on inflation data. St. Louis Fed President James Bullard, one of the more aggressive advocates for tighter monetary policy, has suggested at least two more rate hikes this year, totaling 50 basis points, that would bring rates to a peak of 5.75%.

OPEC+, meanwhile, has had limited success over the past two months in trying to push crude prices up with production cuts.

The 23-nation alliance announced a 1.7 million-barrel-per-day cut in April, on top of an October undertaking to shed 2M barrels daily. 

After the April cut was announced, crude prices only went up for two weeks, before turning lower over four weeks, erasing some 15%. The earlier pledge to cut 2M barrels fared worse, resulting in just a few days of gains before prices tumbled to 15-month lows in March.

Last week, Saudi Energy Minister Abdulaziz bin Salman issued a warning to the short sellers in oil, hinting at further cuts. But Russian President Vladimir Putin later said oil prices were approaching “economically justified” levels, indicating that more output reductions might not be required in Moscow’s opinion.