Crude oil prices struggled to turn bullish at the start of the week, as traders assessed optimism over China’s recovery, future US Federal Reserve’s interest rate hikes and the uncertain global supply.
The United States oil benchmark, the West Texas Intermediate (WTI) was down by 0.3%, trading at $76.78 a barrel, while the global benchmark, the Brent, was down by over 1% to $83.30 a barrel.
In the same vein, gold prices were pinned just above six-week lows at the start of the week, with traders holding off big bets in anticipation of more cues on monetary policy from the minutes of the Federal Reserve’s February meeting.
Spot gold was flat at $1,841.59 an ounce, while gold futures moved little at $1,850.25 an ounce at the start of the week. Both instruments were nursing three straight weeks of losses.
Oil market today; what you should know: The crude market has struggled over the last week on fears of the sticky inflation situation in the U.S., including producer prices rising the most since June, which would prompt the Federal Reserve to continue lifting interest rates for longer than previously expected. Higher rates are expected to weigh heavily on economic growth, and in turn, hurt crude demand this year.
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The US Federal Reserve’s preferred measure of inflation, the Consumer Price Index (CPI), grew last week by 0.50%. This has triggered the commodity’s market to fall back into a bearish state, as traders hold speculative positions, as they draw cues on how the Fed will use its monetary policy tools to reign in on the growing inflationary environment.
The U.S. inflation environment has offset optimism over a recovery in Chinese demand this year, as the second-largest economy in the world ended its severe anti-COVID mobility restrictions. China is forecast to drive crude demand to record highs this year, with the largest importer of the crude set to register almost around half of the demand growth expected this year, according to both the Organization of Petroleum Exporting Countries and its allies (OPEC+) and the International Energy Agency (IEA).
However, any increase in China’s purchases of crude is likely to come from Russia, with recent data suggesting that Russia’s seaborne crude exports jumped 26% last week, with the country exporting 3.6 million barrels a day from its ports in the seven days through Friday.
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It is also important to note that recent economic readings reveal that several facets of China are still struggling in the aftermath of the COVID-19 pandemic. Recent Bloomberg data also showed that while local travel demand surged after the lifting of anti-COVID measures, it was now cooling from a peak hit in late January.
Global Witness reported on Monday that Shell and Vitol, neither of which commented on the story, have sharply increased imports of fuel into Europe from Turkish refineries that have in turn increased their offtake of Russian crude. Russia, the world’s third-largest producer, announced earlier this month that it would cut its March output by 500,000 barrels a day.
This cut in global supply comes on top of the decision by OPEC+ late last year that it would cut oil production targets by 2 million barrels per day until the end of 2023.
Oil prices were also impacted last week by substantially higher-than-expected U.S. inventory builds, while the Biden administration also announced the sale of 26 million barrels of crude from the Strategic Petroleum Reserve. The sale, coupled with a seven-week-long build in U.S. crude inventories, raised the prospect of oversupply in the world’s largest oil consumer.
The Dollar Index (DXY), which measures the strength of the U.S. dollar, hovered near a six-week high against a basket of currencies, which also pressured oil prices. A strong dollar makes crude more expensive for international buyers, which weighs on demand.
Precious metal market today; what you should know: Gold and other metal markets saw limited trade so far this week, with U.S. markets closed for a holiday on Monday. But demand for the dollar persisted in Asian and European trade, keeping a bearish trend on bullion prices.
Hotter-than-expected U.S. inflation readings swiftly cut short the recent rally in gold prices we have seen since the start of the year, as markets drastically reassessed their expectations for interest rate hikes this year.
The current inflationary environment, coupled with signs of strength in the jobs market, gives the Fed enough reasons to keep raising interest rates, which is expected to adverse effect on riskier assets. This is why many analysts believe that the minutes of the Fed’s February meeting, due on Wednesday, are likely to reiterate the central bank’s hawkish stance.
Another factor weighing on the precious metal market is the spike in U.S. Treasury yields. Coupled with the strength of the DXY, these two factors have weighed heavily on non-yielding assets such as gold and other metals. With U.S. yields set to rise even further in tandem with interest rates, the near-term outlook for gold appeared dim, as some Fed officials warned that U.S. interest rates could rise past 6% this year.
Still, gold and other precious metals could benefit from safe-haven buying later in the year, especially if slowing economic growth forces the Fed into reversing its hawkish policy.
Other precious metals were muted at the start of the week. Platinum futures rose 0.2% to $929.40 an ounce, while silver futures fell 0.2% to $21.780 an ounce. Among industrial metals, copper prices fell slightly on Tuesday after rallying 1.5% in the prior session, amid sustained optimism over a recovery in China. High-grade copper futures fell 0.1% to $4.1730 a pound.
What to expect ahead of the week: Focus this week is squarely on the minutes of the Federal Reserve’s February meeting, due on Wednesday, as well as a slew of Fed speakers this week. The minutes are largely expected to reiterate the central bank’s hawkish outlook.
Fed officials also recently warned that U.S. interest rates are likely to rise more than expected this year, as inflation readings for January showed that price pressures remained sticky.
Higher rates are expected to weigh heavily on economic growth, and in turn, hurt crude demand this year. A reading on the Personal Consumption Expenditures price index, another one of the Fed’s preferred inflation gauges, is also due this week and is expected to show few signs of slowing inflation in January.