- Crude up around 1% in early Asian trade as dollar, US yields retreat
- Oil advance measured as China resolves to stick to zero-COVID policy
- OPEC+ denies the production cut it announced was politically motivated
The fall in commodities by the dollar and bond yields is likely to continue as the Federal Reserve’s rate hike is not expected for two weeks, while China’s renewed vigilance against COVID creates endemic volatility, in especially in oil.
Crude prices fell last week, for the fifth time in seven weeks, on what analysts described as concerns that U.S. inflation was not receding as the Fed had expected, to the extent where consumer sentiment and retail sales were now affected.
In Monday’s Asian session, trading in New York and London rose about 1% each, recouping some of last week’s 7% loss. The increase came as OPEC+ members expressed support for a planned production cut of around 2 million barrels per day from November, despite increased opposition from the United States.
But oil’s advance was also measured after Chinese President Xi Jinping said the country would stick to its zero COVID policy, despite widespread damage to China’s economy this year. Xi said Beijing would increase spending and stimulus to help support growth. But the trailers didn’t entirely buy that story.
Stephen Innes, managing director of SPI Asset Management, a Singapore-based energy markets advisory firm, said:
“The global financial and economic system is becoming increasingly fragile; for investors, there is ultimately only one natural safe haven: the US dollar.
The , which pits the dollar against the , , , , and , plunged for only the second time in nine sessions on Monday, hovering below 113. 120 in the not too distant future, promising greater headwinds for oil.
Bond yields indexed to the index fell below 4% after hitting a 14-year high of 4.06% last week.
The dollar and yields have been the main beneficiaries of the Fed’s campaign against inflation as the central bank has risen 300 basis points this year and is expected to add another 125 before the end of the year.
The latest inflation reading showed a 0.4% growth in the US consumer price index () last month, double economists’ estimates and four times the August expansion. . The 8.2% growth for September was also not far off from the 9.1% expansion seen in the year through June, which marked a four-decade high.
were flat in September and below expectations as inflation at near 40-year highs weighed on consumer appetite, the economy’s fastest growing sector, adding to the Fed’s puzzle to rein in price growth. Retail sales are a major indicator of consumer spending, accounting for 70% of .
Taken together, the retail sales and CPI numbers suggest the Fed was still far behind in its fight against inflation.
In the wake of stronger than expected inflation last week, US data will focus on the housing market with reports due on , and . House prices fell for the first time in more than a decade in July as rising interest rates hit housing demand, while mortgage applications also fell.
The economic calendar also includes reports on , the , the and .
Regional Fed chairs , , and are also scheduled to make appearances that will be closely watched.
On Saturday, Bullard said last week’s CPI figures showed inflation had turned “pernicious” and left the door open for 75 basis point rate hikes at upcoming Fed meetings in November. and December, but added that it was too early to make that call.
OPEC+ members reiterated their support for the supply cut amid a growing rift between the United States and cartel leader Saudi Arabia. The Biden administration has criticized the production cut, saying it would raise oil prices and support Russia’s war effort against Ukraine by increasing crude revenues in Moscow.
Washington also accused OPEC chief Saudi Arabia of coercing smaller members into complying with the cut.
Several OPEC+ members denied the cut was politically motivated, arguing it was more about stabilizing crude prices. News of the cut had boosted oil prices earlier this month, with assurances of cartel stability supporting a bullish outlook for crude prices.
But the United States had also reacted to the supply cut by releasing 7.7 million barrels of oil from its strategic petroleum reserve (SPR) last week in a bid to drive down crude prices.
The United States has steadily dipped into the SPR this year to help cap gasoline prices at home and reduce the amount of oil revenue Russia collects. The Biden administration has now threatened to release more oil in light of the reduced supply, which could lead to near-term volatility in crude markets.
Disclaimer: Barani Krishnan uses a range of viewpoints outside of his own to bring diversity to his analysis of any market. For neutrality, it sometimes presents opposing views and market variables. He does not hold positions in the commodities and securities he writes about.
