Oil Slumps As Key Inflation Metric Sparks Fresh Slowdown Fears
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(Bloomberg) -- Oil dropped after a key US inflation metric beat estimates, piling onto worries that the US Federal Bank will continue interest rate hikes.
West Texas Intermediate slumped near $87 a barrel on Wednesday as inflation reports compounded forecasts of lower crude demand. Prices paid to US producers rose in September by more than expected, a worrisome sign for investors indicating that more rate hikes are likely ahead to slow down global growth. Later on Wednesday, markets will be looking ahead to minutes from the September Federal Open Market Committee meeting for clues on future hikes.
“The crude demand outlook got no favors today from another US PPI report, downbeat expectations from the German government, and as China’s sticks to its COVID strategy,” said Ed Moya, senior market analyst at Oanda.
Earlier in the session, the Organization of Petroleum Exporting Countries reduced forecasts for the amount of its crude that will be needed in the fourth quarter, making the case for the contentious supply cut announced by the group and its allies last week.
Meanwhile, the US, which will need to help fill the gaps created by OPEC+’s reduction, pared back both its forecasted supply and demand estimates for 2023, according to a US Energy Information Administration report Wednesday. The International Energy Agency will also release its monthly outlooks this week, shedding further light on demand trends into 2023 and the likely impact of sanctions on Russian crude flows.
US Deputy Treasury Secretary Wally Adeyemo said countries are already trying to secure contracts to buy Russian oil before European Union sanctions take effect December 5, Reuters reported.
“One big aspect of the bull case for oil prices is a meaningful loss of Russian supplies, especially as we stare down that December 5th deadline,” said John Kilduff, founding partner at Again Capital. “That’s what’s getting everybody kind of spooked. But to the extent we’re going to see those supplies maintained and stay on the market -- and it looks like we are -- that’s a big bearish element for the market.”
Crude rallied last week after the OPEC+ grouping agreed to cut oil supply. Still, the market’s focus remains on the health of the global economy as aggressive rounds of interest rate increases dampen the outlook for global growth.
As banks adjusted to the shifting outlook, RBC Capital Markets warned that global benchmark Brent could sink into the low $60s in 2023 in the event of a deep recession. It also outlined two more-benign scenarios, while cautioning that given the cross-currents, “nailing an oil price is an exercise in futility.”
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