After a week filled with decisions from major central banks, another week was expected to instil some calm. However, the market to some extent discounted the risk of a possible “shutdown” in the USA and still “digested” the recent Federal Reserve’s statement about keeping interest rates high for a long time. As a result, indices continued their decline, slipping to levels not seen in several months. The dollar gained value, causing the EURUSD rate to temporarily fall below the round barrier of 1.05. Conversely, crude oil began to appreciate again, with the WTI variety in particular surging to become the most expensive since the previous August at $95 per barrel at one point.
Since June, the price of crude oil has risen by approximately 30%. This has triggered fears of inflation. However, potential further growth in this commodity may be limited considering the weakness of the global economy. There’s an increasing likelihood of having to pay $100 per barrel once again.
The ongoing increases in oil prices stem from Saudi Arabia and Russia’s decision to extend cuts to deliveries until the end of the year. This decision was the main reason for the slight decline in global production. Moreover, an increasing number of market participants seem to believe in a soft landing for the US economy, thus avoiding a recession. Last week, the Fed reinforced these expectations by significantly raising its economic growth forecasts. These events have raised concerns that oil supply will be unable to meet demand in the coming months.
These fears are further supported by relatively low stock levels. In the United States, they have fallen by 13% from their peak level in the spring, and, like global stocks, are currently below their five-year average. The recent sharp rise in oil prices has likely accelerated this decline.
These factors might cause the price of the commodity to continue to appreciate in the coming weeks. However, if the US economy (the world’s largest consumer) significantly slows down at the beginning of 2024 (as official estimates suggest), then this factor will cease to support oil pricing. Additionally, Saudi Arabia will likely lift its last mining restrictions at the beginning of the new year. So, two factors hint at a likely reversion to downward pressure on oil prices in roughly three months.
Next week, the Management Board of the National Bank of Poland will decide on interest rates. The market consensus predicts another cut by 25 basis points. Data on PMI will be released from Europe. In the USA, we will receive a monthly employment (NFP) report and the ISM for the industrial and service sectors.
Author: Łukasz Zembik, Oanda TMS Brokers
