How the Fed and OPEC+ will influence oil prices this week
Crude oil prices this week will likely react to the upcoming rate decision from the U.S. Federal Reserve and decisions from the OPEC+ group, but don’t discount a renewed geopolitical risk premium coming from Russia, analysts said. Crude oil prices have been a bit range bound during the latter half of January, with an increase in demand from China balancing recessionary concerns in Western economies. West Texas Intermediate, the U.S. benchmark for the price of oil, struggled to hit the $83 per barrel mark after a late week rally fizzled out during the Friday session. Part of the recent rally was supported by resilient, but tepid, growth in the U.S. economy. The world’s largest economy expanded at an annualized rate of 2.9 percent during the fourth quarter, though that was a slowdown from the 3.2 percent expansion during the three-month period ending in September. Consumer spending, meanwhile, declined in December. Jeff Mower, director of oil news for the Americas at S&P Global Commodity Insights, said that puts his focus squarely on the U.S. Federal Reserve, which meets Wednesday to announce its next rate decision. “A 25 basis point hike is likely baked into current oil futures prices, so the market will be looking out for Fed comments,” he said. “For instance, will the Fed hint at a pause in interest rate hikes, as the Bank of Canada did last week? That could prove bullish for crude oil futures.” Oil rich in its own right, Canadian central bank officials said “it’s time to pause and assess” whether previous policy will be enough to bring inflation back to its 2 percent target rate. A similar decision from the U.S. Fed would send a signal that the world’s largest economy will avoid a hard landing, incentivizing demand and driving the price of oil higher. We’ll see if there’s enthusiasm apparent in the remaining fourth-quarter earnings reports. While Halliburton, an oil field services firm, seemed to emphasize shareholder returns over new investments on exploration and production, Baker Hughes said it was expecting an uptick in capital spending from upstream. For Ole Hansen, head of commodities strategy at Saxo Bank in Denmark, tighter restrictions on Russian resources, coupled with a busy maintenance season for U.S. refiners, could create some additional supply-side strains on the back of China’s growing appetite. Those pressures could influence decisions for parties to a technical committee of the Organization of the Petroleum Exporting Countries and their allies, a group known as OPEC+, when they meet Wednesday. Standing firm on current levels at the last meeting on perceptions of a balanced market, Hansen said he expects the group “most likely” will again recommend no change in production quotas. But without more crude oil, there’s a premium on refined petroleum products such as diesel, fuel oil and gasoline. The Council of the European Union on Friday opted to extend “the restrictive measures targeting specific sectors” of the Russian economy for six months and further noose-tightening is set for February. Analysts at London oil broker PVM, meanwhile, said they anticipate further aggression from the Kremlin following Western decisions to send modern tanks to the Ukrainian front. Russia is “clearly” agitated, they said, and could exploit its natural resources for leverage. Ed Longanecker, president of the Texas Independent Producers & Royalty Owners Association, said the market is clearly underestimating the risks associated with Russia. “We could see an escalation of aggression from the Kremlin as their oil and gas revenues decline and ahead of the heavy weapons delivery from the United States and Germany,” he said. “This could include the targeting of energy infrastructure and weaponizing its oil exports that would put further pressure on global supplies.” Few developments, however, warrant a near-term return to $100 crude. Saxo Bank doesn’t see WTI moving much beyond $85 per barrel, PVM said any flirtation with $100 would be short-lived and Bill Weatherburn, a commodities economist at Capital Economics in London, put the current ceiling at $88 per barrel for WTI.