Sep 18, 2023

The price of US oil is holding steady at a 10-month high as investors await the Federal Reserve’s meeting on Wednesday, following a surprise jump in US inflation last month.

usoil chart

USOIL: Daily Chart

Crude oil prices continued to rise last week, with West Texas Intermediate (WTI) crude oil prices increasing by approximately 4.6%. WTI has now risen for three consecutive weeks, reaching its highest level since November 2021. The price of WTI is also on track to post its largest quarterly increase since the first quarter of 2022, when Russia invaded Ukraine.

This week, traders will be closely monitoring interest rate policies set by central banks, including the Federal Reserve. It is anticipated that the market could face a 2 million barrels per day (bpd) deficit in the fourth quarter due to output cuts by Saudi Arabia and Russia.

In light of Chinese refineries ramping up production to capitalise on strong export margins, the OPEC+ group has decided to extend supply cuts until the end of this year. This could result in a drawdown in inventories, making the market susceptible to further price hikes in 2024.

Several central bank meetings are scheduled for this week, with the Federal Reserve’s meeting being the most noteworthy. The two-day conference, which begins on Tuesday, is expected to maintain its hawkish stance despite keeping interest rates on hold. This comes after a rise in inflation, which suggests that interest rates will be higher for a longer period of time in the United States. However, this could put a strain on the economy and reduce oil demand.

In addition, US fuel demand is anticipated to decline in the coming months after the end of the summer driving season. The meeting will also determine the direction of the dollar, which traded near a six-month high on Monday. A stronger dollar is expected to have a negative impact on oil markets.

In addition to the Federal Reserve, the Bank of England, the People’s Bank of China, and the Bank of Japan will also be making rate decisions this week.

The Bank of England (BOE) is expected to raise interest rates by 25 basis points, while the People’s Bank of China (PBOC) and the Bank of Japan (BOJ) are expected to keep rates unchanged. However, the market will be watching closely for any signals from the BOJ regarding future policy, as some members of the Japanese central bank have suggested a possible end to its ultra-loose monetary policy.

The People’s Bank of China (PBOC) is expected to keep its loan prime rates unchanged in an effort to balance supporting the economic recovery and preventing further weakness in the yuan. The PBOC has been cutting rates and other policy tools since last year in an effort to boost growth, which has slowed to its weakest pace in decades. However, the central bank is also concerned about the impact of lower rates on the yuan, which has fallen to its lowest level against the dollar in more than a decade. The PBOC is likely to continue to use other tools, such as targeted lending and bond purchases, to support growth without further weakening the yuan.

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