Oil bulls wallowed in another day of losses to end last week, which represented the last trading day for the third quarter of 2022, after a surprisingly higher U.S. inflation print for August reinforced expectations for more super-sized Federal Reserve rate hikes. Gold, on the other hand, saw its price perked up for the fourth day in a row on Friday, hitting a one-week high after a largely miserable September for longs in the game.
U.S. crudes saw a strong run-up between Tuesday and Wednesday, however, held the market in good stead for a small weekly gain in five, despite major losses for September and the third quarter, which represents the first quarterly loss for oil in two years.
Price Analysis
The United States benchmark, the West Texas Intermediate (WTI) settled at $79.49 per barrel, down 2.1% on Friday. For the week, WTI was up almost 1%. For the month, however, the U.S. crude benchmark was down 12.5%. For the third quarter, it was down 24%.
The global benchmark, the London-traded Brent, traded at $85.14 per barrel, down 2.3% for the day. Unlike WTI, Brent was also lower on the week, losing 1.2% for a fifth straight weekly decline. For the month, Brent was down 11%, and for the quarter, it lost some 26%.
Although the yellow metal seems to be entering some sort of bull phase, for the month though it ended trading at $1,672.00 per ounce, up 0.2% on Friday. The yellow metal, despite Friday’s bullish price action, closed negative for the month, down 3%, while for the quarter, it tumbled 7.5% for its worst quarter since the first quarter of 2021.
What You Should Know
- Although both benchmarks have posted negative Q3 performance, we could be on the precipice of another bull run as oil bulls are now looking toward the next week’s meeting of the Organization of Petroleum Exporting Countries and its allies, a cartel, commonly known as the OPEC+, with an alliance of 23 oil producers and exporters. The 13-member Saudi-led Organization of the Petroleum Exporting Countries and its 10 Russia-steered allies are to meet on October 5 to finalize output quotas for November.
- Friday’s pressure on oil and other risk assets came after data showed the Fed’s preferred inflation indicator, the Personal Consumption Expenditures (PCE) Index, grew 6.2% during the year to August, versus 6.3% in the 12 months to July. Economists polled by US media had expected the so-called PCE Index to expand by just 6% during the year to August.
- On a monthly basis, the PCE Index actually grew more in August than in July, rising 0.3% from a previous decline of 0.1%. Economists had expected a monthly growth of just 0.2% in August. The readings showed the Fed’s battle against inflation had barely eased despite sharp drops in gasoline prices over the past three months. The Fed has warned of late that it will not let up on rate hikes it had embarked on since March to fight inflation.
- U.S. inflation remains “very high” and could continue to shock as the Federal Reserve works on subduing the worst price pressures in four decades for Americans, Fed Vice Chair Lael Brainard said Friday. She further added, “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target.”
- To fight inflation, the Fed has raised interest rates by 300 points this year, from an original base of just 25 points in February. The central bank’s chairman Jerome Powell said last week that U.S. rate hikes will have some way to go before the Fed considers a pause or reduction, with the likelihood of another 125 basis points being added before the end of the year.
- Also weighing on oil prices is Russia, pushing for the OPEC+ to cut output by a substantial 1.0 million barrels per day or around that, according to sources by Investing.com. But Moscow is unlikely to contribute much to any production cut by the alliance due to the ongoing impact on its energy exports from Western sanctions imposed over its invasion of Ukraine.
- The Russians have also been undercutting others in OPEC+ by selling their crude at heavily discounted rates to buyers like China and India. A production cut by OPEC+ that Moscow does not fully participate in will benefit Russia more than the rest of the alliance as it might continue to steal customers from the others.
- Also, OPEC+ has not met its monthly production targets for months, so any quotas announced by the group might be virtually meaningless. Case in point: A Reuters survey published Friday found OPEC+ raised its September crude oil production to the highest level since 2020, yet failed to meet its September quota. Thus, on the way down too, the alliance might fall short of its target.
- Like oil, it is the same story for the yellow metal as Gold’s four-day rebound reached a climax Friday when the spot price hit a one-week high of $1,675.35 after data showed another surprisingly higher U.S. inflation print for August that reinforced expectations for more super-sized Federal Reserve rate hikes. Gold is often seen as a store of value and a hedge against inflation and Fed rate increases.
What they are saying
On the oil market, Ed Moya, an analyst at online trading platform OANDA, stated, “The Fed pivot is coming before the end of the year because severe economic weakness is around the corner as aggressive tightening will remain in place. The crude demand outlook is not getting any favors from economic data or corporate reports. OPEC+ will have an easy job next week, but oil prices won’t catch a bid until energy traders are confident an aggressive reduction of output at around 1 million BPD will be delivered. Brent crude is poised to consolidate below the $90 level.”
On Gold, Moya explained, “Inflation expectations matter and … things are starting to look better for gold.”
Despite Moya’s optimism about gold going into October, some analysts were less impressed with bullion’s outlook. Reuters’ “BreakingViews” analyst, Robert Cyran, said in a commentary on Friday, “Despite the price recently hitting a two-year high, it has been an inferior hedge, and the opportunity costs have been high. An investment 10 years ago in the S&P 500 Index would have tripled.”
