Oil Bulls Count On OPEC Power To Subdue U.S. Dollar Blues

  • Commodities Analysis
  • Editor's Pick
  • Crude starts Q4 up 3% on bets of a major OPEC+ cut
  • Cut would follow September’s nominal 100,000 bpd reduction
  • Waving a red flag to oil bulls, the US dollar goes into rally mode

Oil bulls are counting on this week’s meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) to flip a four-month-long plunge in crude prices. Nothing wrong in that, only there’s something that could still slow the market’s advance: A resurgent US dollar .

As trading for October and the fourth quarter began earnestly Monday, crude prices rose as much as 3% by noon in Singapore (04:00 GMT) in anticipation of OPEC+ announcing a production cut of as much as one million barrels per day (bpd) for November onwards at its Wednesday meeting.

If OPEC+ orders a production cut, it would come just after a 100,000 bpd cut last month viewed as largely nominal. It will also be only a few months after OPEC+ brought crude production back to pre-COVID levels, following two years of extreme oil market headwinds from the pandemic.

Responding to the speculation of an output cut, New York-traded West Texas Intermediate for November delivery traded at $81.70 a barrel, up $2.21, or 2.8%, on the day. The US crude benchmark ended September down 11.2%. For the third quarter, it was down 24%.

Brent , the London-traded global benchmark for oil, was at $87.41 on its December contract, up $2.27, or 2.7%, on the day. Brent finished last month down 11% and finished the quarter off 22%.

Waving a red flag to oil bulls, the dollar, which had been down the past three sessions, was in rally mode too on Monday.

Though nowhere near the 20-year highs it was at a week ago, there appeared to be nothing to prevent the Dollar Index from reprising the momentum that had been the catalyst for the weakness of almost the entire commodities complex for the third quarter.

Pitting the greenback against the euro , yen , pound , Canadian dollar , Swedish krona and Swiss franc , the Dollar Index breached 112.32 at Monday’s session high—still an appreciable way from its September peak of 114.75.

But with the non-stop chatter of Federal Reserve officials determined to use rate hikes to bust inflation , it might just be a matter of time before the dollar starts ramping higher again to pose new risks to oil and other commodities. Adding to that would be the threat of a recession if the Fed keeps pushing jumbo-sized rate hikes on markets.

Currency strategist James Stanley said in a blog issued Sunday:

“There’s the rate dynamic that keeps matters bullish for the USD; but now there’s also the risk aversion aspect. And investors have the opportunity to not only track one of the highest yielding currencies in the world – but also one of the ‘safest’ currencies as we are in the peculiar situation where the flight-to-quality also correlates with the highest yielder.”

“So, while I hope that we see an element of capitulation in Q4, for the sake of the global economy, I simply do not see evidence of such and thusly am keeping the technical forecast to bullish.”

Investors will be looking closely at Friday’s US jobs report to assess how much impact the Federal Reserve’s rate hikes are having on the economy. Several Fed officials are also due to speak during the week, as markets try to gauge their appetite for another 75 basis point rate hike at the bank’s November meeting. US equity markets look set to remain volatile after closing the books on their third straight quarterly decline on Friday.

Friday’s jobs report for September will show whether the Fed’s aggressive series of rate hikes is having an impact on the labor market. Economists are expecting the US economy to have created 250,000 jobs last month, with the unemployment rate holding steady at 3.7% and wage growth staying elevated.

Recent jobs data have indicated that the labor market remains robust despite a series of jumbo-sized rate hikes.

Another strong jobs report could underline the case for even more hawkishness from the Fed, potentially roiling markets already hard hit by worries over how high rates may have to rise as the central bank battles the worst inflation in forty years.

On the other hand, indications that the labor market is slowing could add to fears that aggressive Fed tightening risks tipping the economy into a recession.

Several Fed policymakers are due to make appearances during the week, including New York Fed President John Williams , Atlanta Fed President Raphael Bostic , Chicago Fed President Charles Evans , San Francisco Fed President Mary Daly , and Cleveland Fed President Loretta Mester .

Investors are assessing the likelihood of another 75 basis point rate hike at the Fed’s November meeting. Recent comments by Fed officials have indicated that they want to see clear evidence of slowing inflation before they let up on the policy tightening.

Markets are entering the final leg of 2022 after closing out a tumultuous third quarter on Friday, roiled by stubbornly high inflation, rising interest rates, and recession fears. Wall Street has posted three quarterly declines in a row, the longest losing streak for the S&P 500 and the Nasdaq since 2008, and the Dow 's longest quarterly slump in seven years.

The Fed’s policy rate is now in the 3.00%-3.25% range, a full 3 percentage points higher than where it was at the start of 2022, and officials have penciled in more rate rises later this year and in 2023.

The economic calendar also includes data on August job openings along with surveys of manufacturing and service sector activity from the Institute for Supply Management, which are expected to remain solid.

Oil bulls have tuned out all these negatives and are betting instead on demand in the fourth quarter, on projections that top crude buyer China will do fewer or no COVID lockdowns and that the Biden administration will stop draining the US Strategic Petroleum Reserve from November to keep gasoline prices suppressed.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

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