Oil Prices Weighed by the Fed’s Hawkishness After a 3-Day Rally

Demand Growth

In this week's monthly oil report, the Organization of the Petroleum Exporting Countries (OPEC), kept its 2023 world oil demand growth unchanged at 2.25 million barrels/day. This constitutes a notable pivot from a series of downgrades, supported by "expected geopolitical improvements and the containment of COVID-19 in China". ^[1]

The report also showed that the OPEC's production fell by 744,000 barrels/day in November, to 28.83 million barrels/day, as the massive output cut plan implemented along with other allies (OPEC+), takes holds.

A day later, the International Energy Agency (IEA) went a step further and raised the oil demand growth forecast by 100,000 barrels/day. As such, demand is now expected to reach 101.6 million barrels/day, from the 2.3 million projected for 2022. ^[2]

Hawkish Fed

The US Federal Reserve moderated the pace of its monetary tightening on Wednesday, with an 0.5% rate increase, climbing down from a series of jumbo 750 basis points hike. However, it maintained the guidance for "ongoing increases" and official raised their terminal rate projection to a median of 5.1%, which suggests more to tightening to the tune of 75 basis points. ^[3]

Chair Powell made sure to hammer the hawkish message home, as he stressed that the bank has "some ways to go" on the rates front, called for a restrictive policy stance for "some time" and essentially ruled out any rate cuts next year.

Recession Fears

Furthermore, the US Fed raised its inflation forecasts and does not expect the Core PCE to drop below 2% target, until at least the end of 2025. It also lowered its GDP forecast to an anemic growth of 0.5% in 2023, from +1.2% previously expected.

A day later, European Central Bank out-hawked its US counterpart, signaling more tightening, expecting rates to rise "significantly at a steady pace". Similarly, to the Fed, it lowered its GDP growth projection to 0.5% in 2023 (from 0.9% previously), while the European economy may actually contract during the current quarter and Q1 2023. ^[4]

We also got a series of poor data from the United States yesterday, as retail sales posted the biggest decline of the year in November, while industrial production also dropped.

USOIL Outlook

The commodity started the week with a three-day relief rally from its 2022 lows, fueled by improved demand projections, the soft US CPI report and the fact that the Keystone pipeline which connects US and Canada had remained closed for a few days.

The Fed's aggressive stance though, along with renewed worries over economic activity, weigh on prices. Meanwhile the Covid-19 situation in China has become very messy, after the recent easing of the lockdown measures.

Moreover, TC Energy reopened part of the Keystone pipeline ^[5], while US crude oil stockpiles surprised on the upside with a rise of more than 10 million barrels from the previous week.

USOil rejected the critical 77.60-79.70 region and slides since yesterday. This keeps it exposed to the 2022 lows (70.068), but sustained weakness below these levels continues to have a high degree of difficulty.

On the other hand, USOil has the ability to take another crack at 77.60-79.70, although daily closes above the EMA200 that would open the door to 84.70 may require a new ccatalyst.