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    Oil dips on rising US inventories, pressure on OPEC+ and prospect of tighter monetary policies

Summary

Oil prices are falling today on a bearish cocktail of crude storage builds in the US, pressure on OPEC+ to increase production further, a new Covid-19 breakout in China, and the possibility of tighter monetary policies ahead.

by: Louise Dickson

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Oil dips on rising US inventories, pressure on OPEC+ and prospect of tighter monetary policies

Oil prices have taken a bearish pivot as the market appreciates a brewing standoff between oil-consumers and OPEC+, a forecasted build in US crude storage, and the resurgence of Covid-19 cases in China.

The bearish cocktail of storage builds and pressure on OPEC+ to raise production has slashed value from both Brent and WTI barrels, despite the overall fundamental tightness in balances - which is bullish for the very-near term.

Bearish signals from Cushing and beyond, stoked by the API report will weigh on oil prices until the official EIA report comes later today. But as storage remains at record low levels in the US, any immediate negative sentiment could be an overstretched reaction.   

The main pressure on oil prices comes from the perceived uncertainty surrounding the OPEC+ meeting on Thursday.

The external flex on OPEC+ from oil-producing countries is mounting, especially from the US, and has led to speculation that if the alliance itself doesn’t add supply to the market, the US, possibly in coordination with other states, will be forced to quell the oil price rally by releasing crude from strategic reserves.

In the past week, the US has sharpened its rhetoric on pleading with the alliance to release more supply on the market than its planned 400,000 bpd increase for December 2021.

China is also blasting out bearish signals as a new local breakout of Covid-19 has sent case numbers to a 3-month high, which given China’s zero-tolerance policy, will prompt restrictions that will weigh on oil consumption.

This demand-side development would put a dent in China’s oil consumption, in particular in the domestic aviation sector. When China reacted to a Covid-19 case resurgence in the summer of 2021, domestic aviation fuel demand fell by nearly 60% in just a matter of weeks as domestic flights were grounded.

The final day of the US Fed meeting today could also take a toll on oil prices. The current weakness of the US dollar on the back of unprecedented stimulus and infrastructure bills on top of Fed bond-buying programs has been adding fuel to oil prices.

Thus, any hint towards lower interest rates sooner than the consensus of late 2022 or early 2023 would put downward pressure on oil prices.

Brent prices have now more than doubled since November 2020 when Moderna and Pfizer announced successful vaccine trials, but breakouts in Russia, China, and elsewhere still pose a salient downside risk to oil demand and the integrity of $85 Brent.

The grueling ascent in oil indices has not only been propelled by vaccines and general improvement in Covid-19 risks, but government policies that were rolled out to support economies in lockdown and spur growth.

But now policymakers are starting to consider raising record-low interest rates to respond to high inflationary trends.

In the US in particular, the monetary arsenal was dispersed with gusto, and between massive stimulus programs, promised infrastructure spending, and continued bond-buying programs, the dollar has been weakening and fueling higher oil prices.

Today’s Fed meeting and the expected rollback of monthly bond purchases is a pre-cursor to an eventual move to tighten monetary policy and a stronger dollar, which will put downward pressure on oil prices.

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