Oil up in Choppy, Pre-Fed Trade; U.S. Crude Still Under $100

By Barani Krishnan

Investing.com - Oil climbed in volatile trade ahead of this week’s decision on rates by the Federal Reserve, though most-actively traded contracts in both U.S. crude and global benchmark Brent remained below or just around the key $100 per barrel level on mixed ideas about demand.

“Oil traders have their sights set on many of the same events this week, as they try to better grasp the economic threat facing the US and other countries around the world,” said Craig Erlam, analyst at online trading platform OANDA. “A recession is the primary downside risk for crude prices and it's all that's keeping them below $100 in the short term.”

New York-traded West Texas Intermediate, or WTI, crude for September delivery settled up $2, or 2.1%, at $96.70 per barrel. WTI fell almost 3% last week, extending to nearly 13% its loss over the past three weeks. In the previous week, it sank to $90.58, its lowest since Feb. 25.

London-traded Brent for October delivery settled up $1.81, or 1.8%, at $100.19, extending last week’s 2.2%. Prior to that, the global crude benchmark was down five weeks in a row, losing about 17%. Like WTI, Brent also hit a near five-month low, at $95.42, during that stretch.

Volatility could be the game for oil and most risk assets this week as the Fed prepares to hit markets with its fourth rate hike of the year. Traders will also attempt to read the tea leaves on the economy from central bank chairman Jerome Powell’s news conference scheduled after the rates decision by the Federal Open Market Committee on Wednesday.

Forecasters’ overwhelming consensus — almost 80% — is that there’ll be another 75-basis point hike for July, just like in June. If so, that will bring rates to a range of 2.25-2.50% by the end of this month, from the 0-0.25% they stood at in February before the increases.

With three more rate decisions left for this year, Fed officials are indicating a high-end of 3.5% or even 4% for rates by the year-end. 

But money market traders are also pricing in rate cuts by 2023 if economic fallout from the Fed hikes turns out to be too great. This comes after bets rose to as high as 70% last week for a record 100-basis point hike in July.

That the market is even contemplating rate cuts by next year tells economists that the risk of a Fed-induced recession between now and then is reasonably high. 

The U.S. economy has already contracted 1.6% in the first quarter and a second quarter in the red is all that’s needed to technically call a recession. The first reading for Q2 GDP data will be on Thursday, a day after the Fed rate decision.

“A faster path of Fed tightening and disappointing earnings reports from the U.S. this week could trigger further weakness in the oil market, although I am skeptical about the scale of the downside risk,” added OANDA’s Erlam. “The tightness of the oil market cannot be ignored even as recession odds rise. A sustainable break below $90 still looks like a big ask and if it does materialize, it will be a bit of a double-edged sword.”

Phil Flynn of Chicago-based broker Price Futures Group also indicated that oil bulls would swarm with dip-buying if WTI ever got below $90.

“Oil inventories around the globe are below normal and if the demand destruction is less than people anticipate, then we could see a huge move up in the price of oil,” said Flynn. “High prices are encouraging more production but that’s going to take some time.”