Edward Moya, senior market strategist at Oanda, is giving battered investors hope on two counts. First, the US Federal Reserve whose every move and every statement is watched by everyone. Second, crude oil prices are below their 50-, 100- and 200-day moving averages despite a rebound in reaction to Opec+ cuts.
In addition, a series of negative divergences between the price of North Sea Brent and its quarterly momentum have materialised for the past eight months, followed by a break below its equilibrium line by momentum.
“Crude prices tumbled after reports that Russia was willing to sell oil at a discount. Russian seaborne oil deliveries are about to have a price cap put in place and it looks like Russia is getting desperate for revenues. Last month, Russia was threatening they would stop selling oil to countries that would agree to use a price cap, but now it seems like that was just a bluff,” Moya writes in an Oct 13 market update. He has a point.
According to the US Energy Information Administration (EIA), before the Opec+ announcement and the speculation of cuts in the days immediately preceding the announcement, crude oil prices were generally decreasing due to increasing concerns around weakening global economic conditions. In addition, the 180-million-barrel Strategic Petroleum Reserve release conducted in recent months may also have relieved supply concerns, the EIA said on Oct 12.
September marked the third consecutive month in which the Brent crude oil futures price decreased, bringing the total decrease to US$27 per barrel ($38.71/b) in 3Q2022. Brent crude oil is priced in US dollars which has been strengthening against other currencies, in particular emerging market currencies. This could be why Russia is selling its crude oil to emerging markets including India, China and Sri Lanka at discounts to market prices.
No surprise then that US dollar strength is leading to a conundrum for Opec+ and its customers in emerging markets. For countries using other currencies, including many of the globe’s emerging markets, the strengthening US dollar makes it more expensive to convert local currency into the US dollars necessary to import crude oil.
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In addition, Oxford Economics lowered its forecast for global GDP growth to 2.2% for 2023, down from the 2.7% forecast in September. This reduction in forecast GDP led EIA to lower its forecast for global petroleum demand in 2023 by 0.5 million b/d. In turn, this could pressure crude oil prices.
EIA has lowered its forecast averages for North Sea Brent to US$93/b in 4Q2022 and US$95/b in 2023 compared to an earlier forecast made in September of US$98/b in 4Q2022 and US$97/b in 2023.
Now to the Fed. The Fed Minutes showed tightening will continue even as the labour market in the US slows. “The key takeaway from the minutes was that several participants noted that it would be important to calibrate the pace of further policy tightening to mitigate the risk of significant adverse effects on the economic outlook. We’ve heard from Fed’s Mary Daly of the San Francisco Fed and vice-chair Lael Brainard and they have voiced support for remaining data-dependent when it comes to future hikes. Right now, it looks like the data is about to get ugly. It will be hard for the Fed to remain aggressive with tightening as the economy deteriorates quickly,” Moya suggests.
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Some economists also anticipate gentler moves — particularly in the last Federal Open Market Committee (FOMC) meeting in December. “Investors should continue to expect a 75 bps rate hike at the Nov 2 FOMC decision, but a downshift in December would be likely if the global growth outlook continues to deteriorate and if the US economy softens,” Moya says.
Technically, yields on the 10-year US treasuries faced resistance at a shade below 4% and have not been able to surmount this. However, indicators have not indicated a downturn yet, so a top formation has not fully materialised.
Yields on 10-year gilts are testing their year highs at 4.4%. Based on the indicators, gilt yields, unfortunately, have the potential to make a new high.
