Crude Oil Crumbles as Markets Assess Banks Ahead of Fed. Will WTI Go Lower

Crude Oil Crumbles As Markets Assess Banks Ahead of Fed
A stronger dollar and a drop in stock prices pushed investors away from commodities as the Fed held off from raising interest rates yet again. Meanwhile, oil fell sharply as a result of the OPEC+ deal to cut production and extend sanctions against Russian exports.

Amid a collapse in oil prices, some analysts expect that the world will slip into recession early next year. The slowdown in global growth is expected to be exacerbated by high inflation and rising interest rates.

The OPEC+ cut will also likely not be enough to support oil prices this year, according to Morgan Stanley strategist John Kilduff. Still, he said it is not impossible for prices to move higher this year.

Another reason to keep an eye on oil prices is the OECD countries’ continued releases of crude from their strategic reserves, reducing available buffers in the event of future supply disruptions.

This has reduced the United States’ Strategic Petroleum Reserve, the largest of its kind in the world, to levels near a 40-year low.

But unless the US can find a way to alleviate the storage crisis or limit production, prices could continue to fall. As we noted in our last blog, Trump has called for a response to historic lows in oil prices, and the administration is starting to take steps to stabilize the market.

One possibility is a plan to pay producers to keep up to 365 million barrels of crude in the ground. This would be an alternative to banning fracking or restricting oil output, and it would fall within the legal framework of the Energy Policy and Conservation Act.

However, even if this were to work, it wouldn’t resolve the underlying issue of a significant oil storage shortfall in the US and Canada. As we mentioned in our previous blog, storage in Cushing is at record-low levels despite the fact that producers are producing more than they can afford to lose.

As the world’s leading producers have been forced to shut in some production, we’ve seen some rebalancing in the oil market and are expecting more in the coming months.

Amid all the turmoil, oil has lost a lot of its momentum and is now trading below $40/bbl in Cushing, which represents about 85% of the US market. This is well below levels not seen since late 2021.

The Fed is set to meet on Wednesday and if the central bank raises rates it could put further pressure on oil prices. It is also expected to announce its new strategy for the economy.

This week will be key in determining whether or not the Fed’s rate hike is enough to sink WTI and Brent. It will also be important to keep an eye on oil prices and the broader financial markets as investors assess the efforts of banking authorities to shore up confidence in the industry.