The price of Brent crude ended the week at $85.03 after closing the previous week at $91.35. The price of WTI ended the week at $78.74 after closing the previous week $84.76.
As expected, the US Federal Reserve increased interest rates by 0.75% last Wednesday after similar increases in the previous two months. After the latest increase the federal funds rate is now in the range of 3% to 3.25%, which is the highest since 2008 and has increased at the fastest pace since 1981 – the last time the US faced concerns about inflation. Additionally, the Federal Reserve has indicated that future increases in interest rates will occur in future months. The Federal Reserve is also expecting that the rate increases will result in job losses and the increased potential for a recession. The latest nowcast from the Federal Reserve Bank of Atlanta estimates that US real GDP growth in the third quarter is 0.3% after the US had negative growth in the first quarter and second quarter.
The tightening monetary policy continues to provide support for the US dollar. The US Dollar Index ended the week at 113.10 after closing the previous week at 109.76 and is at the high level since early in 2002. The strong US dollar is putting further pressure on the economies of other countries because it is making dollar-denominated commodities more expensive.
The outlook for Europe’s economic growth continues to deteriorate with the combination of tightening monetary policy, elevated inflation, and concerns about the supply of energy, while China’s economy is still being hampered by restrictions pertaining to COVID-19 and an over-leveraged property sector. The Chinese Yuan has weakened substantially since April of this year with moving from 6.36 to the US dollar to slightly above 7.16 to the US Dollar. Even if the COVID-19 restrictions are removed, it is unlikely that China’s economy will rebound with the economies of two of its major trading partners – Europe and the US – slowing down. We are projecting that China’s growth in 3Q22 will be 1.19% and forecasting that growth in 4Q22 will be 3.25%.
With the slowdown in the economic activity, the growth in oil demand is waning and there is more downside risk than upside risk. In terms of oil prices, we are forecasting that the price of Brent crude oil will average $88.43 in 4Q22, while WT averages $82.48 and Dubai crude oil averages $84.10.
For a complete forecast of energy prices, including crude oil and refined products, please refer to our Short-term Outlook.