The price of Brent crude ended the week at $85.14 after closing the previous week at $85.03. The price of WTI ended the week at $79.49 after closing the previous week $78.74.
In last week’s note we highlighted that the economy would be the governing factor for oil prices from a short-term time horizon. And while there have been a lot of other recent and pending developments, we still think that will remain the case. With respect to the US, the Federal Reserve is expected to raise rates by 75 basis points in November and 50 basis points in December. There are risks, however, associated with the Federal Reserve raising rates aggressively while US economy is showing signs of fragility.
- New jobless claims declined to the lowest level in five months according to the latest report from the US Labor Department, but the US jobs market has some underlying weakness. Data from the Bureau of Labor Statistics indicates that the number of full-time jobs declined by 242,000 jobs in August and by 465,000 during the months of June, July, and August, while the number of average week hours has fallen to 34.5 from the 34.8 at the end of 2021.
- Labor productivity for all non-farm employees fell by 2.4% in 2Q of this year in comparison with the same period of 2021. Real wages have also been declining with real wages falling by 1.7% in 2Q after falling by 0.4% in 1Q of this year.
- GDP growth in the US is also mixed with the Commerce Department keeping the GDP growth for 2Q at a negative 0.6% annualized rate and a negative 1.6% annualized rate for 1Q. With respect to 3Q the nowcast from the Atlanta Fed spiked to 2.4% on Friday from 0.3% on September. The upward adjustment stems, in part, from the third-quarter personal consumption expenditures growth and third-quarter gross private domestic investment growth increasing from 0.4 percent and -7.6 percent, respectively, to 1.0 percent and -4.2 percent.
The tightening monetary policy continues to provide support for the US dollar. The US Dollar Index, declined last week to 112.17 after closing the previous week at 113.10, but remains at the highest 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.
Inflation in Germany increased to 10% in September from 7.9% in August, and is being driven by energy prices, which are 43.9% higher than in September of 2021. Germany’s economy is expected to be in recession during the rest of the year and through 2023 with a contraction of 0.4% according to Germany’s Joint Economic Forecast. Ironically, the more effective the pending restrictions on Russia’s energy sector, the more downward pressure will be put on the economies of Europe, including Germany.
China’s economy is still being hampered by restrictions pertaining to COVID-19 and highly over-leveraged property sector. According to Goldman Sachs, cities under some form of COVID-19 restrictions still accounts for 25% of China’s gross domestic product. While the latest data for factory output and retail sales were better than expected, the latest data from China’s National Bureau of Statistics shows that service sector fell from 51.9 to 48.9 in September with a reading below 50 indicating contraction. The Chinese Yuan has weakened substantially since April of this year with moving from 6.36 to the US dollar to 7.12 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%.
From a supply perspective, members of OPEC+ are to meet this Wednesday, and it appears that the group will act in response to weakening economic activity and oil demand growth. It is expected that OPEC+ will announce a reduction in supply of at least 1.0 million barrels per day to provide support for crude prices. Additionally, it is likely that Saudi Arabia will reduce its supply further through a voluntary reduction. In our note of September 19th, we expressed the view that member of OPEC+ would adjust supply to align with the waning demand in attempt to defend $90.00 price. While many members of OPEC+ have been struggling to meet production targets, reduction in supply by Saudi Arabia will represent actual barrels being taken off the market.
While there has been plenty of recent news, we are holding to our forecast that the price of Brent crude oil will average $88.43 in 4Q22, while WTI 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.