Commodities Week Ahead: Oil Clings to $90 Ahead of Fed, BoE, BoJ, PBoC Decisions

As the Federal Reserve and central banks of England, China, and Japan ready for rate decisions this week, oil longs seem to have only concern: Keeping a barrel above $90 and adding to the gains thus far for September.

For a market that’s managed to avoid every correction curveball over the past three weeks — including a sizable build in crude and fuel products last week — oil longs have been emboldened not just by Saudi-Russian supply cuts but also Chinese data suggesting a recovery in the troubled No. 2 economy and top oil importer.

But as crude continues its ascent to the mid-$90s, adding 30% over the past three months, the Fed and other central banks are likely to get more queasy about inflation and that could weigh on the macroeconomic backdrop that shapes demand for oil.

Said Edward Moya, analyst at online trading platform OANDA:

"It seems like prices will easily find a home above the $90 a barrel level, which means the focus might shift to the demand outlook from the world's two largest economies.”

Following a change in its front-month position, New York-traded West Texas Intermediate, or WTI, crude was just a little higher than Friday’s settlement of $90.77, hovering at $90.84. 

The U.S. crude benchmark hit $91.15 last week, its highest since November. For the week, WTI also finished last week up 3.7%, adding to prior back-to-back weekly gains of 2.3% and 7.2%. 

London-traded Brent was at $94.73 versus Friday’s close of $93.93.

The global crude benchmark hit a 10-month high of $94.62 last week. Brent finished last week up 3.6%, adding to prior back-to-back weekly gains of 2.4% and 4.8%.

Crude prices have been on a tear since early June, with the rally accelerating in the past three weeks after major oil exporters Saudi Arabia and Russia colluded to remove a combined 1.3 million barrels from the market each day until the end of the year. 

The Fed’s policy-makers aren’t expected to raise interest rates when they meet on Sept. 20, after 11 hikes that added 5.25 percentage points to a base rate of just 0.25% in February 2022. 

But what Chairman Jerome Powell says at his news conference on Wednesday will be closely watched for clues on Fed think for the rest of the year, especially with two more policy meetings on the schedule for November and December.

For context, the headline reading for the U.S. Consumer Price Index rose a second month in a row in August, reaching a year-on-year growth of 3.7% from 3.2% in July. 

That was largely due to high pump prices of gasoline which accounted for more than half of the increase — a phenomenon that could put renewed pressure on inflation fighters at the Fed. The central bank’s desired inflation remains at a max 2% per year and it has vowed to get there with more rate hikes if necessary.

“The Fed are highly unlikely to hike next week but are also unlikely to take the last hike out of their dot plot for later in the year,” economist Adam Button said in a post on the ForexLive forum.

The Fed meeting is also expected to dictate the path of the dollar, which was trading close to a six-month high on Monday. Any more strength in the greenback is likely to weigh on oil markets. 

Beyond the Fed, markets are also awaiting rate decisions from the Bank of England, the People’s Bank of China and the Bank of Japan this week.

The BOE is expected to hike interest rates by 25 basis points, while the PBOC and the BOJ are expected to keep rates on hold. But any signals on future policy, particularly from the BOJ, will be in focus, given that several members of the Japanese central bank flagged a potential end to its negative rate regime.

In China, the PBOC is expected to keep its loan prime rates on hold as it struggles to strike a balance between supporting an economic recovery and preventing further weakness in the yuan.

The pivotal week for global central banks comes after the ECB raised rates by 25bps last Thursday, bringing its benchmark rate to an all-time high of 4.50%. 

Notwithstanding the lack of any major drama on the central bank front, some traders remained cautious of likely pressure this week not just on oil but also risk across the board as talk grew again of a possible U.S. government shutdown. 

US lawmakers have a two-week deadline to vote on a fiscal spending bill, failing which large swathes of the government could stop functioning.

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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.