Crude oil prices trade in negative territory for a third consecutive trading session in a row, with Brent and WTI prices falling as low as $83/b and $76.50/b respectively on Tuesday morning on growing worries for more supplies from Russia, and further interest rate hikes by major central banks ahead in the week.
Brent crude futures lost $1.20/b, or 1.50% to $83/b so far in the day, after falling by more than 2% on Monday, and adding from another dip by 2% last Friday when it was trading to as high as $88/b on optimism over Chinese reopening, and a softer dollar.
Russia oil exports at any price:
Both Brent and WTI crude oil prices lost over 2% on Monday following reports that Russian President Putin has allowed local energy companies to sell however many barrels at whatever price they can get in the market.
Why is bearish for the oil markets? Because Putin gave the green light to the oil companies to apply any discount necessary to sell their oil to any customer in the world, without setting any floor price for exports.
This event could create headaches within the OPEC group since the cartel declined its overall crude production by 2 million bpd last year to support the falling prices amid the fear of an economic recession.
Interest rate hikes ahead:
Adding pressure on the recent selloff, energy investors are worrying about the coming interest rate hikes from the three largest central banks in the world, which threatens to slow further global economic growth and weaken demand for petroleum products.
Federal Reserve is widely expected to hike interest rates by 25 basis points to 4.50% on Wednesday, Feb. 01, followed by a 50 basis points increase by the European Central Bank and the Bank of England to 3% and 4% respectively on Thursday, Feb. 02, to curb the 40-year record high inflation.
Taking support from the coming Fed’s rate hike, the DXY-U.S. dollar index which tracks the greenback against six major currencies, managed to bounce off from its 7-month low of 101.50 mark hit last week, to just over 102.50, adding extra pressure on the dollar-denominated crude oil prices.
Three of the world’s largest central banks, the Federal Reserve, European Central Bank, and Bank of England will hold policy meetings in the week ahead to fight a 40-year record high inflation.
The rate hikes decisions will be in the spotlight this week, with investors expecting both the ECB and BoE to increase their interest rates by 50 basis points. In comparison, the Federal Reserve is widely expected to slow the pace of interest rate hikes to a 25 basis points in the face of cooling inflation in the United States.
Dovish signals from the Federal Reserve?
The U.S.-based Federal Reserve will have its FOMC policy meeting on Wednesday, Feb. 01, where investors expect the world’s largest central bank to decide a 25-basis point rate increase to a range of 4.5% to 4.75%, slowing the size of the increase for a second straight meeting.
The Federal Reserve hiked its Fed’s Fund rates by 75 basis points four straight times last year before approving a 50-basis point move in December.
The eased inflation in recent months had eventually encouraged Federal Reserve into a less tightening monetary policy, at a time the U.S. labor market and economic growth also cooled in late 2022.
Expectations of slower rate hikes have also dented the U.S. dollar and Treasury yields. The DXY- U.S. dollar index which tracks the greenback against six major currencies, posted a seven-month low of 101.50-mark last week, while the yields on the 10-year Treasury fell as low as 3.30% in mid-January, further pressuring the dollar against major peers.
Any dovish signals from Fed’s statement are likely to be harmful to the greenback and positive for risky-sensitive assets such as tech and growth stocks, growth-led currencies, and cryptocurrencies.
ECB and BoE ahead of 50 bps rate hike:
Both the European Central Bank (ECB) and the Bank of England (BoE) will meet on Thursday, February 02, with markets expecting a rate hike of 50 basis points to 3% and 4% respectively.
Investors will also look for any signals of how much further and how fast policymakers intend to go since inflations still stand well above the ECB’s and BoE’s 2% inflation target.
The weaker dollar together with the hawkish rhetoric from ECB and BoE have helped Euro and Pound Sterling to bounce off from their multi-year lows of $0.95 and $1.04 a dollar, hit at the end-September 2021 to the current highs of $1.09 and $1.24.
The U.S.-based Henry hub natural gas prices broke below the much-advertised $3/mmBtu support level, while the European natural gas price of Dutch TTF extended recent losses toward the $55/MWh level, amid a combination of actors such as milder-than-normal weather, lower demand, record-high production, Freeport online, and plenty of LNG supplies.
In contrast to what energy analysts were expecting for the gas prices at the beginning of the winter in the Northern Hemisphere a few months ago, the natural gas price on both sides of the Atlantic has been posting significant losses following a broader selloff in the gas market.
The falling gas prices will have a significant impact on reducing what businesses and households pay for electricity and reducing the effects of energy-driven inflation.
Henry hub gas prices break below $3/mmBtu:
The front-month contract on the New York Mercantile Exchange’s Henry Hub is moving in a range of $2.70-$2.90/mmBtu (or million metric British thermal units), its lowest level since June 2021, and trading nearly 62% down from 14-year high of $10/mmBtu on August 24, 2022.
The sell-off in the U.S.-based gas prices was triggered by the record-high output of more than 100 bcf/d (or billion cubic feet per day), in the last quarter of 2022, the almost full U.S. gas storage, while the higher-than-normal temperatures continued to reduce demand for heating in houses and buildings.
Adding to the negative sentiment, energy traders sold gas contracts after the news that the 2 bcf/d of gas-capacity Texas-based LNG export terminal Freeport is reported to be readying to resume operations in February, after its sudden closure in June, increasing the gas supply in the already over-supplied U.S. market.
European Dutch TTF gas prices plunged on milder weather:
Sellers have also dominated the European gas market lately, with the Amsterdam-based Dutch TTF gas prices trading in a range of €51-€57/MWh (or per megawatt hour), the lowest level since September 2021, and trading nearly 83% down from an all-time high of €342/MWh on August 26, 2022, after Russia cut the gas flows to Europe via Nord Stream 1 pipeline for maintenance reasons.
Dutch TTF prices, Weekly chart
Europe’s wholesale natural gas prices extended losses below their lowest levels since Russia invaded Ukraine on February 24, 2022, as the warmer weather across the continent and the declining industrial activity have weakened the demand for heating and gas-powered energy by more than 15%.
The lower-than-anticipated gas demand has enabled EU countries to use less gas from storage that was built up in anticipation of cuts in supplies from Russia, which was Europe’s main supplier before the war by 40%.
The milder weather has allowed countries to store more gas in their inventory facilities, which stood at nearly 84% at the begging of 2023, importing mainly LNG from the U.S. and Qatar, coupled with gas from Norway, Algeria, and Azerbaijan via pipelines.
The storage levels stand some 30% higher than in 2021 and more than 10% higher than the average of the previous five years.
Euro jumped above the $1.09 key resistance level on Monday morning for the first time since early April 2022, driven by both the hawkish signals from the European Central Bank on interest rates hikes, and the recent weakness of the U.S. dollar on growing expectations for a less aggressive Federal Reserve in the coming months.
Hawkish signals by ECB boost Euro:
Investors increased bets on the common currency this morning, cheering the hawkish comments by European Central Bank (ECB) governing council member Klaas Knot, who said European interest rates would rise by 50 basis points in February and March and continue climbing in the months after.
According to Reuters, Knot is considered a hawk among policymakers, and the comment was taken as pushback against recent reports that the ECB would scale back to 25 basis points moves from March.
Adding to those hawkish comments by Knot, ECB President Christine Lagarde pushed back against economist’s opinion that it would slow the pace of rate hikes given recent retreats in EU inflation. At the same time, the ECB will hold its next rate-hike policy meeting on February 02.
Hence, sentiment in broader European financial markets has started to improve following the falling energy and inflation numbers. The retreating crude oil and natural gas prices have been major catalysts for Euro to bounce off from its yearly lows of $0.95 hit at the end of September to the current highs of $1.09.
European natural gas Dutch TTF prices, currently trading at nearly €65/MWh, have fallen 62% since early December, and more than 80% since topping at €340/MWh in late August, removing significant inflation pressure from the Eurozone’s economy, and sharply increasing the optimism that EE could avoid a hard landing-recession, which eventually weighed positively on EUR/USD pair.
A softer U.S. dollar lifts the Euro:
Forex investors are now betting that falling inflation in the United States will eventually encourage Federal Reserve into less tightening monetary policy, pulling down the U.S. dollar against Euro and other major peers.
The DXY- U.S. dollar index which tracks the greenback against six major currencies, including the Euro which has a 60% weight on the index, hit a fresh seven-month low of 101.50 mark, tumbling nearly 12% since peaking at 115 in early October, on growing bets that the Federal Reserve will slow its pace of rate hikes to prevent a further slowdown in the world’s largest economy.
Yet, markets remain uncertain over where U.S. interest rates will peak, given that inflation is still trending near 40-year highs, and remain well above the Fed’s 2% annual target. Traders see rates peaking at 4.89% by June 2023, with a 25-basis point rate hike baked in for February 01 (FOMC meeting).
The Federal Reserve hiked the interest rate by 0.75 percentage points four straight times last year before approving a 0.5 percentage point move in December.
Expectations of slower rate hikes have also dented the U.S. Treasury yields, with the 2-year and 10-year yields falling to four-month lows of 4.14% and 3.48% respectively, further benefiting the euro against the dollar.
The price of the yellow metal broke above the $1,930/oz level on Friday morning for the first time since end-April 2022, driven by some safe-haven demand, a softer dollar and yields, and weaker-than-expected U.S. macroeconomic data.
Investors have been moving some funds into the safety of Gold in recent weeks on the prospect of a global economic slowdown, as record-high inflation, energy crunch, and soaring interest rates could hit hard economic activity, and consumer confidence.
Gold is heading for a fifth straight week of gains allowing it to add almost $300/oz, or up nearly 20% off November’s low of $1,620/oz, rallying in tandem with a sharp drop in the U.S. dollar for the same period over the path of Fed’s monetary policy.
The prospect of smaller rate hikes by the Federal Reserve has pulled out steam from the hawkish Fed-led 2022’s greenback rally, letting the dollar-denominated gold recover toward the $2,000 key psychological level.
DXY, Daily chart
DXY-U.S. dollar index which tracks the value of the greenback against six major currencies, hit a fresh seven-month low of 101.57 on Wednesday, while the yields on the 10-year U.S. bond fell to nearly 3,35%, on hopes of less-aggressive U.S. rate hikes by the Federal Reserve.
Economists expect the Federal Reserve to hike its benchmark borrowing rate by 0.50 percentage points on February 1st; a 0.25 increase will demonstrate a slowing from what has been a blistering pace in 2022, possibly hinting to no more raises or even cuts by year end. The Fed hiked the rate by 0.75 percentage point four straight times last year before approving a 0.5 percentage point move in December.
The yellow metal also gained some traction after a series of weaker-than-expected corporate earnings and U.S. macroeconomic data this week, such as retail sales, and the PPI-Producing Price Index, which drove up the expectations for a lower U.S. inflation reading ahead, and an eventual pivot in the Federal Reserve’s hawkish rhetoric.