By Barani Krishnan
Investing.com — Crude prices rebounded from $100-lows to settle in just-positive territory on Monday as investors awaited direction from meetings due later in the week by the Federal Reserve and OPEC+ — two very different organizations with very different objectives.
The Fed is likely to impose a 50-basis, or half-percentage, point rate hike at the conclusion of its May policy meeting on Wednesday — its first hike of such magnitude in over 20 years — as it aims to quell the worst U.S. inflation in four decades. Within that mission of the central bank lies the challenge of what to do with this year’s 40% inflation in crude prices, which is a result of the supply deficit caused by the sanctions on Russian oil — an event outside the Fed’s control.
OPEC+, led by the 13-member Saudi-controlled Organization of the Petroleum Exporting Countries and 10 other oil producers steered by Russia, holds its monthly meeting a day after the Fed’s. More than ensuring the stability of crude supply to the world, the global oil cartel’s job is to ensure that a barrel stays at or above $100.
Brent crude, the London-traded global benchmark for oil, settled up 44 cents, or 0.4%, at $107.58 a barrel. It fell to as low as $103.12 earlier in the session.
New York-traded West Texas Intermediate, or WTI, the benchmark for U.S. crude, settled up 48 cents, or 0.5%, at $105.17, after plumbing a session low of $100.30.
One reason for the high inflation in the United States now is soaring wages brought on by record employment and demand for workers.
If the job market slows down because of the Fed, this will have important implications for the oil market because of the nexus between the two.
High oil prices can hurt economic growth but not, necessarily, a job market like the one in the U.S. now. But a slowdown in jobs growth, or worse, a sharp spike in employment — just like two years ago, at the height of the Covid breakout — will almost certainly drive crude prices lower.
“If the Fed shows no sign of wavering from reducing their balance sheet, raising interest rates and signaling a more aggressive move in the future, then oil prices may sputter,” said Phil Flynn, energy analyst at Price Futures Group in Chicago.
Flynn said the biggest downside threat to oil “is the possibility of a recession”, referring to the first-quarter US economic growth, which already came in at a minus 1.4%, with just another negative quarter needed between April and June to reach the technical definition of recession. “At this point the Fed has an incredibly tough job to do,” added Flynn.
But just like the Fed is determined to break the back of the U.S. inflation, OPEC+ is also determined that oil prices never again see the lows of Covid 2020.
Even before the Russian invasion of Ukraine on Feb. 24, OPEC+ had pushed up crude prices at each of its meetings over the past year by offering a meager hike of 400,000 barrels per day in monthly production to a supply-starved market rebounding from the Covid 2020 disruptions — and then not even fulfilling that.
These are the dynamics to keep in mind as the Fed isn’t going to be able to reduce inflation without getting oil prices down — wage spiral and demand for workers being just one part of the problem — and OPEC+ isn’t going to roll over and play dead while the central bank and the combined forces of the Biden administration try to take an ax to the oil market.
U.S. crude’s low of $100.30 in Monday’s session was enough to trigger technical short-covering to resume last week’s bullish momentum that could now see it aim for the $105 – $108 resistance and liquidity areas, said Sunil Kumar Dixit of skcharting.com
“If this $105 – $108 resistance area attracts enough buyers, expect momentum to ride higher to $109 – $113 and even extend to $116,” Dixit added.
Also, if push comes to shove, OPEC+ will keep squeezing crude production to ensure prices don’t fall too from where they are.
With summer air travel and U.S. road trips just around the corner, it might be hard to keep oil below $100 a barrel as much as it might be difficult to prevent it from testing the highs of the Ukraine-invasion, which was almost $140.