Mercurial oil trade

Dovish Fed talk, soft dollar, US reserve draws sooth China demand fears

Steve Sutherlin

Petroleum News

Alaska North Slope crude leapt $2.28 Nov. 30 to close at $89.63, while West Texas Intermediate vaulted $2.35 to close at $80.55 and Brent surged $2.40 to close at $85.43.

The gains came about in a surge amid a risk on atmosphere torched off by dovish comments from Federal Reserve Chair Jerome Powell suggesting that the Fed will tone down its aggressive interest rate increases, which have been its primary weapon to tame inflation.

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The Fed so far has raised its benchmark rate to a range of 3.75% to 4% - up from near zero in March - recently employing monthly hikes of 0.75%. It will meet Dec. 14 to consider its next rate adjustment.

Powell, during a talk at the Brookings Institution Nov. 30, said that it now “makes sense to moderate the pace” of rate increases, adding that the “time for moderating the pace of rate increases may come as soon as the December meeting.”

“I don’t want to over tighten,” Powell said in the Q&A session.

It is not appropriate to “crash the economy and clean up afterwards,” he said.

Financial markets shook off ennui in response to the Powell comments as well. The Dow Jones Industrial Average gained 1.95% and the tech-heavy NASDAQ jumped 4.15%.

Following the Powell remarks, the dollar fell by more than one percent against the yen in Asian trade Dec. 1. A weaker dollar stokes demand by making oil more affordable for countries that must trade local currency for dollar-denominated crude.

An outsized drawdown in U.S. crude supplies added additional impetus to the bullish price action.

Commercial crude oil inventories for the week ending Nov. 25 - excluding Strategic Petroleum Reserve releases - fell by 12.6 million barrels from the previous week, the U.S. Energy Information Administration said in a Nov. 30 report. At 419.1 million barrels, inventories stood 8% below the five-year average for the time of year. Releases from the SPR for the week totaled 1.4 million barrels.

On Nov. 29, the American Petroleum Institute released its own report of large U.S. crude draws, injecting some optimism into an atmosphere of worry over Chinese demand in the face of COVID-19 lockdowns and internal tensions leading citizens into the streets to protest.

ANS rose $1.23 Nov. 29 to close at $87.35, as WTI rose 96 cents to close at $78.20 and Brent slipped 16 cents to close at $83.03.

ANS gained 75 cents to close at $86.32 Nov. 28, while WTI added 96 cents to close at $77.24 and Brent fell 44 cents to close at $83.19.

Oil prices turned downward to close out the week ending Nov. 25, as traders fretted that unrest in China might lead to draconic crowd containment measures by the government.

ANS fell $1.68 Nov. 25 to close at $85.37, while WTI shed $1.66 to close at $76.28 and Brent was down $1.78 to close at $83.63. U.S. markets were closed for Thanksgiving Nov. 24.

ANS plunged $3.09 Nov. 23 to close at $87.05, as WTI plunged $3.01 to close at $77.94 and Brent gapped $2.95 lower to close at $85.41.

Traders were shocked Nov. 23 by the EIA report that U.S. gasoline stocks jumped by 3.1 million barrels for the week ending Nov. 18, dwarfing the 383,000-barrel build that analysts had forecast.

Prices were further pressured by reports that the G7 price cap on Russian oil could be set above recent trading levels, allowing Russia to make a profit to prevent a supply shortage on the global market.

Nyet to investment growth

Investments in Russia’s upstream hit $45 billion last year, rebounding from COVID-19-induced lows of $40 billion in 2020 but now will remain subdued until at least 2025, Rystad said in a Nov. 30 release. Gazprom and Rosneft will keep spending around 2021 levels, but other players will see a significant drop in investments.

Several large liquefied natural gas projects have been pushed out five or six years into the future due to technological and funding constraints as Western partners pull out, Rystad said.

Greenfield investments will suffer the largest drop in spending, projected to fall 40% from last year, it said.

Only 2 billion barrels of oil equivalent of resources were sanctioned last year, almost all from the Baltic LNG project at which Gazprom started construction in May 2021, Rystad said. Financing the project will be a struggle, and service companies are leaving.

“No significant new projects are expected to be sanctioned in Russia next year, but activity will resume in 2024 with the Gazprom-operated Chayandinskoye (Phase 2) gas-condensate field - a resource base for the Power of Siberia-1 gas pipeline to China - and the Payyakhskoye oilfield, part of Rosneft’s huge Vostok Oil project in the north of the country,” Rystad said. “Brownfield investments are expected to drop by only 14% as oil production has not taken a significant hit.”

In 2023, brownfield investments will drop by approximately 20% compared to 2021, Rystad said, adding that Rosneft and Lukoil will account for roughly 42% of the spending.