The Potential for a Large U.S. Rate Hike Pummeled Crude Oil Prices

Recap:  The potential for a large U.S. rate hike pummeled crude oil prices to their level since the Russian invasion of Ukraine. Both contracts hit lows on Thursday which were below the Feb. 23 close, the day before Russia invaded Ukraine, with Brent reaching its lowest since Feb. 21. After the invasion, WTI oil futures broke above $100 a barrel for the first time since 2014 but quickly retreated as President Joe Biden said Russian oil sanctions weren’t part of the initial response plan. Shortly after, the U.S. announced a complete ban on U.S. oil imports from Russia, causing oil prices to rise again. Volatility on Thursday was wild, with oil prices recouping some of the session’s losses. August WTI fell as much as $5.74, or 5.95 before trimming losses to settle at $95.78 a barrel, down 52 cents or 0.54%. This is the lowest settlement for WTI in three-months.  Brent for September delivery fell as much as $5.07, or 5.09% before it too pared losses to settle at $99.10 a barrel, down 47 cents, or 0.47%. NYMEX ULSD for August delivery lost 1.65 cents per gallon, or 0.45% to $3.649, while RBOB for August delivery lost 4.69 cents per gallon, or 1.45% to $3.1868.

Technical Analysis:  Investors flocked to the dollar, often seen as a safe haven asset. The dollar index hit a 20-year high on Wednesday, which makes oil purchases more expensive for non-U.S. buyers. Worries of COVID-19 curbs in multiple Chinese cities to rein in new cases of a highly infectious subvariant have also kept a lid on oil prices.

Data from the U.S. Energy Information Administration also point to slackening demand, with product supplied slumping to 18.7 million barrels per day, the lowest since June 2021. Crude inventories rose, bolstered by another big release from strategic reserves. We have been keeping an eye on the 200-day moving average as a gauge for the near-term direction of WTI. Despite falling $3.58, or 3.8% below this average, WTI failed to settle below it, leaving this technical indicator in place for determining whether or not this market can work lower. Below this level additional support is set at $90 and $88.43. Resistance is seen at $100 and $101.78. 

Fundamental News:  U.S. Treasury Secretary, Janet Yellen, said representatives of President Vladimir Putin had no place at a meeting of the Group of 20 major economies, warning that the war in Ukraine was causing a negative spillover around the world. She was speaking at a news conference on the sidelines of a G20 meeting of finance leaders on the Indonesian island of Bali, which Russia is also attending. The U.S. Treasury Secretary said she would continue to push hard for a cap on the price of Russian oil that she said would help lower energy prices and maintain global oil flows after European and potentially British and U.S. sanctions on the transport of Russian oil take effect at the end of the year.

Russia’s Foreign Ministry spokeswoman, Maria Zakharova, said that attempts by the Group of Seven leading western nations to cap oil prices may in fact cause them to rise.

China's Commerce Ministry said that setting a cap on the Russian oil price is a "very complicated issue" and the precondition to solve the Ukraine crisis is to promote peace talks among relevant parties.

U.S. President Joe Biden and Israeli Prime Minister Yair Lapid will sign a joint pledge to deny Iran nuclear weapons on Thursday.

Goldman Sachs reiterated its bullish oil price view following the recent sell-off. With inventories at record levels, it reiterated its view that oil prices are skewed to the upside. It expects sharply higher prices in its adverse scenario for global oil supply-demand. Goldman Sachs expects a U.S.-Saudi agreement to result in a modest increase in OPEC+ oil output. It expects Russian flows to only modestly decline from current levels this year.

Early Market Call – as of 8:20 AM EDT

WTI – August $97.14, up $1.36

RBOB – August $3.2368, up 5.00 cents

HO – Augusts $3.6625, up 1.31 cents

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This market update is provided for information purposes only and is not intended as advice on any transaction nor is it a solicitation to buy or sell commodities. Sprague makes no representations or warranties with respect to the contents of such news, including, without limitation, its accuracy and completeness, and Sprague shall not be responsible for the consequence of reliance upon any opinions, statements, projections and analyses presented herein or for any omission or error in fact. The views expressed in this material are through the period as of the date of this report and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance or results and actual results or developments may differ materially from those projected. The whole or any part of this work may not be reproduced, copied, or transmitted or any of its contents disclosed to third parties without Sprague’s express written consent.