US crude exceeds $85, with supplies scarce
Analysts said that crude oil prices may rise further in light of expectations of tight supplies and continued resilience in global demand, but bad news elsewhere may prevent the market from overactivity.
West Texas Intermediate, which is the American benchmark for the price of oil, breached the $80 ceiling aggressively last week, and moved into the mid-$80 range by the end of the trading day on Friday. November was the last time WTI traded at this level.
At the end of a lackluster month of action, the rally was partially supported by persistent supply-side concerns. Commercial crude oil inventories in the US market, the largest in the world, decreased by 10.6 million barrels compared to the week ending August 18.
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Even with a modest increase in the retail price of gasoline, demand is still resilient. The total amount of refined petroleum products sent to market, an indicator of demand, is 6% higher than this time last year, and refineries are operating at 93.3% of maximum capacity.
However, this comes amid signs of a slowdown in the broader economy. The labor market is slowing, and manufacturing, one of the bright spots of the Texas economy, is facing headwinds, said Emily Kerr, chief economist at the Federal Reserve Bank of Dallas.
“The contraction in Texas manufacturing continues, with lower new orders, production and capital spending,” she said.
However, the Texas Independent Producers and Equity Owners Association, an industry trade group, said the price of oil could rise further due to lower commercial crude inventories.
“However, absent a major supply disruption, economic headwinds in the US are likely to prevent a sustained rise in WTI this year,” said Ed Longanker, President of TIPRO.
If oil prices rise further, that will contribute to overall inflation. An inflation measure of the Fed’s preferred level of personal spending, a lagging indicator, showed an increase of 0.2% in July compared to June, half the level from the May-June period. This indicates that consumers are still spending, but the pace is slowing amid continued high prices.
Meanwhile, the unemployment rate rose to 3.5% last month, its highest level since February 2022. For some analysts, this means the Fed may be done raising interest rates, although those with a bullish bias shrug it off. Remarks issued in Jackson Hole, Wyoming. , a symposium last month that inflation was too high and that further tightening might be necessary.
Longanecker sees the mid-$80s playing a role in WTI, but a pullback to TIPRO’s projected range of $75 to $80 a barrel remains a possibility as hawkish policies at the Fed make borrowing more difficult, increasing pressure on American families.
This week brings data on everything from manufacturing in the US economy to the Beige Book, a summary of economic conditions across the Fed regions. But for Bill Witherburn, a commodities analyst at Capital Economics in London, the focus is squarely on developments in China.
“Demand for oil in the world’s second-biggest consumer has been strong, even though activity in other parts of the economy appears to be on edge,” he said.
If the August data shows strength in Chinese demand for crude oil, that would be bullish for oil and a source of relief as other parts of its economy are weakening. Chinese trade data will be released on Wednesday, and inflation data for August will be released on Friday.
Although Saudi Arabia is no longer a major exporter of crude oil to the US, its oil – and decisions about what to do with it – has global ramifications. Giovanni Stonovo, commodities strategist at Swiss investment bank UBS, said market watchers will seriously wait to see if the kingdom decides to adopt production curbs on the back of mixed economic news.
“However, the Saudi production cuts will still be in place in September, so the market should remain tight and support prices,” he said.
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