Two Main Oil Market Talking Points Last Week, Analysts Say - Rigzone News

Two Main Oil Market Talking Points Last Week, Analysts Say | Rigzone

Two Main Oil Market Talking Points Last Week, Analysts Say

In a report sent to Rigzone recently, analysts at Standard Chartered outlined that, in their view, there were two main talking points for oil markets last week, “one top-down and one bottom-up”.

“The macro consideration is the latest Federal Open Market Committee (FOMC) meeting, with its positive message for the economy but its negative message for asset markets due to an implied longer wait for policy rate cuts,” the analysts said in the report.

“In our view, the added uncertainty generated by the Fed makes it significantly less likely that key OPEC producers will relax output cuts this year,” they added.

“We expect oil producers to conclude that is still too early to relax their cautious stance on the market backdrop,” the analysts went on to state.

The Standard Chartered representatives outlined in the report that the other talking point was “the low level of crude oil inventories at WTI’s pricing point of Cushing, Oklahoma”.

“In short, Cushing is a collection of some 16 storage terminals concentrated across 2,000 hectares. About four million barrels per day of pipeline capacity comes into Cushing and 3.3 million barrels per day [of] capacity leaves, making it the key nexus for output from the Rockies and the Permian,” the analysts stated in the report.

“Cushing inventories have fallen in 11 of the past 12 weeks, losing 20.3 million barrels to reach a 14-month low of 22.9 million barrels,” they added.

“The minimum operating requirement (min-op), below which operational efficiency becomes impaired and WTI spreads would likely become highly elevated and volatile, is likely to be somewhere in the 21-22 million barrel range,” the analysts warned.

Inventories have not been below 20 million barrels since 2014, the analysts highlighted in the report, “when min-op was lower (total shell capacity was more than 10 million barrels lower in 2014 than now)”.

“The post-2014 low was 21.3 million barrels in July 2022, just 1.6 million barrels below the current level,” the analysts said in the report.

“We think the pressure on Cushing inventories is such that there is a high probability of a significant dislocation in WTI prices,” they added.

“Helped in part by the Cushing draw, the latest Energy Information Administration (EIA) weekly release was bullish according to [our] U.S. oil data bull-bear index, which rose 107.3 week on week to +35.6. The crude oil balance was dominated by a three million barrel per day week on week fall in net imports,” the analysts went on to state.

In its latest report, Standard Chartered outlined that its U.S. oil data index has been categorized as bearish 22 times, neutral 17 times, and bullish 13 times in the past year. The expected number of bearish, neutral, and bullish categorizations for the past year was 20.8, 10.4, and 20.8, respectively, according to the Standard Chartered report.

FOMC Meeting

FOMC holds eight regularly scheduled meetings per year, according to the Federal Reserve website, which notes that, at these meetings, the committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

The latest FOMC meeting was held from September 19-20. In a FOMC statement posted on its site on September 20, the Federal Reserve said, “recent indicators suggest that economic activity has been expanding at a solid pace”, adding that “job gains have slowed in recent months but remain strong, and the unemployment rate has remained low”.

In the statement, the Federal Reserve said the U.S. banking system is sound and resilient but warned that inflation remains elevated.

“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” it added.

“The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks,” it continued.

“The committee seeks to achieve maximum employment and inflation at the rate of two percent over the longer run. In support of these goals, the committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent,” the Federal Reserve went on to state.

In the statement, the Federal Reserve said the committee will continue to assess additional information and its implications for monetary policy.

“In determining the extent of additional policy firming that may be appropriate to return inflation to two percent over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” it said.

“In addition, the committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its two percent objective,” it added.

“In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook,” it continued.

The Federal Reserve noted in the statement that the committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee's goals.

“The committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments,” it added.

To contact the author, email andreas.exarheas@rigzone.com

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