Brent futures settle at lowest since January with focus on Fed pace of rate hikes after ISM data

What are prices doing ?

• February Brent crude
  BRN00,
  +0.95%

  BRNG23,
  +0.95%,
  the global benchmark, lost $2.89, or 3.4%, to settle at $82.62 a barrel on ICE Futures Europe. That was the lowest front-month finish since Jan. 10, according to Dow Jones Market Data.

• West Texas Intermediate crude for January delivery
  CL00,
  +0.79%

  CL.1,
  +0.79%

  CLF23,
  +0.79%
  declined by $3.05, or 3.8%, to settle at $76.93 a barrel on the New York Mercantile Exchange. Prices had touched an intraday high of $82.72 before settling at their lowest in just over a week.

• Also on Nymex, January gasoline
  RBF23,
  +0.18%
  fell 8 cents, or 3.4%, to settle at $2.2019 a gallon, the lowest since December 2021, while January heating oil
  HOF23,
  +0.68%
  ended at $2.9998 a gallon, down 17 cents, or 5.3%.

• January natural gas
  NGF23,
  +0.99%
  lost 11.2% to $5.577 per million British thermal units, the lowest finish since Oct. 27, as warmer weather forecasts eased demand expectations, analysts said.

Market drivers

“The market lost focus on the price cap and OPEC, as rumors spread that the Fed was not happy with market optimism,” Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch.

See also: What analysts think of the $60 price cap on Russia oil

U.S. benchmark stock indexes declined on the Fed jitters and oil followed, he said, with speculation that interest rates will be “higher for longer.” The Fed “just can’t stand market optimism as they fear it will feed into inflation.”

The Institute for Supply Management’s barometer of U.S. business conditions at service-sector companies such as banks and restaurants rose to 56.5% in November, a strong showing that signals the economy is still expanding at a steady pace.

The Fed has been raising interest rates in an effort to ease inflation. “Continued Fed tightening can only reduce demand for oil,” said Manish Raj, chief financial officer at Velandera Energy Partners.

Meanwhile, it’s unclear how much Russian oil the EU and Group of Seven sanctions measures might remove from the global market. The world’s No. 2 oil producer has been able to reroute much, but not all, of its former European shipments to customers in India, China and Turkey.

See: Russian oil cap kicks in as western leaders try to pressure Putin over Ukraine

On Sunday, the OPEC+ alliance of oil producers, including Russia, maintained their targets for shipping oil to the global economy.

The decision to continue with the 2 million barrel per day production cut, which began in November, through the end of 2023 is “not a surprise given the uncertainty in the market” over the impact of the EU Russian crude-oil import ban and the G7 price cap, said Ann-Louise Hittle, vice president, macro oils, at Wood Mackenzie, in Sunday commentary.

See: No OPEC+ oil shakeup as Russian price cap stirs uncertainty

OPEC+ also faces “downside risk” from the potential for weakening global economic growth and China’s zero COVID policy, she said.

A private gauge of China’s services sector slipped further into contraction in November, with the Caixin China services purchasing managers index dropping to 46.7 in November, down from 48.4 in October, Caixin Media Co. and S&P Global said Monday.

Still, on Monday, some news about China relaxing its COVID restrictions may have “helped paint a brighter picture for demand,” Marios Hadjikyriacos, a senior investment analyst at XM, said in a note to clients.

See: China begins easing restrictions in Beijing and elsewhere

Looking further ahead, WTI oil prices may trade in a somewhat tight $20 range next year.

In emailed comments, Jay Hatfield, chief executive officer at Infrastructure Capital Management, told MarketWatch that his company projects a trading range of $80 to $100 for WTI oil during 2023.

“Weakness in projected demand from a likely recession in Europe and sluggish growth in China will be offset by the ongoing energy crisis in Europe,” he said. 

European natural gas is currently trading over $40 per thousand cubic feet which is the British thermal unit equivalent of oil trading at $240 a barrel, said Hatfield. “High European natural gas prices draw other hydrocarbons in the Euro Zone including distillate, coal and [liquefied natural gas], supporting global oil and gas prices.”

In the U.S. Monday, natural-gas futures dropped by more than 11%. NOAA’s 6 to 10-day outlook shows warmer-than-normal temperatures for the eastern and central U.S., which will “likely reduce heating demand throughout early December,” said Victoria Dircksen, commodity analyst at Schneider Electric.