Overconfident Oil Price Predictions?

2023 Oil price forecasts

The oil fever seems to have subsided, prices have significantly reduced in recent months, and WTI oil futures slid from $120 in early June $95 on July 27. While we are not back at pre-2022 or even pre-pandemic levels, and external factors are still tightening supply, some analysts have been more optimistic than others.

Source Brent 2023 average ($/bbl) WTI 2023 Average ($/bbl)
EIA [1] 93.75 89.75
Fitch Solutions [2] 90 87
Bank of America [2] 100 95
Citigroup [3] 75 45

What has led to such optimistic bets on oil bears?

Let’s start with a reality check: Western countries are trying to wean off Russian energy imports, with sanctions fully implemented by the end of the year; Global oil production has minimal capacity to spare; Diplomatic efforts to get oil from Iran and Venezuela remain fruitless for months, and Erratic Chinese quarantine restrictions could spike oil demand anytime.

Despite the heat wave already causing energy troubles, the actual challenge lies ahead – Winter is coming. Extreme temperatures this summer so far have already claimed 1,600 lives in Spain and Portugal alone, soon the heat will change from a life-threatening situation to a vital necessity.

If people are deprived of heating because of oil & gas shortages, the body count would be much higher in the following winter. So far, nothing mentioned above would directly contribute to a lower oil price.

However, all this doom and gloom also brought forth recession fears, a subdued consumer sentiment alone has alleviated the anticipated demand boom during the US driving season and reduced industrial production. But is that sufficient to take the world out of the “high oil seas”?

Mega oil projects to the rescue

Fear not, for there are multiple mega oil projects about to be operational, injecting the market with a fresh, steady supply of crude oil. In 2023, Africa will take the spotlight with a 15% growth in oil production, and a lot more to come.

Country Operational date Production (bpd) Company
Guyana 2023 Q4 220,000 ExxonMobil
Senegal 2022 Q3 100,000 BP (with others)
Greece 2022 Q3 10,000 Energean
Ethiopia Suspended 120,000 Fairfax Africa Fund
Nigeria 2022 Q4 650,000 Dangote
Brazil May 180,000 MODEC

In terms of developing its energy sector, the African continent is resource-rich while lacking infrastructure and investment, many African countries actually suffered from fuel shortages as enormous oil and gas deposits lie beneath their feet.

Fortunately, several oil refineries will be operational around the fourth quarter of 2022. Most notably, the Dangote Petroleum Refinery in Nigeria is expected to boast a production capacity of 650,000 barrels per day. Once we include other refineries such as Lagos I, Bayelsa III, and Mashi, Nigeria is posed to become the oil kingpin in 2023 with 150 million barrels of crude oil ready to be shipped every day.

All the chatter on crude oil – why not natural gas? Gas pipelines like both Nord Stream projects need considerable time to build. In the case of the proposed Trans-Saharan pipeline, diplomatic, economic, and environmental disputes among various countries have stalled the project for years. Since the pipeline would transport natural gas from Nigeria to Europe, passing through Niger, Algeria, Morroco, etc., bringing more countries into the fold only complicated the situation.

Conclusion

The African oil supply in the near future is likely to replace Russia to serve western markets, solving the energy crisis and lowering inflation. Still, once the pandemic leaves for good and the dust is settled in Ukraine, global consumption would resume and grow, reinvigorating the oil bulls. Check the latest oil price here.

How can the White House Tame Soaring Oil Bulls?

In recent weeks, the crude oil bulls seem to be tamed by recession fears, sliding below $100, yet the underlying problems remain, namely that Russian energy products were not effectively replaced, and that the pandemic and supply shocks have pushed up prices left and right.

While we have previously discussed some difficulties and solutions from a supplier’s perspective, the US government is another major player that controls and regulates the energy market. Let’s take a look at the (possible) measures using the global oil demand and supply model:

What DID the government do?

As oil and gas prices were included as inflation indicators, the aggressive rate hikes from the Federal Reserve in the past months were direct attempts to cool down the economy, and incidentally the energy consumption. While the latest price trends seemingly proved rate hikes a useful tool to lower prices, it was actually attributed to recession fears that suppressed both demand and supply, deeming rate hikes as overkill.

President Biden has proposed a tax holiday, straight up cutting prices at the pump. But when other things held constant, a lowered price level would cause an excess demand, eventually settled by a higher price. Though consumers may briefly enjoy slightly lowered prices, oil producers will take the lion’s share without having any intention to increase production.

Releasing strategic oil and gas reserves into the market have partially relieved prices, however using a finite amount of resources to fill the bottomless pit of demand is futile, the supply curve is bound to decrease. The US government should also purchase oil futures to improve oil price prospects, prompting suppliers to increase production and investment – which take months or longer to take effect.

Secretary Yellen of the US Treasury suggests putting insurance and financing caps on Russia oil among the US and its allies, in order to ameliorate the oil shortage while limiting Russia’s revenue. Setting aside the question whether China and India – two major oil consuming nations would actually listen to their “ally”, countries that have banned Russian imports may stand firm for political considerations.

Assuming the policy is successfully implemented, limiting the insured-oil carrying capacity of vessels would inadvertently raise prices through a tighter supply (less oil shipped) or higher cost (more ships to carry the same amount).

What CAN the government do?

How about boosting supply? We have revealed several issues that have hindered short term increments in oil production, and developed nations are usually notorious for their environmental regulations regarding building new oil refineries, expanding existing facilities is seldom a welcoming news to local communities.

If the Biden administration is willing to provide subsidies and other political concessions to domestic oil producers, then he will have to prepare for a major backlash from the Democrat supporters when the 2022 midterm elections in November arrives.

Latest US diplomatic visits to Venezuela, Saudi Arabia have pointed out another solution: asking for help from other oil producing countries. After excluding countries with major crises e.g. Libya and Venezuela, there are still countries with production capacity to spare.

For instance, China has deliberately reduced oil and gas productions to meet its emission target, and the White House can persuade Beijing to relax those constraints, but international negotiations contain too many moving parts to produce a concrete outcome.

Maybe the answer lies in the demand curve: adjusting consumption patterns. Although most Americans prefer to travel by personal vehicles over mass transit, remote working arrangements have significantly reduced gas consumption from nationwide commuting. Promoting work-from-home not only improves employee performances, it also comes with the happy by-products of fewer greenhouse gas emissions and lower oil and gas prices. Check the latest oil price here.

The Bulls Stops Here – Riding the Crude Oil Rollercoaster, From Inflation High to Recession Low

Oil Price trend

It is safe to assume crude oil was one of the biggest winners of the first half of 2022, from below $80 per barrel in January to a high of $123.6 in March, such prices were not seen since 2008. Within the first few days of June, Brent and WTI oil futures have declined more than $20. What happened back then, and what will happen next?

Inflation

Inflation has taken over the market in the first six months, just as the world was slowly recovering from the pandemic, Russia happened – the Russian invasion of Ukraine sparked supply shocks that aggravated inflation, and western sanctions on Russian oil pushed crude oil prices even higher. It was not an easy decision since the European continent depended on Russia’s energy imports despite their environmental sustainability efforts.

Governments then scrambled to look for alternatives: The oil industry was relatively stagnant during the pandemic and unable to boost production upon request. Talks with Iran are still going nowhere, and countries like Libya and Venezuela were riddled with internal strife, which in turn crippled their oil industry. Certain OPEC members did produce more oil but the amount was negligible, and they have agendas to maintain a profitable price level, as well as healthy relations with Russia – another OPEC member.

Recession

Meanwhile in China, the “zero-case” target has eluded the government and its people, the stringent standards and policies have closed down industrial and residential areas alike – bringing the global supply chain to a halt. While it has vastly cut the oil demand, the lack of Chinese goods has contributed considerably to global inflation.

When inflation was running wild in most parts of the world, even the European Central Bank had to break its 11-year-streak of a negative key interest rate, though the Federal Reserve was much more hawkish than other major central banks. Federal Reserve Chairman Jay Powell was hellbent on taming the inflation bulls at around 2%, rising rates from 0.25% to 1.75% over a time frame of fewer than four months.

As borrowing costs increased, investors began worrying about a possible recession, and three consecutive months of negative GDP growth confirmed their suspicions. After the European Central Bank introduced a July rate hike on 9 June, the oil bulls left the building. WTI oil futures have retreated below $100 a barrel in less than a month.

Who would win?

What should we expect for the rest of 2022? Inflation seemingly endured the previous rate hikes, while neither Russia nor Ukraine is ready to concede, but the oil supply would most likely remain tight, giving room for oil bulls to return. As for the medium to long term, once peace is restored in Ukraine, and the oil supply returns to previous levels, oil prices should cool off eventually.

Regarding the fears of recession, history has indicated most recessions lasted less than a year, and policies are meant to be changed, it is a matter of time for the market to ride the tides of recovery. Check the latest oil price here.

El Salvador Putting All the Eggs in the Bitcoin Basket

Big trouble brewing in the small country?

On 29 June, 2022, bitcoin was trading below $20,000, shedding more than two-thirds of its value of $65,000 in October, 2020. Just a few weeks prior, TerraUSD has demonstrated an even more jaw dropping 95% freefall, from one US dollar to one-third of a cent.

These trends simply show how volatile the cryptocurrency market can be, yet El Salvador – the first country to use bitcoin as a legal tender, has put the fate of its people on Bitcoin, by heavily investing public funds in it. Current world leaders are often critical and doubtful towards these currencies not being controlled by a centralized government body, President Nayib Bukele was a firm bitcoin believer, so much that he kept “buying the dip” despite Bitcoin’s extended weak run.

What makes the smallest Central American country with a developing economy to embark on the bitcoin experiment on a national scale?

Background

Unlike most of its neighbors, El Salvador does not possess rich mines of precious metal and stones, nor does it have massive oil reserves like Venezuela. The country’s main strength lies within its soil, which favors agricultural activities, namely coffee growing. The brown bean brought modest wealth to El Salvador, but most of them went to the government and plantation owners.

The one thing most Latin American countries share is the abundance of dictators, and El Salvador is no exception. From Spanish overlords to right-winged generals, El Salvador often alternated between periods of oppression and civil wars, until it finally ended in 1992. For the next three decades, El Salvador struggled to build a modern economy and a functional democracy, but the aftermath of its past also led to a refugee crisis and the epidemic of violent gangs.

Ground zero for the bitcoin experiment

Then on a fateful day in 2019, a small Salvadorian town called El Zonte had received an anonymous bitcoin donation, for building the local community through a bitcoin transformation. The “Bitcoin Beach Initiative” quickly garnered the attention of President Nayib Bukele, he then declared bitcoin as a legal tender in the country on 7 September 2021, being the first country to do so.

The news was met with numerous criticisms, the International Monetary Fund warned Bukele of its potential risks, and the World Bank once refused to assist El Salvador to integrate bitcoin into the economy.

Nonetheless, El Salvador was ushered into the Bitcoin era, “Chivo” – the official bitcoin wallet app was introduced along with ATMs throughout the country. As an incentive bonus, $30 worth of bitcoin was gifted to first-time registering Salvadorians. Out of its 6.5 million population, around 4 million people have installed the app.

When the “Chivo” hits the wall

However, this doesn’t mean the entire nation has embraced bitcoin, only 40% of the registered users still use Chivo after spending the $30 incentive bonus, and most small businesses do not accept bitcoin payment. Big chain stores would take the cryptocurrency, only because they have the resources to implement the hardwares and training. Stores often encountered issues when someone tried to pay by Chivo, the transaction cannot be completed, yet the amount was still deducted from the wallet.

Security issues were raised when a Chivo account registration only required the citizen’s date of birth and ID card number, hackers stole numerous identities to get the incentive bonus. While some people simply used it as a debit card to deposit their US dollar savings, at times they were unable to access their funds. With the US dollar already a stable and reliable means of exchange, there is not enough need or urgency to switch to the faulty Chivo app and volatile bitcoin.

But President Bukele had more stored for El Salvador, the government has spent over $50 million of public funds to purchase bitcoins. Even though bitcoin prices continued to drop in recent months, Bukele kept “buying the dip” by announcing through twitter. As a firm bitcoin believer, he also plans to build “Bitcoin City” – a monumental $1 billion project that will be powered by geothermal energy, which is also used for mining bitcoins.

Why Bitcoin in El Salvador, and why not?

On paper, El Salvador should be a great testing ground for nationwide bitcoin application. Remittance from overseas Salvadorians accounted for around 20% of its national income, creating demand for a safe and efficient method of transaction. A small and densely populated territory is also beneficial for promoting new technologies, many citizens didn’t have a conventional banking account, a safe and quick mobile crypto wallet app should be an appealing, chic banking option.

Despite all that, two pain points have hindered bitcoin’s development in El Salvador. The security issues mentioned above had diminished the app’s appeal as a trustworthy banking alternative, and bitcoin’s ongoing bearish run is too much of a risk for most Salvadorians to invest in.

Still, it would be premature to call the entire project a failure, as the crypto market remains in its adolescence, cryptocurrencies like bitcoin still have room to rebound; the loss is not finalized until the government decides to sell its bitcoins. There is a fine line between a visionary and a gambler, with a nation’s fate at stake, only time will tell the answer. Check the latest bitcoin price here.

No Tap to Turn for More Crude Oil

Supply side problems

On 22 June 2022, Crude Oil WTI Futures retreated to $104 a barrel – a month-low. But with all things considered, the first half of 2022 still saw oil prices climbing from around $70 to a high of $122 – which is roughly a 70% increase. Due to high oil prices, fuels and transportation costs are higher, so is the general price level.

When Russia is being sanctioned by the US and European countries, they have to seek new sources for crude oil. Naturally, they have turned to OPEC+, the Organization of the Petroleum Exporting Countries, asking its members to increase production. However, there were only negligible changes in total quantity produced in the months passed.

How come it is so difficult to increase oil production? In order to answer this question, one must have a basic understanding of the oil industry. Oil producers come in all shapes and sizes, from nationally owned enterprises (National Iranian Oil Company), multinational corporations (ExxonMobil), to small-sized private companies.

99 problems for oil producers

Nationally owned enterprises primarily follow the nation’s interest, which goes further than basic financial gains, geopolitics and diplomatic relations played significant roles in their business decisions. The blatantly obvious example would be Russia and Iran, though they have a developed production system with huge production rates, clashing political interest dissuades the west from trading with oil companies in both nations.

Although multinational corporations do not have to answer to any government in particular, they still have to work for the shareholder’s (or investor’s) interests. Since the oil crash in 2015, oil companies have been suffering deficits, increasing production also translates to higher operating costs, such as hiring more workers, purchasing and maintaining new machines etc.

Even for oil giants like ExxonMobil, a major decline in oil prices can easily cancel out the revenue brought by hiking production. As a result, major private oil companies became more prudent in expanding their production.

As for small-sized oil producers, their concerns and hardships are often greater than the larger companies mentioned above. A smaller size greatly increases risks, e.g. a hurricane might completely destroy the only oil facility, ceasing the sole source of income.

Moreover, the oil industry in general suffers from labor shortage, companies were unable to re-hire workers laid off in the 2015 oil crash, long hours and harsh conditions do not make a welcoming recruiting message. When it comes to smaller producers, a single worker can make a huge difference.

Other than labor shortage, all oil producers also faced shortage in equipment parts, which in turn diminished maximum production capabilities. The functional spare machines were often dismantled for repairing those that are currently in use, recent supply shocks have limited the availability of new parts and pushed up prices. Over time, fewer operational machines produce less oil.

Even if all the previous issues are addressed, it takes time to train new workers, repair idle oil wells and machines, requiring several months to pump barrels of oil again. Although it is considerably faster than exploring and drilling at a new source. In short, oil producers lacked the proper motivation and resources to increase production. When it comes to response time, the supply side is not as nimble as the demand side. Check the latest crude oil price here.

$140 a Barrel of Crude Oil? Not as Crazy as You Think

What Will Happen When 200 Million People All Go on a Trip in the Coming Months?

Oil and gas consumption would go through the roof. Due to the lack of lasting and relieving factors, analysts at Goldman Sachs anticipated crude oil rising to $140 a barrel in the third quarter. Since Crude Oil WTI Futures managed to jump from around $70 to over $120 in the course of six months, $140 would not be an outlandish prediction.

In the short term, crude oil prices are unlikely to decline through diversifying supply sources or boosting production, with the US driving season underway, it is expected oil and gas prices will receive yet another tailwind.

US Summer Driving Season and Impact on Oil Prices

The summer driving season in the US starts from 30 May (Memorial Day) to 5 September (Labor Day), as many Americans go on summer car trips, gasoline and crude oil consumption would increase steadily over the period.

US driving season is not to be underestimated. In 2021, the US consumed 8.80 million barrels of gasoline on a daily average; During the Memorial Day weekend, the figure went up to 9.2 million barrels.

According to the Energy Information Administration, every barrel of crude oil (42 gallons) can produce 19 to 20 gallons of motor gasoline. Hence, the 400,000 gasoline barrels difference is translated to roughly 800,000 more barrels of crude oil to meet US driving season demands.

Moreover, gasoline used in the summer requires special blends to reduce ozone and smog-forming toxins, the extra procedures in turn drive up pump prices even further.

The only upside is slightly more energy efficient than winter gasoline, by around 1.7%.

As of 14 June 2022, the US national average price for regular gasoline is $5.016 per gallon, a 60% bump from $3.080 in 2021. In states like California, regular gasoline now costs $6.438, where diesel almost asks for $7 a gallon.

The American Automobile Association (AAA) predicted 39.2 million Americans traveled during the Memorial Day weekend, with 34.9 million people choosing automobiles as their means of transport. Comparing the two figures last year, they have a projected growth of 8.3% and 4.6% respectively, though still lower than pre-pandemic levels.

But this is not the end of the wave of travelers, the pent-up demand for vacation is about to be released when US travel restrictions are mostly lifted. In a survey conducted by the Vacationer, over 80% of the 1,030 adult participants plan to travel this summer, and 44.8% had more than one trip planned ahead.

Crude Oil WTI Futures basically share the same seasonal patterns with gasoline prices, thus the US driving season would also contribute to the already soaring oil prices. If the supply side shocks could not have a timely response, the question had to be asked: Can the oil bulls be stopped from the demand side?

Electric and hybrid vehicles have enjoyed a steady growth in sales, but they only take up a quarter of the US automobile market. High retail prices and the shortage of charging stations for electric vehicles (EV) dissuaded potential car owners with limited income or living in rural areas. In addition, a recent shortage in semiconductors has hindered EV production and increased costs.

Drastically changing consumption patterns and preferences would be an arduous task, most people have been deprived of the chance for travel since the beginning of the pandemic. Recalling the results from the Vacationer survey, many Americans are willing to overlook the transportation costs in exchange for a breath of fresh air, leaving rational thinking for daily commute and grocery runs.

Bottom Line

To sum up, Americans are dead set on traveling this summer, oil and gasoline prices would maintain their upward trajectories in the coming months. Electric and hybrid vehicles are yet to effectively replace traditional ones, in order to alleviate the demand for gasoline. But remember, don’t leave summer gasoline blends with ethanol in your car unattended for weeks, they can break down the engine. Check the latest crude oil price here.

For a look at all of today’s economic events, check out our economic calendar.

Crude Oil and Libya – The North African House of Cards

Rich in Oil Reserves and Proxy War Players

When oil prices crept to $120 a barrel, people turned to OPEC to increase production, in order to fill the vacuum left by the American and European ban on Russian oil products. However, the Arab nations did most of the heavy lifting, yet the overall production barely went up, some African nations had actually produced less oil in recent months. In the case of Libya, certain oil facilities and ports were closed due to political demonstrations and military conflicts.

What Exactly Happened in Libya?

Over ten years have passed since the last time the North African nation caught international attention. In 2011, Muammar Gaddafi was killed during the First Libyan Civil War – officially ending the leader’s controversial reign that spanned five decades. But his death only fragmented his opposition and loyalists into smaller camps, and brought forth the Second Libyan Civil War.

An uneasy peace was struck in 2020, with three major domestic leaders contesting for the legitimate leadership, and multiple nations lurking behind the curtains with vested interests.

Why Libya Is So Important for Crude Oil Markets?

The grand prize for controlling Libya would be its enviable oil reserve, ranked 7th in the world, taking up 39% of Africa’s total reserves, and possibly with more crude oil lies unexplored beneath the sands and sea beds. Libyan crude oil is known for its “sweetness” – which does not require much effort to be processed into conventional car fuels. Libya currently produces around 1.2 million barrels of crude oil on a daily basis, with five functional refineries, and expansion and repair plans underway.

Politics

Multiple pretenders have laid claim to the Libyan leadership, as of June 2022, three individuals were left in this presidential race: Dbeibeh, the current prime minister; Bashagha, the alleged successor elected by the Libyan House of Representatives; and Haftar, the military commander.

While Dbeibeh retained control in the west and the capital city of Tripoli, Haftar used Benghazi as his base and took the east, and Bashagha operated his administration in Sirte – a coastal city between Tripoli and Benghazi.

Foreign powers have provided support for various factions, Egypt and Russia backed Haftar; Qatar and Turkey assisted Dbeibeh. Although the EU officially recognized Dbeibeh, there were reports of France and Italy aiding Haftar. As the Russian invasion of Ukraine raged on, the situation has only gotten more complicated.

After Haftar launched an unsuccessful military campaign to take Tripoli, all sides have agreed to a ceasefire in 2020. Presidential and parliamentary elections were supposed to be held in 2021 to resolve the political stalemate, but they were postponed to June 2022, yet no updates are available on the election arrangements.

Elections and Oil

Assuming elections are held in the near future and oil production resumes, around 63% of the crude oil will be exported to Europe, a much less significant portion goes to the US. Brent oil prices would be relieved, because banning Russian oil had a larger impact on Europe than the US, as indicated by Hungary’s reluctance to pass the motion.

Despite Libya’s vast oil resources, it was often overlooked by experts due to its political instability. Jalel Harchaoui, an expert on Libya from IEMed and Global Initiative, believed the promises for elections are merely halfhearted attempts to extend the status quo, where faction leaders can keep their power. Furthermore, there is no guarantee for a peaceful transition of power. In this North African House of Cards, a single mistake would plunge the country into chaos. Check the latest crude oil price here.

Long Way to Go to Stop the Oil Train

From $94 to over $115 per barrel, crude oil has been on the rise for almost two months. The US government has turned to Venezuela as a possible alternative for crude oil. One must ask:

What kind of crude oil does Venezuela produce, and is it enough to meet America’s demands?

To begin with: Venezuela is indeed the home of the world’s largest oil reserve. But there is a twist, its crude is heavy. Heavy crude oil consists of hydrocarbons with long molecular chains and higher boiling points, this means it would require considerably more energy and water to process them and often causes pollution. For example, Venezuela had nine oil spills in the past two years, resulting in significant environmental damage. Flaring from oil refineries also emitted greenhouse gasses, with very familiar impacts on global climate.

On the flip side, heavy crude oil is more abundant than light crude oil, which is the convenient choice and more likely to run out first. The distillation and cracking processes give a greater diversity of oil produced, including bitumen for paving roads, diesel as car fuels and more.

Quantity wise, Venezuela’s oil production has declined over the years, with a daily production rate of somewhere between 500,000 and one million barrels per day. But most of them were already spoken for, China has become the biggest buyer for Venezuelan oil since the US implemented sanctions on the Maduro administration.

Before the Russian invasion of Ukraine and the international sanctions that followed, the US imported around 200,000 barrels of crude oil from Russia on a daily basis, taking up 3% of its total import. However, Venezuela cannot simply boost its production to cater American demands.

Right now, Venezuela’s oil industry is in a sorry state, the forced nationalization of oil companies’ assets has made foreign companies leave with their capital. Years of mismanagement eventually led to decrepit oil infrastructure, including pipelines and equipment that are prone to accidents and pollution.

The working force of PDVSA – Venezuela’s state-owned oil company is also severely lacking in both quantity and quality. After the strike in 2002, competent and experienced workers were replaced by those who supported the Chavez and Maduro regime. People still working there today were often underpaid or not being paid at all, forcing them to dismantle equipment for scrap metal.

Addressing these problems requires policy changes, investment, equipment, and more labor with proper training. Even after meeting the above criteria, oil production would not grow exponentially overnight, getting back to the heyday of pumping 3.5 million bpd takes time. Chevron’s license in Venezuela does not include oil extraction and processing yet, more steps are needed in order to bring Venezuelan crude oil to the US.

Politics

Moreover, the political standstill between the US and Venezuelan governments remains the primary obstacle for importing Venezuelan oil again. The controversial 2018 Venezuelan presidential election served as the catalyst dividing for international support between Maduro and Guaidó, the self-proclaimed Acting President that was recognized by most countries.

The pandemic has seemingly eased the tension to allow dialogues between the Maduro and Guaidó camps to take place. The Biden administration has suggested Maduro introduce a fair and open democratic presidential election in 2024, with the current leader not being a candidate, in exchange for lifting sanctions.

Still, critics are concerned with Maduro’s close ties with Russia, they worry lifting sanctions toward Venezuela would in turn deem sanctions towards Russia much less effective. Opposition leaders also likened Maduro to Putin, in terms of political oppression and violation of personal rights, the current proposal from the US would be too lenient for the authoritarian leader.

Bottom Line

Since Venezuela has been supplying crude oil to Europe despite US sanctions, the scenario where sanctions and lifted would mostly affect US oil prices. With Crude Oil WTI Futures well on their way to reach $120 per barrel, we could expect some short-term downward pressure. But for a long-term force to slow the oil train, investors would need more credible oil production and trading figures to support the sentiment. Check the latest crude oil price here.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

The West Scrambled to Control Soaring Oil Prices in the Short Term

Is Venezuela the Roadblock to Oil Bulls?

Currently, oil prices are substantially inflated due to supply-side shocks and Western sanctions against Russian energy products. It is estimated that the cost of a barrel of crude oil was over $110 at the end of May 2022 – a near ten-year high, prices are also on the rise globally.

Following the ban on Russian oil, the US and European countries sought to find alternate sources of fossil fuels as quickly as possible. This is when Venezuela entered the picture.

In March 2022, the US sent a delegation to Venezuela [1], a country which was deemed by the US to be “Not Cooperating Fully With Antiterrorism Efforts” [2] and had numerous notable figures under US sanctions [3].

Shortly after, the US plans to lift certain sanctions towards Venezuela. As a result, US energy giant Chevron is allowed to negotiate an operating license in the South American country [4]. For 15 years, Venezuela has been in Uncle Sam’s crosshairs [5], what has led to the possible thawing of relations?

The answer lies deep within the Venezuelan soil and ocean bed – its famed oil reserve.

Venezuela is blessed with a plethora of natural resources, precious metals, diamonds, oil etc. [6] Since 1522, Spanish conquerors and socialist dictators alike had vastly benefitted by exploiting the land [7]. Despite producing crude oil for over a century [8], the nation still boasts the world’s highest number of proven oil reserves at almost 300 billion barrels [9].

Its current political head – Nicolás Maduro, was handpicked by his predecessor Hugo Chávez [10], the outspoken Venezuelan president who once mocked then-US president George W. Bush as “the Devil” at the United Nations General Assembly [11].

As an authoritarian leader, Hugo Chávez had built a domestic economy heavily dependent on crude oil – taking up an astonishing 96.6% of total exports [12], with the US being its major customer. In the year 1997, almost 650 million barrels of crude oil were shipped to its now-sworn enemy [13].

Chávez then used the oil wealth to fund a series of welfare policies that targeted the poor, including affordable housing and healthcare systems [14]. Nearly a decade after his death, the Eyes of Hugo Chavez are seen throughout the country, as a watchful symbol that looks after his people, and a clear reminder of his popularity among the grassroots [15].

Unfortunately for Venezuelans, Chávez’s legacy also laid the foundation to their current woes. Price control policies have backfired when the official prices were lower than local food production costs [16]. Food shortages became so widespread that “Maduro diet” became a sardonic local synonym for weight loss due to hunger [17]. The World Food Program and other private charities had to intervene to help malnourished children through soup kitchens [18].

Hyperinflation in Venezuela

Apart from oil reserves, Venezuela also took the top spot for hyperinflation. In 2019, Inflation rate went up by 350,000% [19], although the latest figure in April has gone down to a still-absurd 222.30%, the population still faces price increase on a daily basis [20]. Dollarization rose to the occasion as the unofficial response, Venezuelans working in the private sector managed to get by with their income issued in the stable greenback, but those without access to the US dollar were condemned to even more hardships [21].

Civil unrest has thus become the recurring theme in the Maduro administration. Disgruntled by food shortages, power outages, low wages and more, people have taken to the streets to voice out their grievances [22]. Meanwhile, a total of six million refugees and migrants have left Venezuela [23], due to the harsh conditions that were left without proper solutions.

US Sanctions, China and Russia

With the US sanctioning Venezuela for alleged ties with terrorism and anti-democratic actions, Maduro had to find new customers for its oil exports. China stepped in by purchasing more oil from Venezuela over recent years, eventually replacing the US as its biggest customer in 2020 [24], while Iran provided refinery equipment and condensate in exchange for Venezuelan crude oil [25].

Russia’s ties with Venezuela are more military-oriented, especially through deals on nuclear energy and military equipment [26]. Relations between the two countries remained unfazed in the Russian invasion of Ukraine, just as major countries sanctioning Russia [27].

Venezuelan Economy and Oil

The economic structure of Venezuela makes it extremely vulnerable to oil price volatility and domestic production. In 2002, the employees of the state-owned oil company PDVSA had organized a strike, bringing daily production down to 25,000 barrels a day. In the following two decades, poor management caused severe corruption, lack of maintenance, an exodus of unpaid and unmotivated workers, and countless environmental damage [28]. According to OPEC, Venezuela crude oil production has taken a nosedive from almost 3 million barrels per day in 2014 to below 1 million in 2022 [29].

Oil Historical Prices and Impact on Venezuela

Oil price in the 21st century was on a general downward trend, from $140 a barrel in 2008 to $20 in 2020 [30]. The substantial dip greatly limited Venezuela’s spending power and resources to address its internal strife. Even though opposition leader Juan Guaidó failed to effectively take the office from Maduro in the 2019 presidential elections [31], Venezuela has hit its all-time low with the pandemic aggravating the existing problems into crises.

To find out what’s next for Venezuela and Maduro, and whether Venezuelan oil can replace the Russian’s, please follow us as a follow-up piece will be available in the coming week. Check the latest crude oil price here

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

 

Gold’s Shining Moment?

Gold Historical Analysis and Fundamentals

The yellow metal has been steadily gaining value for a century, despite a temporary setback in the previous decade. The allure of gold goes beyond its aesthetic values in jewelry and ornaments, its physical properties have made it a great conductor for electronics, and contained certain medical purposes as well, future technological advances will only increase its demand for new applications.

From a simple supply and demand perspective, gold production from mining operations is the sole supply factor. Over a 25-year span, 50% more gold had been mined and extracted, with hurdles from COVID-19 gradually lifting in various countries, production rate is expected to increase again.

On the other hand, gold mines are depleting over time; only 28 gold deposits have been discovered since 2012. S&P is pessimistic on gold’s long-term production in its market intelligence report, it expects little to no growth in gold production, putting notable upside pressure to gold prices.

Demand wise, gold is mostly sought after for jewelry and electronic components; and jewelry has been the primary source for gold consumption. The pandemic has considerably weakened the consumption figures from 719.2 tonnes in Q4 2021 to 517.8 tonnes in Q1 2022, after the health restrictions are lifted in China, market demand for gold is likely to recover.

Although the gold standard has become a monetary relic, some central banks still purchase gold as a safe, alternate asset to fiat currencies. This option is particularly enticing for new economic powerhouses like China, India, and Turkey etc. Gold purchasing for central banks has taken up to 80 tonnes in Q1 2022.

As gold trading is dollar-denominated, the greenback’s exchange rate is inversely related to gold demand, i.e. A cheaper dollar attracts investors to purchase gold at a virtually discounted price. When the greenback is weakened against major currencies, gold would become a viable hedge. Being a safe haven asset also means volatility in the market would draw capital from other assets with highest risks, which applies to most adverse events, e.g. economic recession, and natural disasters.

But what will happen when the shock is so big that it hits the entire global economy? The short answer would be: buy gold! Ever since Russia mobilized its troops on the Ukrainian borders in late January 2022, gold price has been increasing until early March. The market anticipated the unstable situation would bring major disruption to the market, food from Ukraine could not get out of the country, and Russian capital and products were cut off by the west.

After months of bombing, sieges, and skirmishes, the direct economic impacts of the war were mostly digested. The remaining elephant in the room would be the inadvertent inflation, partially caused by the Russian invasion, and the ongoing pandemic which wreaks havoc in other regions, notably China – the major exporter of goods and consumer of crude oil.

Then we see the Federal Reserve announcing a series of rate hikes, a hawkish approach to prevent price levels from skyrocketing. Other central banks like the Bank of England then followed suit, albeit increasing with fewer basis points. The disparity in rate hikes among different countries strengthened the US dollar against other major currencies, which in turn soured the market’s appetite for gold.

Gold Price Forecast

What’s next for gold then? According to Standard Chartered Global Market Outlook in April, the report is optimistic towards a bullish gold that banks on:

●        The Russian invasion dragging on for months (very likely given no progress in peace talks)

●        Less hawkish Fed (Depends on US domestic data)

●        USD meeting its peak (Depends on economic performance of Euro zone and the UK)

Gold has always been a defensive asset – mostly reacting to external factors, its appeal lies in its stable nature – like its chemical properties, not for its earning potential. The good news is – whenever the market is looking for a panic button, the shiny metal is always there. Check the latest gold price here

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Could US Dollar Persist Through 2022?

US Dollar Hit Another Milestone

As risk aversion prevails, the US dollar index rose to a 20-year high on Tuesday. The dollar index hit 104.19, the highest since Dec 2002. It later retreated 0.14% to 103.63. Comparably, US treasury yields rose to its highest level since November 2018. Check the US Dollar movement here

Fed Members Adamant About Fighting Inflation

Minneapolis Fed President Neel Kashkari revealed on Monday that the central bank is not getting as much help as it wishes from the supply chains to tame inflation. That said, he reassured investors that inflation will be contained ultimately. Follow Fed’s latest update here

“I’m confident we are going to get inflation back down to our 2% target, but I am not yet confident on how much of that burden we’re gonna have to carry versus getting help from the supply side,” Kashkari said.

Elsewhere, Atlanta Fed President Raphael Bostic said on Monday that he expects the Fed to deliver two or three more 50 basis point hikes.

“I would say that (a 75 basis-point rate hike) is a low probability outcome given what I expect will happen in the economy over the next three to four months,” Bostic said.

Despite Kashkari and Bostic’s not too hawkish remarks, investors’ risk-off sentiment hit markets hard.

Upcoming events that may affect the trend of USD:

  • Jan 11 — US Consumer Price Index (April)
  • Jan 12 — US Producer Price Index (April)

For a look at all of today’s economic events, check out our economic calendar.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Oil Prices Edge Up On Supply Concerns

Germany recently turned the tide on Russian oil sanctions. Meanwhile, the OPEC+ is reportedly unlikely to respond to supply shortages. As investors are anxious that these can further exacerbate the global oil supply, oil prices went up near the weekend.

Germany Changes Its Mind On Russian Oil Ban

German Economy Minister Robert Habeck stated that the country is looking for alternatives to Russian oil, according to Reuters. If the country finds new sources, it will join other European Union (EU) members in EU sanctions on Russian oil. Read all the latest news about oil here

“Today I can say that an embargo has become manageable for Germany,” Habeck said.

He cited the last task that stands in the way as Russia’s state-owned Schwedt refinery in eastern Germany. Halting its operation could impact that region significantly but he revealed that “a solution is close at hand”.

“To develop this is the task of the next days — and yes, I hope only days,” Habeck said.

Investors were worried that this could further tighten global oil supplies. Check out oil’s latest price moves

A Russian oil embargo was first brought up in March and the member states were split on it. The German foreign minister said that the country and other member states were too reliant on Russian energy that it would not be wise to cut themselves off. Notably, Germany relied heavily on Russian energy imports, with a third of its oil supply coming from Russia. Since the Russia-Ukraine war, Germany has been actively reducing its dependence to 12 per cent.

OPEC+ Has No Intention Of Increasing Outputs

According to Reuters, despite the global oil shortage, OPEC+ is reportedly going to stick to its current plan on output increase in the upcoming meeting in May. The group has been pressured by the US to boost output more aggressively. In the group’s current plan, it aims to increase output by 432,000 barrels per day every month until the end of September.

Upcoming Events To Watch:

May 4 Crude Oil Inventories

May 5 OPEC+ Meeting

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Fed Chair Powell Signals More Aggressive Rate Hikes

Fed’s Hawkish Turn

In March, Federal Reserve kicked off its tapering plans as expected. The central bank increased its interest rate by 25 basis points. The meeting minutes, which were released in April, revealed that many council members did not rule out the prospect of a more aggressive tapering in the future. Last week, Fed Chair Powell’s comment at a panel discussion solidified this idea, pushing the US dollar higher and the gold price lower. Follow Fed’s latest updates here

A 50 Basis-Point Hike On The Horizon

Powell stated on Thursday’s International Monetary Fund panel discussion that the Fed is ready to raise interest rates more aggressively to combat inflation, and a 50 basis-point hike will be discussed in the upcoming FOMC meeting in May. If the Fed de facto finalises a half-point hike, it would be the strongest pace in more than 40 years.

“It is appropriate, in my view, to be moving a little more quickly. And I also think there’s something in the idea of front-end loading whatever accommodation one thinks is appropriate… I would say that 50 basis points will be on the table for the May meeting,” Powell said.

According to the CME Group’s Fed Watch Tool, expectations for a half-point hike increased to 97.6% now.

Stronger Dollar, Gold Under Pressure

Powell’s hawkish statement drove the greenback up. The US dollar index hit a 25-month high on Friday. Euro slipped 0.4% in response to ECB’s mixed policy signals. On Monday, French President Emmanuel Macron’s election victory brought the euro higher. The euro opened at $1.0852.

Gold prices slipped in response to strengthening dollar and treasury yields. Spot gold dropped 0.7% at the close on Friday. Check the latest gold price here

For a look at all of today’s economic events, check out our economic calendar.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

US Dollar Strengthened On Hawkish Fed Minutes

US dollar hit the highest since May 2020 this week after the release of the minutes from the Fed’s March FOMC meeting. The dollar index rose to 99.778 and later closed at 99.7.

Hawkish Fed Minutes

As revealed in the Fed minutes of the March FOMC meeting, a significant number of officials concurred with the idea of a more aggressive approach to balance sheet reductions. One Fed representative Esther George suggested a 50 basis-point hike. Receive the latest news here

“Many participants noted that—with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level—they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting. A number of these participants indicated, however, that, in light of greater near-term uncertainty associated with Russia’s invasion of Ukraine, they judged that a 25 basis point increase would be appropriate at this meeting,” the minutes said.

“Many participants noted that one or more 50-basis-point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.”

The minutes also revealed that the central bank may begin reducing its balance sheet in May. As the Fed doubled its balance sheet during the pandemic, it currently has two plans to trim it down. The first way is to cut down $60 billion in treasury yields and $35 billion in mortgage-backed securities every month. The other option is a gradual reduction. Start with minor reductions and slowly increase the amount to its target “over a period of three months or modestly longer if market conditions warrant”.

Bullish Outlook

According to a poll conducted by forex analysts, many of the respondents agreed that the greenback will remain strong as long as the Fed remains a hawkish approach. The dollar index has gained 4% so far this year, and close to half of the increase happened in March. Check out the latest price updates on the hottest FX pairs

For a look at all of today’s economic events, check out our economic calendar.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Oil Prices Drop After Last Week’s 5% Jump

Oil prices advanced 5% to $121 a barrel last Wednesday in response to pipeline disruption and Biden’s emergency meeting with NATO. US WTI settled at $115 per barrel on the day.

The spike is temporary. Oil prices fell more than 2% on Friday when part of that pipeline reportedly resumed operation and after the European Union’s foreign ministers were split on imposing oil sanctions on Russia. This week, as China’s financial hub Shanghai announced a city-wide lockdown, oil prices came under pressure again.

Shanghai’s Abrupt Lockdown

On Monday, Shanghai launched a two-stage Covid lockdown of its 26 million residents in an effort to curb a recent COVID outbreak. The current phase is targeted at the eastern part of the city and will end on Friday morning. The second stage of the lockdown will run from Friday morning to Apr 5. The city suspended all public transit and ride-hailing so far.

The scale of the lockdown is the biggest in two years. Investors are worried about a potential dive in oil demand since China is the world’s largest oil importer. US WTI fell more than 8% at one point on Monday.

A Major Disruption And NATO’s Meeting

A major storm disrupted crude oil exports from Kazakhstan’s CPC terminal last week. Two of the three loading facilities at the site were damaged. The remaining facility was still functioning but it paused its operation temporarily due to bad weather. Stay tuned to the latest financial news

Russian officials said oil supplies by the CPC could potentially be halted completely for two months. The CPC pipeline currently accounts for 1.2% of world oil demand. Despite the Biden administration’s sanctions on Russian oil, this pipeline remains uninterrupted. The majority of the oil is owned by Russia, Kazakhstan and international oil firms.

On the same day, US President Joe Biden arrived in Brussels where he was going to meet with NATO, the G-7 and the European Union. They planned to discuss further sanctions against Russian exports and look for ways to reduce the European Union’s reliance on energy exports from Russia. Currently, oil exports from Russia account for a third of the EU’s overall consumption.

The heightened uncertainty of both events led to a 5% increase in oil price last Wednesday. Yet, the spike was short-lived. A day later, several sources revealed that the CPC pipeline partially resumed operations, easing investors’ anxiety over supply concerns. Meanwhile, no consensus was achieved over the European Union’s potential sanctions on Russian crude and petroleum product imports. While some member states supported an oil ban, some such as Germany and Hungary held their stance that energy should be off the sanction list.

“To do so (impose the sanctions) from one day to the next would mean plunging our country and all of Europe into recession,” German Chancellor Olaf Scholz previously stated.

These updates drove oil prices lower. Brent futures dropped 2.1%, while US WTI dropped 2.3% at the end of last Friday.

Bullish Oil Outlook

Commenting on the recent oil spike, Andrew Lipow, President of Lipow Oil Associates, said, “There’s a growing consensus that the de facto ban on Russian oil purchases has resulted in a supply disruption of 2 to 3 million barrels a day, and until the world can figure out how to replace that oil we’re going to march on higher until demand destruction takes place.”

Oil has rallied over 50% in 2022 so far, the highest level since 2008. Due to an increase in oil demand and a decrease in oil supply, the EIA predicted that Brent crude oil prices and US WTI could average $83 and $79 per barrel respectively this year. Check the latest oil price here

For a look at all of today’s economic events, check out our economic calendar.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

The Fed Kicks Off Rate Hikes Finally

The Wait Is Over

After much anticipation, the Federal Reserve announced a quarter-point interest rate hike on Wednesday in an effort to curb the rising inflation. This marks its first interest rate increase since 2018.

The central bank predicted six more rate hikes in 2022 and three more next year, beating the market forecast of three hikes per year. Dollar fell and gold steadied on the announcement.

Key Takeaways From FOMC

Fed policymakers voted 8-1 to raise the federal fund rate from 0.25% to between 0.25% and 0.5%. Fed Chair Jerome Powell said that the central bank could kick off reducing its nearly $9 trillion balance sheet at its next FOMC meeting in May. Stay tuned to the latest financial news.

The rising inflation continues to be the Fed’s main concern, and the Fed is not too optimistic about ending inflation any sooner. Notably, the consumer price index, a key inflation gauge, showed that food and energy costs hit a 40-year high in February. Considering this, Powell expected the US inflation only to cool down slightly this year. He projected a 4.1% inflation by the end of this year and 2.6% in 2023.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labour market to remain strong,” the Fed said in a statement.

Additionally, Fed cited the invasion of Ukraine by Russia as a potential hurdle to the US economy.

“The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity,” the Fed stated.

The only comforting news for the Fed is that the labour market in the country has generally improved, as there were more jobs and the unemployment rate slipped substantially.

Looking forward, the central bank said it will continue monitoring key statistics, including readings on public health, labour market conditions, inflation pressures and inflation expectations, and financial and international developments.

“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 Fed concluded.

Market Reaction

Fed’s speech was less hawkish as expected, weakening the US dollar. The dollar index retreated to 98.36. As new data showed that Australia’s employment has improved, AUD/USD gained 98 pips to 0.7294. Receive latest updates on the popular FX pairs

Spot gold dipped as much as 1.2% but later regained its ground and ended the day with a 0.4% increase to $1,925 an ounce.

For a look at all of today’s economic events, check out our economic calendar.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Oil Prices Cool Down As An OPEC Member Supports Output Hike

A Sign Of Relief

Oil prices have been skyrocketing since the war in Ukraine. When the Biden administration imposed a ban on Russian oil as part of the US sanctions on Russia for the war, investors have been anxious that oil prices could go up even higher.

On Wednesday, a statement made by an OPEC member spurred the oil prices to cool down a bit. WTI crude oil plummeted more than 12% to settle at around $109 per barrel. Meanwhile, Brent oil prices dropped 13% to $111, the biggest day drop since April 2020. Check the latest oil price

The UAE Supports Oil Supply Boost

The United Arab Emirates made a statement on Thursday indicating that it supports increasing oil supply and will convince OPEC to boost its supply. Read the latest financial news

“We favour production increases and will be encouraging OPEC to consider higher production levels. The UAE has been a reliable and responsible supplier of energy to global markets for more than 50 years and believes that stability in energy markets is critical to the global economy,” Al Otaiba, the current UAE Ambassador to the US, stated.

The oil cartel OPEC member’s announcement is a relief to many investors. Russia, the producer of about 7% of global supplies and the second largest exporter of crude oil, can no longer export crude and oil products to the US, as announced by the Biden Administration on March 8. In the meantime, the UK announced on the same day that the country will phase out the imports by the end of 2022. Oil prices settled about 4% higher on the announcement.

Investors were nervous that the supply loss would push oil prices higher in the future. Hence, if the UAE ambassador does convince the OPEC to increase oil production to fill the Russian supply gap, that could potentially ease the overheated oil prices further.

Upcoming Events to Watch:

  • Mar 16 – IEA report
  • March 31 – the 27th OPEC Meeting

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Interest Rate Hike In March Is Certain

How likely are these factors going to impact the tightening pace? Find out in our latest analysis.

Powell’s Takes on the Russia–Ukraine Crisis and Rate Hike

Fed Chair Powell affirmed in testimony to Congress on Wednesday that the Fed will begin interest rate hike at March’s FOMC meeting. He cited the recent Russian–Ukraine crisis as a key factor to the future tightening pace, in addition to inflation. He highlighted that there are still too many uncertainties ahead so the Fed will be cautious before making any big decision. Receive the latest news here

“There are events yet to come and we don’t know what the real effect on the U.S. economy will be. The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely. The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Powell said.

In light of the current situation, Powell is eyeing to increase short-term interest rates by 0.25%. If inflation does not ease as quickly as expected, the Fed might tighten more aggressively. Powell did not rule out the possibility of increasing rates by 0.5%. Notably, the last time the Fed opted for a 0.5% rate increase was in 2000.

Nonfarm Payroll Preview

The US Labor Department is releasing the nonfarm payrolls results for February this Friday. The market consensus is 400K added jobs, fewer than January’s 467K added jobs.

While some analysts still cited Omicron as a factor that might adversely affect Friday release, the impact of Omicron on the US job market might be less severe as expected. There was a surprise for January’s nonfarm payrolls as the actual data exceeded expectations. The US economy added 467K jobs in January, versus the expected 150K. Looking into other data, both the labour force participation rate and average hourly earnings are better than expected.

Market Reaction

In light of Russia’s invasion, US crude oil surged to its highest since 2011 and Brent oil ended on Wednesday at its highest close in nearly eight years.

The US dollar index was not much impacted by Powell’s speech and hovered around 97.35. Meanwhile, as the consumer prices in the Eurozone increased 5.8%, EUR/USD dropped slightly to 1.1121. Receive the latest price updates on the hottest FX pairs

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

 

Gold – Time to Shine?

Gold is traditionally considered a hedge against political risks and inflation. This week, as the conflict between Russia and Ukraine mounts and US inflation continues to soar, investors turned their attention to the safe-haven asset. Gold prices jumped to the highest level since June 2022 on Tuesday, and on Thursday, Gold prices surged to a 15-month peak. In February alone, gold prices have climbed by five percent.

Escalating Geopolitical Tensions

The most recent Russia–Ukraine conflict began in November 2021 when satellite images showed that Russian troops have been amassing on the border with Ukraine. Things have escalated further this week. Stay tuned to the latest financial news

Russian President Putin made a speech on Monday saying that Russia would recognize the independence of two territories in Ukraine which was currently under the control of the Moscow-backed separatists. This could potentially pave the ways for an invasion as those separatist regions could seek military support from Russia. Gold climbed 7 dollars to $1,905 an ounce.

Ukraine declared a nationwide state of emergency, which will last for 30 days on Wednesday. Gold retreated $1,898 an ounce. Check the latest gold price

On Thursday, Putin announced that he would carry out a “special military operation” in Ukraine on live. Prior to this, he has been denying any potential attack on Ukraine. The US believed a full-scale invasion of Ukraine is imminent. Gold prices hit the highest level in over a year.

A Mixed Outlook

Despite the surging inflation and the geopolitical situation, analysts at UBS considered the gold surge is short-lived because of the upcoming interest rate hikes.

“We keep a negative view on gold and silver, which we think are likely to face downward price pressure amid higher US interest rates and a stronger USD,” UBS wrote in a statement.

On the other hand, Goldman Sachs analysts said gold could hit above $2,000 this year.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Will the Recent Inflation Signal a Rate Hike?

Fed’s Tightening Agenda Remains Vague

Federal Reserve officials reinforced in January’s FOMC meeting that they would start raising rates in March, according to the minutes released on Wednesday. The central bank is open to the idea of a faster interest rate hike but they would still rely on future economic data to determine whether a faster pace of tightening is justified. Receive the latest news update here

“Most participants noted that, if inflation does not move down as they expect, it would be appropriate for the committee to remove policy accommodation at a faster pace than they currently anticipate,” the minutes say.

The Fed is hesitant and less hawkish than expected. Even when the economic data released before the January meeting is encouraging, there is no explicit mention of the exact date to begin the process or the possibility of a 50 basis point hike.

A month after the meeting, both the producer price index and consumer price index results revealed that inflation continues to soar, suggesting a need for steeper tightening. Will the Fed announce the first interest rate rise in the next scheduled meeting?

Inflation Is Getting Higher

According to the data released on Tuesday, the producer price index was up 1% in January, the biggest increase in eight months. The PPI jumped 9.7% over the past 12 months ending in January 2022. The results are much worse than anticipated. The Wall Street forecasted the monthly increase and the 12-month PPI to be 0.5% and 9.1%.

The prices for final demand goods rebounded by 1.3% in January, compared to a 0.1% decline in December. According to the press release, over 40% of the broad-based increase can be traced to a 0.8% rise in the index for final demand goods less foods and energy.

A similar situation happened to retail inflation. Driven by a surge in the cost of shelter, food and energy, the consumer price index climbed 0.6 in January and 7.5% over the past 12 months. The 7.5% increase marked the biggest increase since 1982. Stripping out the price volatility of food and energy costs, the CPI rose 6%, still above the market estimate of 5.9%.

The Fed previously indicated in December 2021 that inflation would fall sharply this year. Considering the current situation, market expects the Fed to act more swiftly and aggressively to tame inflation. Market does not rule out the possibility of the Fed raising hike before the next FOMC meeting.

Upcoming events to watch:

  • Feb 17 (Thurs) 8:30 (GMT-5) – Initial Jobless Claims
  • Feb 24 (Thurs) 8:30 (GMT-5) – US GDP
  • Mar 4 (Fri) 8:30 (GMT-5) – Nonfarm Payrolls
  • Mar 4 (Fri) 8:30 (GMT-5) – Unemployment Rate
  • Mar 9 (Wed) 8:30 (GMT-5) – JOLTs Job Opening

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.