The Fed Makes a Risky Move to Lower Crude Prices

Crude prices are going down since the beginning of the week. Brent crude lost almost 2.0% to $92.50 per barrel despite touching the $96.00, the highest since November 2022. 

The oil market is witnessing a furious battle around the resistance at $92.00-94.00 per barrel. Stakes are high, as a breakthrough of this resistance would initiate an upside scenario with targets above $100 per barrel. This would be extremely unfavorable for the American economy and for other oil consuming countries too, as it will ramp up inflation. This scenario was probably behind the recent decision of the Federal Reserve (Fed) that signaled a higher-for-longer interest rates scenario. This is a very risky move in an effort to tame inflation.

Oil traders were cautious, and they were not trying to push oil prices above $96.00 per barrel of Brent crude ahead of the Fed meeting on September 20. Thus, prices returned to the resistance zone below $94.00 per barrel. However, this was s short break for the Fed to announce its decisions and to prepare for another surge of crude prices. The Organization of the Petroleum Exporting Countries and its allies known as OPEC+ supports rising prices with its recent production cuts and 3.3 million of deficit expectations for the Q4 2023. International Energy Agency expect Brent crude prices to rise to $93.00 in average for the entire 2023, which is by $7.00 above the previous forecast. These forecasts are resulting in Bank of America and Chevron CEO Mike Wirth expectation of oil prices above $100 per barrel for the rest of 2023. Falling crude inventories in the United States, including a contraction of 2.135 million barrels last week, strongly advocates this upside scenario. 

On the other hand, the downside scenario is not supported at all. So, a rise of Brent crude prices above $94.00 per barrels is seen as a likely move. Thus, the Fed has joined the game in an effort to bring inflation expectations down. Policymakers have decided to leave its interest rates unchanged at 5.5%. But the rhetoric form Fed’s leader Jerome Powel and co suggest that it could make another interest rates hike by 0.25% in 2023 and reduced the number of potential rate cuts for 2024 on its dot plot projections with an average forecast for the next year at 5.1% against the expert consensus of 4.6% before the Fed meeting. He also called a soft landing of the U.S. economy as a primary objective, not a baseline scenario, which was unexpected. This mat mean that the Fed sees a hard landing for American economy in the next 3-6 months. So, why another interest rates hike is been considered? Such rhetoric may be prompted by rising fuel prices that would boost prices. Powell is trying to lower oil deficit expectations for Q4 2023 by prompting lower fuel demand in the U.S. 

This is a very brave move. But if it fails to tame oil prices and bring them back below $94.00 per barrel of Brent crude the Fed should expect some major troubles. U.S. debt market was also affected by the Fed rhetoric as 10-year Treasuries yields went above September 2022 highs. This very dangerous level almost wreaked a havoc on the debt market of the United Kingdom last year. Investors could expect such a turbulence this time too. If this turbulence will be accompanied by persistent high oil prices the U.S. and other developed countries may experience structural economic troubles or stagflation with a very severe consequences. Let’s hope it was worth it.