The WTI crude oil price bullish run continues despite the Federal Reserve hawkish message. Commodity prices headed lower after Fed’s message, but oil did not follow.
The crude oil price traded above $75 for the first time since April 2019. On its way up, it briefly traded above $76, in a context when other commodity prices declined after the Fed’s recent hawkish message.
Commodity prices typically have an inverse relationship with interest rates. Higher rates trigger lower commodity prices and the other way around. Only this time it’s different.
Despite the Fed sending a hawkish signal to the markets, crude oil’s bullish run continues. Moreover, the market expects the Fed to signal the tapering of the asset purchases at the upcoming August Jackson Hole Symposium, another hawkish turn priced in the markets. Nevertheless, the price of oil remains up.
The COVID-19 pandemic led to a sudden drop in demand and oil briefly settled below zero in the futures market. But OPEC+ reacted quickly, supply fell below demand, and prices rebounded aggressively.
Like it or not, oil remains a big part of the energy mix. Its share in global energy consumption remains huge, despite ongoing global efforts for greener policies.
Nuclear Negotiations with Iran Stall
Traders paid attention this year to the ongoing negotiations regarding the US returning to the Iranian nuclear deal. Only recently, the negotiations took a big blow as Iranian presidential elections showed the rise of a hardliner.
Suddenly the extra oil supply from Iran is unlikely to reach the market in the second half of this year, putting further upside pressure on prices. Moreover, demand is forecast to increase in the next six months, by about three million barrels a day, according to the latest estimates.
The recent OPEC-JMMC meetings did not signal an increase in supply, so the market remains short of oil at a time when economic activity picks up. Therefore, supply/demand imbalances are expected to continue for the rest of the year, fueling higher oil prices.
For all market participants, higher oil prices are a concern because of inflationary pressures. The price of oil is a driver of inflation, and judging by the latest developments in the oil market, inflation is unlikely to ease anytime soon.