Oil Jumps on China COVID-Ease, Fed Pivot Talk

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By Barani Krishnan

AiVIF.com -- Sensing that it was probably overdoing its COVID lockdowns while the rest of the world had moved on with the pandemic, top oil importer China said Tuesday it was reviewing social curbs over the virus and could fully reopen for business by spring 2023, sending crude futures rallying after a two-day drop.

Continued hopes for a Federal Reserve pivot — a buzzword that simply means the central bank might opt for a lower rate hike than 75 basis points — in December also added to risk appetite across markets, despite labor and other data that remained unsupportive to that notion. 

Investors have been on the edge since summer over the Fed’s aggressive rate hike regime that went from March’s 25-bp hike to 75-bp in June, which the central bank has maintained. The dollar tumbled initially Tuesday on the speculation, then rebounded before turning weaker again in New York’s late afternoon trading, providing a backwind to oil and other commodities. 

Reuters reported about an unverified note trending in social media, and tweeted by influential economist Hao Hong, that a "Reopening Committee" formed by Chinese Politburo Standing Member Wang Huning, was reviewing overseas COVID data to assess various reopening scenarios, including dropping most curbs by spring 2023.

“Crude prices jumped after rumors that China was preparing for a full reopening in March 2023,” said Ed Moya, analyst at online trading platform OANDA. 

New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled up $1.84, or 2.1%, at $88.37 a barrel, after a net drop of almost 3% over the past two sessions.

London-traded Brent crude, the global benchmark for oil, also settled up $1.84, or almost 2%, at $94.65 per barrel, after last week’s rally of 3%.

On the Fed pivot, Moya said: “Momentum was building on expectations for the Fed to downshift their tightening pace in December, but now that call seems like it may have been premature. Rates might need to stay higher for longer if the labor market is still healthy and inflation ends up being stickier than markets are initially thinking.”

The number of available jobs for Americans came in well above expectations in September, with nearly two positions for every job-seeker, the Labor Department said Tuesday in latest monthly data that appeared to complicate the Fed’s inflation fight.

A sterling labor market has been one of the greatest redeeming qualities of the U.S. economy over the past two years. But it is also an anathema of sorts for the Fed as robust wage growth has added to the worst inflation in four decades. The Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, said there were 10.72 million available positions in September, above the estimated 10 million.

The JOLTS reading “reverses a recent decline and raises the risk of a tight jobs market for longer and the Fed needing to hike more”, economist Adam Button said in a post on the ForexLive forum, noting that there were 1.9 positions available for every job-seeker.

The Fed is all but certain to deliver a 75-basis-point rate hike on Wednesday, the fourth of its kind, as the central bank keeps to a series of jumbo-sized rate increases to get inflation back to its target.

Inflation, as measured by the Consumer Price Index, stood at 8.2% during the year to September, not too far from the 40-year peak of 9.1% noted in the 12 months to June. 

The Fed’s target for inflation is a mere 2% a year and it has said it will not back off on interest rate hikes until it achieves its aim. Since March, the central bank has raised rates by 300 basis points from an original base of just 25. The Fed intends to add another 125 basis points to rates before the year-end.

The JOLTS data came ahead of Friday’s more important non-farm payrolls report for October, which the Fed uses as a key benchmark for rate decisions. Economists expect the Labor Department to report that the United States added 191,000 non-farm jobs last month, versus September’s growth of 263,000.

Fighting inflation isn’t the Fed’s only agenda. It is also mandated to ensure “maximum employment” for Americans, further adding to the central bank’s headache in ensuring a balance between the two priorities even as it tries to cool employment in order to get price pressures down. Under the Fed’s definition, maximum employment is achieved when the monthly jobless rate is at 4% or below. The central bank has scored full points on this task since the start of this year, as unemployment hit 4% in January and has stayed below that level.

Oil market participants were also on the lookout for U.S. weekly oil inventory data, due after market settlement from API, or the American Petroleum Institute.

The API will release at approximately 4:30 PM ET (20:30 GMT) a snapshot of closing balances on U.S. crude, gasoline and distillates for the week ended Oct. 28. The numbers serve as a precursor to official inventory data on the same due from the U.S. Energy Information Administration on Wednesday.

For last week, analysts tracked by AiVIF.com expect the EIA to report a crude stockpile build of 367,000 barrels, versus the 2.588-million barrel rise reported during the week to Oct. 21.

On the gasoline inventory front, the consensus is for a draw of 1.358 million barrels over the 1.478 million-barrel decline in the previous week.

With distillate stockpiles, the expectation is for a drop of 560,000 barrels versus the prior week’s gain of 170,000.