Oil Tumbles in Belated Nod to Fed, “China’s Pivot” on COVID

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By Barani Krishnan

AiVIF.com -- “Better late than never” is what the oil bears will say — though the bulls will disagree.

Crude prices tumbled Thursday in a belated reaction to the Federal Reserve’s higher for longer vow on rates, as both New York-traded West Texas Intermediate and London’s Brent erased the previous session’s gains made over sharp U.S. inventory draws that ignored the central bank’s actions.

China’s pivot on COVID — even if the Fed did not have one on rates — also did crude prices in. Beijing was back to playing up its zero-COVID policy on Thursday, a day after speculation that the largest oil importer might relax social curbs to join the rest of the world, which has moved on from the two-year-long pandemic.

WTI settled its latest session down $1.83, or 2%, at $88.17 per barrel. In Wednesday’s trading, the U.S. crude benchmark finished up 1.8%, after breaching $90 the first time in three weeks with an intraday high of $90.36.

Brent settled Thursday’s trade down $1.49, or 1.5%, at $94.67. The global crude benchmark rose 1.8% in the previous session after a three-week peak at $96.42.

“China stands by its zero-COVID policy and global central bank tightening is crushing economic activity…which means the short-term crude demand outlook will probably get slashed,” observed Ed Moya, analyst at online trading platform OANDA. 

Fed Chair Jerome Powell says he's not sure about a soft landing or recession for the U.S. economy as the nation weathers its worst inflation in four decades. He's certain about one thing though -- that it's premature to pause on the central bank's aggressive rate hike regime.

The Fed on Wednesday raised rates by 75 basis points for a fourth straight time in November. The sixth rate hike of the year effectively brought rates to a peak of 400 basis points from just 25 in March. 

The central bank said rates had to be “sufficiently restrictive” to bring inflation down to its 2% objective over the medium term. Inflation, as measured by the Consumer Price Index, is about four times higher than the Fed’s target now — standing at 8.2% during the year to September, after a 40-year peak of 9.1% in the 12 months to June.

The Fed’s hawkish talk also drove the dollar up in Thursday’s trade, adding to the weight on dollar-denominated commodities such as crude. The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, hit a three-week high of 113.035.

Bond yields, benchmarked to the 10-year Treasury note, also hit a three-week peak of 4.216.

Investors, economists and business leaders have warned for some time that the Fed’s aggressive rate hikes could land the world’s largest economy in a recession — just 2.5 years after the last slowdown that broke out with the coronavirus pandemic in mid-2020.

The U.S. economy did sputter in the first two quarters of the year, with back-to-back negative growths of 1.6% and 0.6% in Gross Domestic Product that technically placed the nation in a recession. Third-quarter GDP, however, came in at a resilient 2.6%, raising questions of whether another slowdown was likely or a soft landing was possible instead.

Aside from the Fed, the Bank of England also raised rates by 75 basis points this week, its most in 33 years, adding to the specter of a global economic slowdown.