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Oil Struggles Against Recession Fear; U.S. Crude Climbs But Brent Down

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© Reuters.

By Barani Krishnan

Investing.com — Oil bulls are discovering that the Russia-OPEC driven crude rally isn’t immune after all to talk of a U.S. recession.

Since the Feb. 24 invasion of Ukraine, even in the weeks leading up to that, longs in crude have behaved as though supply disruptions are the only thing that matters to energy prices — not demand. 

The presumption has shaped their indifference to any discussion on the potential impact to oil demand from the worst inflation in America in 40 years. China’s debatable actions in clamping down on new Covid breakouts in the world’s largest oil importing country had also fueled skepticism toward any selloff in oil.

This week as well, oil bulls dug their heels in as talk of demand destruction gained momentum from gasoline retailing at record highs of nearly $4.50 per gallon and diesel at well above $6 in U.S. pumps. After a two-day slide of almost 10%, crude still managed to pull back half of those losses in just one session — Wednesday.

But the laser-focus of macro investors at the same time on the Fed’s tightening actions and whether that could ultimately do the economy in returned to haunt the oil market on Thursday.

After spending the first half of the session in the negative and the second higher, the two crude benchmarks settled the day mixed and little changed. But more important perhaps was the gnawing feeling that crude longs could no longer summarily dismiss the negative impact of inflation-recession talk.

“Oil prices remain a volatile trade as the crude demand outlook grows more uncertain,” said Ed Moya, analyst at online trading platform OANDA. “Inflation remains uncomfortably high and has accelerated global growth concerns. The risk-off tone on Wall Street is leading to a much stronger U.S. dollar which is weighing on oil prices.” 

New York-traded West Texas Intermediate, or WTI, the benchmark for U.S. crude, settled up 42 cents, or 0.4%, at $106.13 after falling as much as $3 earlier in the session.

Brent crude, the London-traded global benchmark for oil, settled down 6 cents, or 0.01%, at $107.45 a barrel after rallying by more than $1 earlier. 

While many energy traders remain fixated over the EU’s potential ban on Russian crude, fear of disruptions from that seems to be losing momentum, Moya said. 

Soaring pump prices and slowing economic growth are expected to significantly curb the demand recovery through the remainder of the year and into 2023, the International Energy Agency cautioned on Thursday. 

“In this market environment, oil will struggle if China moves forward with city-wide lockdowns,” Moya said, adding that longs in crude will have to hope that summer U.S. road trips and flights and cruises hold up the demand picture.

Economists fear that the U.S. economy, finally on the path to resilience after the damage wrought by the two-year long coronavirus pandemic, could head for negative growth again from the Fed’s rate hikes.

The Producer Price Index, or PPI, which measures what retailers pay for goods at the wholesale level, rose 11% in the year to April, after an 11.2% rise in the 12 months to March, the Labor Department said on Thursday.

A day earlier, the department reported that the Consumer Price Index, or CPI, expanded 8.3% in the year to April — versus 8.5% rise in the 12 months to March — as fuel and food prices stayed near record highs.

Prior to PPI and CPI readings, the Personal Consumption Expenditure Index, or PCE, which is closely followed by the Fed, rose by 5.8% in the year to December and 6.6% in the 12 months to March. 

The Fed, whose own tolerance for inflation is a mere 2% per year, has been alarmed by these numbers and is determined to bring the PPI, PCE and CPI  readings back to benign levels.

To do this, officials at the central bank are debating the viability of a 75-basis point interest rate hike in June, after the 50-bps and 25-bps increases at their May and March meetings, respectively. A 75-bps hike would represent the largest upward adjustment in rates since 1994. 

Fed Chair Jerome Powell has also indicated that a total of seven rate hikes — the maximum allowable under the central bank’s calendar of meetings this year — were on slot for 2022, and more could follow in 2023, until a return to the annual 2% inflation rate is achieved.

Commodities

Oil falls 2% on Powell comments, hopes for Venezuela supply

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© Reuters. FILE PHOTO: Oil pump jacks are seen at the Vaca Muerta shale oil and gas deposit in the Patagonian province of Neuquen, Argentina, January 21, 2019. REUTERS/Agustin Marcarian

By Stephanie Kelly

NEW YORK (Reuters) -After hitting seven-week highs, oil prices slumped 2% on Tuesday as Reuters reported that the United States could ease some restrictions on Venezuela’s government, raising hopes that the market could see some additional supplies.

Prices also fell after Federal Reserve Chairman Jerome Powell warned the economy could be hurt by attempts to reduce inflation.

For the first time since May 2020, the Brent international benchmark settled below U.S. West Texas Intermediate crude. Refiners worldwide have scrambled to find alternative energy supplies after Russia’s invasion of Ukraine. U.S. reserves are falling and that has raised the price for U.S.-based crudes, said Andrew Lipow, president of Lipow Oil Associates in Houston.

Brent crude fell $2.31, or 2%, to settle at $111.93 a barrel, and U.S. West Texas Intermediate (WTI) crude fell $1.8, or 1.6%, to settle at $112.40 a barrel.

Powell suggested there could be some economic pain involved in bringing inflation down. The U.S. central bank will “keep pushing” to tighten U.S. monetary policy until it is clear that inflation is declining, he said.

“Some of those comments tempered buying enthusiasm on the oil side,” said Phil Flynn, an analyst at Price Futures Group.

U.S. President Joe Biden’s administration will authorize U.S. oil company Chevron Corp (NYSE:CVX) to negotiate with Venezuelan President Nicolas Maduro’s government as soon as Tuesday, Reuters reported, citing sources. There is no final U.S. decision yet on renewing Chevron’s current limited license to operate in Venezuela, the source said.

Oil prices have generally been rising as Russian supply is squeezed by bans from several countries and an economic downturn due to broad sanctions on Moscow imposed by the United States and allies.

Russia’s production dropped by 9% in April, and the country, part of the OPEC+ group, produced far below levels required under a deal to gradually ease record output cuts made during the worst of the pandemic in 2020.

This month, non-Russian deliveries into the Polish port of Gdansk hit the highest in at least seven years, as refiners in eastern Germany and Poland switched.

“Ultimately, this is a supply-side story,” said Fawad Razaqzada, analyst at City Index. “Unless OPEC and its allies ramp up production and fast, it is difficult to see how prices can go down meaningfully.”

EU foreign ministers failed on Monday in their effort to pressure Hungary to lift its veto on the proposed oil embargo. But some diplomats now point to a May 30-31 summit as the moment for agreement on a phased ban on Russian oil.

U.S. crude and gasoline stocks fell last week, according to market sources citing American Petroleum Institute figures on Tuesday. U.S. government data is due on Wednesday. [API/S] [EIA/S]

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Commodities

Venezuela’s Maduro, opposition expected to talk; U.S. eases some sanctions -sources

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© Reuters. FILE PHOTO: Venezuela’s President Nicolas Maduro and his wife Cilia Flores dance during the May Day celebrations in Caracas, Venezuela May 1, 2022. REUTERS/Leonardo Fernandez Viloria

By Vivian Sequera, Matt Spetalnick and Marianna Parraga

CARACAS/WASHINGTON (Reuters) -Venezuelan President Nicolas Maduro and the country’s opposition were expected to announce a resumption of talks as Washington eases some sanctions to help smooth the way for the negotiations, according to U.S. officials and others familiar with the matter.

U.S. President Joe Biden’s administration authorized U.S. oil company Chevron Corp (NYSE:CVX) to open talks with Maduro’s government, temporarily lifting a U.S. ban on such discussions, senior administration officials said on Tuesday.

Washington has not made a final decision on renewing Chevron’s current limited license to operate in Venezuela, several sources told Reuters. Chevron is the last U.S. oil producer to maintain a presence in Venezuela, home to the world’s largest crude reserves.

The United States was also poised to remove Erick Malpica, a former official of state oil company PDVSA and the nephew of Venezuela’s first lady, Cilia Flores, from a sanctions list, one U.S. official told Reuters on condition of anonymity.

The moves, which U.S. officials said were decided in consultation with Venezuela’s opposition, follow a visit to Caracas in March by the highest-ranking U.S. delegation in years, leading to the release of two U.S. detainees.

It was widely seen as a goodwill gesture by Maduro, who is under heavy U.S. sanctions along with his inner circle.

Maduro requested the U.S. lifting of sanctions on Malpica in the Caracas talks, two sources familiar with the matter said. The Venezuelan opposition said it did not ask for the delisting of any sanctioned officials. The White House did not immediately respond to a request for comment.

The Socialist leader also expressed a willingness to return to negotiations in Mexico with the opposition, which he abandoned in October, and sources said the two sides were expected as soon as Tuesday to set a date for resuming talks.

The talks are aimed at resolving Venezuela’s long-running political crisis, and Washington insists that any major lifting of sanctions will depend on progress at the table. The United States has recognized opposition leader Juan Guaido as legitimate president, condemning Maduro’s 2018 re-election as a sham. But Maduro remains in power.

Venezuelan Vice President Delcy Rodriguez said in a post on Twitter (NYSE:TWTR) that her government hopes the U.S. decision to ease some sanctions would pave the way for a total lifting of “the illegal sanctions that affect our people.”

‘GUARDRAILS’

The decision to allow contacts between Chevron and PDVSA – the centerpiece of Venezuela’s U.S.-sanctioned oil sector – has “guardrails” to prevent going beyond the narrow authorization to discuss “potential future activities” in the country, one of the officials said.

The latest U.S. moves, including the Chevron decision, were intended to help encourage renewed Mexico talks, and the steps are contingent on Maduro acting “constructively” in negotiations, officials said.

“It does not allow (Chevron) entry into any agreement with PDVSA or any other activity involving PDVSA,” a senior administration official told reporters. “So fundamentally what they’re doing is just allowed to talk.”

Despite that, Senator Robert Menendez, chairman of the Senate Foreign Relations Committee and Biden’s fellow Democrat, said in statement: “The Biden administration must refrain from lifting any additional sanctions until Maduro makes concrete concessions at the negotiating table.”

The senior administration official said sanctions relief would be calibrated in line with “ambitious, concrete and irreversible outcomes” in negotiations and warned that U.S. steps could be reversed if there was any backsliding by Maduro.

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Commodities

Oil Inventories Unexpectedly Drop by 2.4M Barrels Last Week: API

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© Reuters.

By Yasin Ebrahim

Investing.com — U.S. crude oil inventories unexpectedly dropped last week, the API reported Tuesday, following a day of wild swings in oil prices on easing supply fears as President Biden could reportedly lift a ban on U.S. oil major Chevron (NYSE:CVX) doing business in Venezuela

West Texas Intermediate, the U.S. benchmark, traded at $110.52 per barrel following the report after settling down 1.6% at $112.40 per barrel.

U.S. crude inventories fell by 2.4 million barrels for the week ended May. 12. That compared with a build of 1.6 million barrels reported by the API for the previous week. Economists were expecting an increase of about 1.5 million barrels. 

The API data also showed that gasoline inventories fell by 5.1 million barrels last week, while distillate stocks increased by about 1.1 million barrels.

The official government inventory report due Wednesday is expected to show weekly U.S. crude supplies rose by about 1.4 million barrels last week.

 
 

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