US rail stoppage fears, easing Chinese lockdown drive crude futures

Front-month ICE Brent gains by $1.39/bbl on the day, to $94.48/bbl at 09.00 GMT.

PHOTO: Crude values gain as the market sees signs of a global demand recovery. Getty Images

Upward pressure:

The threat of a rail stoppage and potential crude supply disruptions in the US has propped up Brent. The country's rail system brings some crude oil in from Canada and sends exports of US gasoline and diesel to Mexico. The Pacific Northwest also depends heavily on rail to bring oil in from North Dakota.

OPEC kept its oil demand forecast unchanged this week, citing signs of major economies having fared better than expected despite headwinds such as higher inflation. It still expects global demand to rise by 3.1 million b/d in 2022 and by 2.7 million b/d in 2023.

Reports of easing lockdown restrictions in China have sparked hopes of an oil demand recovery. Authorities in China’s Chengdu have announced a complete lifting of restrictions imposed on 1 September.

Downward pressure:

The International Energy Agency (IEA) cut its demand forecast for 2022 by 100,000 b/d to 2 million b/d as a result of the global economic slowdown. The Paris-based organisation predicts that global oil demand will slow in the fourth quarter of this year, and that supply will exceed demand into 2023.

The market is grappling with the possibility of an aggressive 100-basis point US interest rate hike to be announced at next week’s Federal Open Market Committee (FOMC) meeting. According to Bloomberg, chances of a 100-basis point rate hike increased after the US consumer price index showed another massive year-on-year gain of 8.5% in August. This is far above the Fed's target of 2% inflation target.

Former US Treasury Secretary and President Emeritus of Harvard University Larry Summers tweeted that if he were a Fed official, he would pick “a 100 basis points move to reinforce credibility.”

Crude values could come under pressure from heightened expectations of a record interest rate increase over the coming days, but are likely to find a floor around $80-85/bbl, says Religare Broking vice president Sugandha Sachdeva. She argues that Brent is likely to attract renewed buying interest if it hits these lows.

By Konica Bhatt

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