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Futures Movers: Oil turns lower with focus on Fed pace of rate hikes after ISM data

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Oil futures turned lower on Monday as data showing a rise in U.S. service-sector business conditions fed the likelihood of further interest-rate increases by the Federal Reserve.

Prices had traded higher in early dealings, supported by a European Union ban on importing Russian seaborne crude and a price cap of $60 a barrel that took effect Monday, signs that China was relaxing its COVID-19 restrictions, and a decision Sunday by OPEC+ to keep production quotas unchanged.

What are prices doing ?

West Texas Intermediate crude for January delivery
CL00,
-1.80%

CL.1,
-1.80%

CLF23,
-1.80%

declined by 90 cents, or 1.1%, to $79.08 a barrel on the New York Mercantile Exchange after trading as high as $82.72.

February Brent crude
BRN00,
-1.62%

BRNG23,
-1.62%
,
the global benchmark, lost 72 cents, or 0.8%, at $84.85 a barrel on ICE Futures Europe.

Back on Nymex, January gasoline
RBF23,
-1.95%

fell 3.4 cents, or 1.5%, to $2.2466 a gallon while January heating oil
HOF23,
-3.56%

traded at $3.0761 a gallon, down 9.2 cents, or 2.9%.

January natural gas
NGF23,
-9.60%

lost 8.3% to $5.763 per million British thermal units, adding to last week’s steep losses.

Market drivers

“The market lost focus on the price cap and OPEC, as rumors spread that the Fed was not happy with market optimism,” Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch.

See also: What analysts think of the $60 price cap on Russia oil

U.S. benchmark stock indexes declined on the Fed jitters and oil followed, he said, with speculation that interest rates will be “higher for longer.” The Fed “just can’t stand market optimism as they fear it will feed into inflation.”

The Institute for Supply Management’s barometer of U.S. business conditions at service-sector companies such as banks and restaurants rose to 56.5% in November, a strong showing that signals the economy is still expanding at a steady pace.

The report followed data released Friday showing a robust 263,000 new jobs created in November, with hourly pay up by a sharp 0.6%.

Meanwhile, it’s unclear how much Russian oil the EU and Group of Seven sanctions measures might remove from the global market. The world’s No. 2 oil producer has been able to reroute much, but not all, of its former European shipments to customers in India, China and Turkey.

See: Russian oil cap kicks in as western leaders try to pressure Putin over Ukraine

On Sunday, the OPEC+ alliance of oil producers, including Russia, maintained their targets for shipping oil to the global economy.

The decision to continue with the 2 million barrel per day production cut, which began in November, through the end of 2023 is “not a surprise given the uncertainty in the market” over the impact of the EU Russian crude-oil import ban and the G7 price cap, said Ann-Louise Hittle, vice president, macro oils, at Wood Mackenzie, in Sunday commentary.

OPEC+ also faces “downside risk” from the potential for weakening global economic growth and China’s zero COVID policy, she said.

A private gauge of China’s services sector slipped further into contraction in November, with the Caixin China services purchasing managers index dropping to 46.7 in November, down from 48.4 in October, Caixin Media Co. and S&P Global said Monday.

Despite the continued OPEC+ production cuts, Wood Mackenzie forecasts a balanced market for next year with adequate supplies, Hittle said.

For now, prices are currently weighed down by expectations of slow demand growth, despite the EU oil import ban on Russian seaborne crude and the G7 price cap, she said. The adjustment to the EU ban and price cap is likely to “support prices temporarily.”

See: No OPEC+ oil shakeup as Russian price cap stirs uncertainty

On Monday, “even though OPEC did not ride to the rescue by slashing its production. Instead, some news about China relaxing its COVID restrictions may have helped paint a brighter picture for demand,” Marios Hadjikyriacos, a senior investment analyst at XM, said in a note to clients.

See: China begins easing restrictions in Beijing and elsewhere

Looking further ahead, WTI oil prices may trade in a somewhat tight $20 range next year.

In emailed comments, Jay Hatfield, chief executive officer at Infrastructure Capital Management, told MarketWatch that his company projects a trading range of $80 to $100 for WTI oil during 2023.

“Weakness in projected demand from a likely recession in Europe and sluggish growth in China will be offset by the ongoing energy crisis in Europe,” he said. 

European natural gas is currently trading over $40 per thousand cubic feet which is the British thermal unit equivalent of oil trading at $240 a barrel, said Hatfield. “High European natural gas prices draw other hydrocarbons in the Euro Zone including distillate, coal and [liquefied natural gas], supporting global oil and gas prices.”

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