Oil Prices Return to Range-bound Fluctuation

In the world of oil trading, December 23rd started with West Texas Intermediate (WTI) crude oil experiencing modest gains, hovering around $69.84 per barrelThis comes on the heels of a tumultuous week in which oil prices initially dipped before rallying back, closing the week by recovering some of their previous lossesRemarkably, while the weekly trading showed signs of a rebound, it did not breach previous lows

On the fundamental side, the Federal Reserve's hawkish stance regarding interest rates is placing downward pressure on oil prices, compounded by a softer outlook for global demandThis combination creates a challenging environment for oil traders, who find the market largely confined to established ranges

The strength of the U.Sdollar remains a pivotal factor, as it continues to operate at elevated levels

Coupled with the constraints of supply and demand, this scenario suggests that significant price movements are improbable in the near term

This week, the market is expected to be quieter due to the Christmas holiday, with all eyes on the EIA inventory data set to be released on Thursday

Moreover, OPEC+ has recently downgraded its oil demand growth forecast for 2024 for the fifth consecutive month, painting yet another layer of caution over the outlook

JPMorgan anticipates a shift from a balanced oil market in 2024 to a surplus of 1.2 million barrels per day in 2025, based largely on expectations that non-OPEC+ supply will increase by 1.8 million barrels daily, while OPEC output is held steady

Perhaps reflecting concerns about economic health, U.Sconsumer spending data for November was solid, yet the month-to-month increase in the core PCE price index was the smallest recorded in six months

This uptick in consumer spending, fueled by strong demand across various goods and services, underscores the resilience of the U.SeconomyIt juxtaposes projections from the Federal Reserve, which now expect fewer interest rate cuts in 2025 compared to estimates from September

Following a series of hot economic data, the inflation report from last month brought some optimismThe U.SCommerce Department released data indicating a moderate price increase, with the core inflation measure reflecting its smallest rise in half a year

Despite this positive news, the year-over-year increase in the core inflation rate, which excludes food and energy, remains well above the Fed's target of 2%. LPL Financial's Chief Economist Jeffrey Roach noted, “Consumers have the capacity to spend, supported by the wealth effect from income growth and increasing portfolio values

Economic growth is being bolstered by strong consumer demand,” adding a caveat about inflation’s persistence in certain categories impacting Fed decisions regarding interest rates

According to the Bureau of Economic Analysis, consumer spending, which accounts for more than two-thirds of U.Seconomic activity, grew by 0.4% last monthAfter revisions, October's growth was altered to a more modest 0.3%, while economists had projected a 0.5% rise for November, a slight increase from a previously reported 0.4% in OctoberNotably, consumer spending surged at a rate of 3.7% in the third quarter, marking the fastest growth rate in a year and a half and contributing to a reported GDP growth rate of 3.1% for that quarterThe economy expanded at a 3.0% pace in the second quarter

For the fourth quarter, the Atlanta Fed predicts a potential GDP growth of 3.1%. Personal income rose by 0.3%, notably driven by a 0.6% increase in wages

alefox

However, once inflation is factored in, disposable income increased by a mere 0.2%, indicating that some households may have dipped into savings to facilitate spending

The savings rate has fallen from 4.5% in October to 4.4%. Economists believe last month's easing of inflation rates is unlikely to alter the Fed's upcoming policy tone

October's report indicated a 0.1% rise in the personal consumption expenditures price index, unchanged from the previous month’s adjusted 0.2% increase

In a recent statement, San Francisco Fed President Mary Daly recognized the difficulty behind the Fed's decision to lower rates by 25 basis points, describing it as “a tough call.”

Daly echoed Chair Powell’s sentiments regarding the necessity for caution in implementing further policy adjustments, stating, “For me, it’s essential that we recalibrate policy

I consider it a challenging decision.” During a television interview, she elaborated on the ongoing need to focus on forthcoming economic signals

This marks the first public statement from a decision-maker since the Fed adjusted its policy rate range to 4.25%-4.50%, with recent forecasts suggesting that most officials now predict fewer cuts than previously anticipated in 2025.

The revised projections indicate a target level for the federal funds rate of approximately 3.9% by the end of next year, compared to the earlier forecast range of 3.4%. Daly expressed satisfaction with the more measured easing path formed in the economic forecast summary, stating, “I’m very comfortable with this midlineIt seems reasonable, but we need to remain flexible.”

In accordance with Powell’s recent discussions of a “cautious” approach going forward, futures markets have begun to readjust expectations regarding the potential for additional rate cuts