Weaker Demand Signals Pull WTI Crude Lower

New York Mercantile Exchange oil futures and the nearest delivered Brent contract on the Intercontinental Exchange extended losses into a third successive session Wednesday, with investors keeping risk appetite in check following the outlook for lower demand growth next year hit by the rapidly spreading omicron variant.

Market attention has turned Wednesday afternoon to the highly anticipated decision on monetary policy by the Federal Open Market Committee when central bank officials are expected to announce a sharp acceleration in reducing monthly bond purchases. The Federal Reserve will also release their latest projections for inflation, unemployment rates, and economic growth, while the dot plot will offer banking official views on when the central bank would increase the federal funds rate.

Ahead of the meeting, government data reported U.S. wholesale prices spiked 9.6% in the 12 months ending in November, which was also the highest year-on-year PPI print on record. The consumer price index — the market’s preferred gauge of inflation, increased 6.8% from a year earlier in November to a 39-year high.

With the recent inflation readings, market expectations of changes in Fed policy have changed as well, as reflected in CME Group’s Fed Watch tool. The consensus still calls for FOMC officials to leave interest rates unchanged at Wednesday’s meeting, but about 30% of investors now see a 50-basis point hike by June 2022. That’s up from 0% only a month earlier.

Fed Chairman Jerome Powell is all but certain to announce a pivot to a faster pace of tapering $90 billion in monthly bond purchases, while investors will look for clues from his post meeting news release on when the central bank would hike interest rates in the face of rising inflation.

Wednesday morning, oil futures extended the selloff triggered by downgraded projections on global oil demand growth from the International Energy Agency released Tuesday. The Paris-based energy agency now forecasts demand growth of 5.4 million barrels per day (bpd) for this year and 3.3 million bpd for 2021, down by 100,000 bpd from November’s outlook. IEA warned that new containment measures put in place to slow the winter surge of COVID-19 cases will slow the expected recovery in global jet fuel demand, albeit will not derail it. COVID-19 cases have been rising steadily across most of the nations around the world in recent weeks.

Domestically, New York reimposed its indoor mask mandate as COVID-19 cases spiked statewide more than 43% since Thanksgiving, straining the health care system amid staffing shortages. At the same time, the Energy Information Administration projects global production growth will outpace gains in global oil demand, with supply seen rising by 1.7 million bpd in the first quarter 2022, and by 2 million bpd in the second quarter.

IEA projects record annual oil production highs for the United States, Canada, and Brazil in 2022, and by Saudi Arabia and Russia should OPEC+ fully unwind their restrained output.