Monday Morning Update

Oil prices have continued to rise on supply-side fears and raised geo-political tensions. Following last week’s rally, which saw WTI crude futures rise 4% over the five-day period, prices this morning rose above $81.5dbp hitting their highest level since early November. Meanwhile Brent crude futures appreciated over $85.75dpb, similarly hitting the highest price since early November.

As we looked at last week, Ukrainian forces ramped up drone attacks on oil refineries in the Russian interior striking places such as Ryazan, Kstovo and Kirishi. Collectively, the areas under attack account for between 7-10% of Russia’s oil processing capacity.

This comes as trade continues to be disturbed by ongoing disruptions in the Red Sea which sees around 10% of the worlds crude oil exports transiting through it.

Last week prices were also supported on the demand-side, with the IEA indicating that global oil demand is forecast to increase by 1.7 mb/d over the first quarter of 2024 given a more optimistic outlook for the US in addition to a rise in demand for bunkering.

Much of the increased demand for bunkering is a consequence of the trade flow disruptions. On the supply side the IEA wrote that “trade dislocations from the rerouting of Russian barrels and more recently due to unrest in the Middle East, have boosted oil on water by 115 mb”. This means that oil on water levels is at their second highest level since the peak of the pandemic.

This Wednesday attention will turn to the FOMC, where Fed policy makers are making their latest interest rate decision and providing forward guidance through the release of their dot plot.

Here the consensus is projecting that the Fed will maintain their benchmark policy rates at their current 5.25-5.5% target range. This comes as markets continue to speculate on when the Fed will first cut and the extent to which they will do so throughout the year. For example, looking further ahead, implied money market expectations are pointing to around 75bps worth of cuts throughout 2024.

This marks a sizeable reduction to the 150bps worth of cuts that were previously being priced earlier this year and is indicative of how the market has readjusted their monetary loosening expectations given persistent inflation and a historically tight labour market.

For example, last Wednesday we learnt that US inflation rose 10bps last month, hitting 3.2% on an annual basis. This beat market expectations of 3.1% and demonstrated that the Fed continue to face headwinds in their fight to bring inflation back down to their 2% target rate.

All eyes are thus on the Fed at 18:00 on Wednesday, for the release of their dot plot and press conference half an hour later.

Though today is a little light on the release of data, at 10:00 this morning, attention will turn to the release of the Eurozone’s Harmonised Index of Consumer Prices. Here, the market consensus is pointing to a month-on-month print of 0.6%, in line with the previous month’s print. On an year-on-year basis, it is expected to come in at 3.1% – again unchanged from January’s level.

Following the ECB’s policy meeting earlier this month – where Frankfurt held rates for the fourth consecutive time – markets will be looking to see how this morning’s print may impact interest rate expectations looking forward.

At their latest policy meeting, the ECB stated that they expect inflation to average 2.3% this year, before easing to 2.0% in 2025 and 1.9% in 2026.