Oil in red again as flying dollar, Fed uncertainty snuff Russia-led rally

December 5, 2022 1:36 PM EST

By Barani Krishnan -- Europe’s ban on Russian oil and the price cap on the same may dominate headlines, but it’s relatively quiet U.S. factory orders and services sector data that seems to be deciding where crude prices should close the day.

New York-traded West Texas Intermediate, or WTI, and London’s Brent were both down more than 1% each in Monday’s early afternoon trade after rallying almost 3% earlier on a litany of headlines about how oil markets could be headed for seizure from the West’s clampdown on Russia.

Russia “will not accept" the $60-per-barrel cap on its oil and is analyzing how to respond, Kremlin spokesman Dmitry Peskov said. The cap would destabilize global energy markets but not affect Moscow’s ability to sustain what it calls its "special military operation" in Ukraine, Peskov added.

For context, the price cap by the Group of Seven, or G7, countries will allow non-EU nations to continue importing seaborne Russian crude oil, but it will prohibit shipping, insurance and reinsurance companies from handling cargoes of Russian crude around the globe, unless it is sold for less than $60. That could complicate the shipment of Russian crude priced above the cap, even to countries which are not part of the agreement. Russian Urals crude traded at around $67 a barrel on Friday.

But the White House, responding to the Kremlin’s ire, suggested that WTI and Brent will ultimately come around to the advantage of consuming countries.

“We believe that the oil price cap will have no long-term impact on global oil prices,” said John Kirby, coordinator for strategic communications at the National Security Council in the White House. “We are confident that this price cap will secure the discount on Russian oil.”

WTI for January delivery was down $1.48, or 1.9%, at $78.50 per barrel by 12:45 Eastern U.S. Time (17:45 GMT) after rallying to $82.71 earlier.

Brent crude for February was down $1.42, or 1.7%, to $84.15, after a session high at $88.43.

Oil slumped as the dollar rallied for the first time in four sessions after orders for U.S. factory-made goods rose 1% in October. It was the 12th increase in 13 months for factory orders versus manufacturing, which contracted in November for the first time in 2-1/2 years, according to a measure by the Institute for Supply Management (ISM).

Separately, the ISM-tracked services sector showed a reading of 56.5 in November on Monday, versus 54.4 in October. Economists had predicted a reading of 53.3 for last month.

"This is a tough time for forecasting the U.S. economy,” economist Adam Button said in a post on the ForexLive forum. “In the space of 15 minutes there were two reports on the U.S. service sector; one said the U.S. economy was contracting at a 1% clip, the other showed an economy accelerating.”

“The thinking is that we might not be at the peak of U.S. rates after all. For sure the Fed is going to pause at some point next year around 5% but if the numbers keep running hot like this, they won't pause for long,” said Button. “The worry is that 5% rates aren't going to be enough and the Fed will eventually have to hike to 6-7% (or higher). The issue is that we don't really know how the U.S. economy will react to those rates then. It's been so long since the U.S. has had genuinely high rates that it's a tough call.”

The Fed has added 375 basis points to rates since March. Prior to that, rates peaked at just 25 basis points, as the central bank slashed them to nearly zero after the global outbreak of the coronavirus pandemic in March 2020.

After four straight jumbo-sized hikes of 75 basis points between June and November, markets expect the Fed to impose a smaller increase of 50 basis points at its upcoming rate decision on Dec. 14.

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