Fed Will Be One Of The Leading Oil Price Drivers in 2023

The Federal Reserve will be one of the leading oil price drivers this year.

That’s according to Stephen Brennock, an oil analyst at PVM Oil Associates, who told Rigzone that expectations that it will gradually pare back the pace of rate hikes should weigh on the dollar and therefore be supportive for oil prices.

“However, there is an element of uncertainty hence the outcomes from the Federal Open Market Committee (FOMC) meetings could prove very volatile for the dollar and oil prices,” Brennock warned.

Al Salazar, a Senior Vice President at Enverus Intelligence Research (EIR), highlighted that the Fed’s rate hikes are intended to curb inflation and slow economic activity, noting that such conditions are not supportive of higher oil prices.  

“Markets are concerned about the possibility of a recession, which will certainly cause pockets of oil price weakness,” Salazar told Rigzone.

“That said, the likelihood of a major recession leading to material crude and product inventory builds remain low, which drives our bullishness in the second half of this year,” Salazar added.

In a statement sent to Rigzone last week, Bill Farren-Price, the director of EIR, said the company expects rising oil demand in the second half of 2023 to spark inventory draws and higher prices, “with a price call for Q4 an estimated $20-$30 per barrel above the current forward strip”.

Think of Fed Tightening as Supply Restraint

Dan Kish, a distinguished senior fellow at the Institute for Energy Research (IER) told Rigzone that you can think of the Fed tightening as a supply constraint.

“As the cost to borrow money goes up, it affects capital-intensive industries significantly, not just oil, but infrastructure and renewable energy as well,” Kish said. 

“As costs rise for projects, there will be less of them at the very time when the world needs more oil to help tamp down inflation,” he added.

“In the longer run, if the Federal Reserve’s tightening leads to recession, that will reduce demand and the price of oil,” Kish went on to note.

FOMC

The Federal Reserve System is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest, its website notes.

The FOMC holds eight regularly scheduled meetings per year, and, at these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth, the Fed’s website outlines.

The Fed’s site highlights that the FOMC consists of 12 members; the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

To contact the author, email andreas.exarheas@rigzone.com