Crude Prices Drop Below $65 for the First Time in 3 Months

U.S. crude futures accelerated losses, tumbling below $65 a barrel for the first time since late August, after Federal Reserve Chair Jerome Powell said the strong U.S. economy may warrant ending the central bank’s asset purchases sooner than planned next year. 

West Texas Intermediate crude futures fell as much as 7.9% on Tuesday after the comments, while the global benchmark Brent also declined as part of a broader market retreat. During a Senate Banking Committee hearing in Washington, Powell said it is appropriate to discuss wrapping up its purchases at its next meeting. Meanwhile, investors are also assessing warnings that the new omicron variant could withstand existing inoculations, potentially affecting OPEC+ to decide to shift its output policy when it meets later this week. 

“It’s an effort to diminish economic activity, which strikes right at the heart of the demand outlook,” said John Kilduff, founding partner at Again Capital LLC.

Oil has slumped more than 20% in November, set for the biggest monthly loss since March 2020, when the onset of the pandemic crushed global consumption. Investors are now seeking clues about the challenge posed by the omicron variant and how producers will respond. The Organization of Petroleum Exporting Countries and its allies will decide Thursday whether to pause a run of monthly supply hikes.

The weakness has hit the forward price structure for Brent that traders look to for clues on supply-demand. Brent for January supply is poised to expire in a so-called contango on Tuesday, meaning that the most immediate price is lower than the following month. That’s a sign that expectations for short-term tightness have dissipated since the variant emerged in South Africa.

While expiry-day pricing is often highly volatile, the wider forward curve has also weakened noticeably, giving traders seeking yield by holding long positions less incentive to be invested. While much of the curve remains backwardated -- where nearer-term prices trade above longer-dated ones -- gaps between monthly contracts have narrowed.

Prices:

  • West Texas Intermediate crude for January delivery fell $5.21 to $64.77 a barrel at 1:11 p.m. in New York
  • Brent for January settlement, which expires Tuesday, sank $3.16 to $70.28 a barrel on the ICE Futures Europe

The more active February contract traded down $5.25 at $67.97 a barrel.

Oil traders are also tracking talks this week aimed at reviving Iran’s 2015 nuclear deal with world powers. Success at the negotiations in Vienna could lift sanctions on Iran’s economy, leading to a resumption in official oil flows. The exchanges began positively on Monday, according to a top European diplomat.

Macro-economic data from Asia pointed to improvements in leading economies, a positive signal for energy demand. In China, the manufacturing purchasing managers index returned to expansion, while factory output in Japan edged up.


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