Oil prices near yearly lows

Global oil prices concluded the week close to their lowest levels of the year amid mounting concerns over inflation and the potential for interest rate hikes, which bolstered the strength of the US dollar. However, a brief period of instability caused by an unusual coup attempt in Russia led to a slight increase in gold and oil prices during electronic trading over the weekend, with the possibility of further gains if uncertainty persists.

The events in Russia are expected to generate higher price volatility in the week ahead, potentially reversing the recent slide in oil prices. On Sunday, Brent traded over $74 per barrel, while US West Texas Intermediate crude surpassed $60.50 per barrel. Even if the situation in Russia stabilises, the ongoing price volatility will further fuel concerns about inflation and potentially put an end, at least temporarily, to the decline in oil prices.

The outlook for inflation, already stirred up by last week’s events and speeches from central banks such as the Bank of England and Norway’s central bank, along with the minutes from the Reserve Bank and Federal Reserve Chair Jay Powell’s congressional appearances, remains uncertain. Last week’s weakness in gold and oil prices may have seen its end, as these recent developments are likely to shape discussions and market sentiment in the near term.

Oil prices concluded the week lower, with Brent trading around $72 per barrel and US West Texas Intermediate crude at $69.50 per barrel. The Federal Reserve’s decision to refrain from raising rates earlier this month was accompanied by Chair Jay Powell’s indication of potential rate hikes in his congressional testimony. Additionally, the hawkishness of the Reserve Bank of Australia’s June meeting, which resulted in a 0.25% rate increase, has added to discussions surrounding inflation and heightened expectations for substantial rate rises.

Economists now speculate whether the Reserve Bank of Australia will opt for a half-percent rate increase at its upcoming meeting, particularly if the monthly inflation indicator for May fails to show a significant drop in consumer prices. Meanwhile, a surprise drop in US oil inventories, which contracted by 3.8 million barrels last week compared to the market’s forecasted 0.3 million barrel increase, was overshadowed by concerns about interest rates and inflation.

Analysts and investors have once again overlooked the eighth consecutive weekly decline in the number of US operating oil and natural gas rigs, as interest rate and inflation concerns take centre stage. This marks the first time since July 2020, during the depths of the pandemic, that US oil and gas rig use has fallen for eight consecutive weeks. According to Baker Hughes, the number of active US oil rigs fell by six to reach a 1-1/4 year low of 546 rigs in the week ending June 23. This figure stands significantly below the 3-1/4 year high of 627 rigs posted on December 2 last year.

Although the decline in rig numbers has had no impact on US oil production figures, which were estimated at 12.4 million barrels per day in mid-June according to the Energy Information Administration, the gold market experienced a weak week despite the anticipated support from renewed inflation fears, slowing growth, and rising interest rates.

Gold finished the week around $1,929 per ounce, reflecting a decline of over 2%, but rebounded slightly above $1,930 per ounce in response to the events in Russia and the faux revolt by the Wagner mercenary group.

Investors in the gold market remain cautious as Powell is set to deliver two more speeches this week, coupled with key inflation data releases in the US on Friday and in Australia on Wednesday.

The gold market faced a setback last Thursday due to a simultaneous hawkish stance from central banks worldwide and Powell’s unwavering commitment to two more rate hikes this year, following the Federal Reserve’s decision to maintain rates at the June meeting.

While Powell’s message during this week’s speeches in the US will likely emphasise the commitment to control inflation, President Putin and the situation in Russia could once again trigger another round of inflationary commodity price increases, particularly in oil and gold.