The US government remains up and running after a short-term budget was agreed. Even so market interest rates continue to rise, and the Fed is still expected to keep rates higher for longer. Markets are keeping an eye on oil prices, which have been constantly rising since June.
US reaches last minute budget agreement
Even though the US Personal Consumption Expenditure (PCE) data released on Friday was modestly positive, markets began the month of October with further hikes in market interest rates. The Federal Reserve (Fed) continues to maintain its stance of keeping interest rates high as long as necessary until inflation reaches the 2% target. On the stock market front, declines continue even after a temporary budget agreement was reached over the weekend to avoid a government shutdown.
In surprising developments over the weekend, Congressional Speaker McCarthy opposed Republicans. He chose to pass bipartisan legislation that would fund the government through to the middle of November. The measure had the support of more than half of Republicans and all Democrats except one.
This is a last-minute agreement that will weigh on markets again when the November deadline approaches if a bipartisan agreement is not reached before then.
Oil prices continue to rise
Another factor on investors’ minds is the rise in the price of crude oil. Oil has not stopped rising since the end of June with a revaluation of around $24.
There are a few reasons behind this impressive rise:
On the one hand, global oil demand is reaching record levels, driven by strong summer air travel, increased use of oil in power generation and growing Chinese petrochemical activity. Initially, it was expected that the slowdown in the Chinese economy would cause a decrease in demand, but this hasn’t happened yet.
For the remainder of the year, global oil demand is expected to expand by 2.2 mb/d to 102.2 mb/d, with China accounting for more than 70% of the growth.
On the supply side, global oil supply decreased by 910 kb/d to 100.9 mb/d. The OPEC+ block's production fell 1.2 mb/d to 50.7 mb/d in July as a result of a steep decrease in Saudi Arabia's output.
However, according to projections made by the EIA, global oil output will rise by 1.5 mb/d through the end of 2023. This process of supply growth may continue into next year and may have a negative impact on the price.
In conclusion, there is a chance that oil will continue to rise in price as long as demand remains robust as it has been until now. However, global growth forecasts, especially in China, are not optimistic. If these predictions turn out to be true, this could break the sharp rising trend in crude oil prices.
OPE+ meeting scheduled for tomorrow
The OPEC+ meeting is planned for tomorrow. No significant decisions from the producing nations are expected to be made, especially given that the most recent production cuts in Saudi Arabia and, to a lesser extent, Russia, have had the desired impact of lifting prices. Technically, oil continues in a clear upward trend but in an overbought situation and with bearish divergences on the daily chart. This could be a sign of at least a technical correction in the short term.
Oil monthly chart, October 3, 2023. Source: CAPEX.com WebTrader.
Key Takeaways
- Market interest rates increase further.
- US PCE data was modestly positive.
- The Fed remains firm on keeping rates high until the 2% inflation target is reached.
- Temporary US budget agreement agreed upon over the weekend.
- The price of oil has been rising since June with a revaluation of around $24.
- Global demand for oil is expected to expand for the rest of the year.
- Global supply of oil greatly decreased after production cut by Saudi Arabia.
- EIA expects oil production to increase by 1.5 mb/d by the end of 2023.
- OPEC+ meeting scheduled for tomorrow.
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Sources: Bloomberg, Reuters
