On Friday oil prices started to price in a major recession as the dollar index soared and risk assets contracted, suggests Phil Flynn of PRICE Futures Group.
The British pound hit an all-time low against the dollar strangely enough because the UK is starting to put policies in place that will improve their economy for the long run even though it may mean some pain in the short run.
The BBC reported that “The pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in 50 years. In early Asia trade, sterling fell close to $1.03 before regaining some ground to stand at about $1.07 on Monday morning, UK time. Chancellor Kwasi Kwarteng has promised more tax cuts on top of a £45bn package he announced on Friday amid expectations borrowing will surge. The cost of UK government borrowing also continued to climb on Monday. If the pound stays at this low level against the dollar, imports of commodities priced in dollars, including oil and gas, will be more costly.”
The Biden administration continues to bite the hand that feeds it by talking about more regulations on the oil and gas industry. Reports over the weekend the Biden economic team wants to pressure the energy industry to lower gasoline prices. Yet the real reason why US energy companies have faltered is because of a lack of investment and the demonization of the oil and gas industry by the Biden administration by the far-left members of the democratic party. Biden administration policies have exasperated inflation and they had no clear plan for what’s next. At the same time, they want to continue the policies that helped exasperate inflation by increasing government spending.
Yet they also want some wiggle room on the doomed-to-fail price cap measures in Russia. The Wall Street Journal is reporting that “The Biden administration is trying to stave off a bipartisan push on Capitol Hill to sharpen the enforcement of a proposed cap on the price of Russian oil, aiming to avoid an escalation that officials worry could upset the effort’s delicate diplomatic balancing act.
Treasury and White House officials have been working for months on a plan to set a cap on the sales price of Russian oil around the world. With allies in the Group of Seven wealthy nations, they have designed a plan to limit Russia’s revenue from oil sales while still keeping Russian oil available on global markets. The plan would bar the use of Western financial services for shipping Russian oil if the oil isn’t sold below the cap. Sens. Chris Van Hollen (D., Md.) and Pat Toomey (R., Pa.) are working on legislation that would take the price-cap design a step further. They want to threaten all foreign firms-not just ones based in G-7 countries with the possibility of sanctions if they purchase, insure, or finance Russian oil above the price cap according to the Journal.
The UK has to be defensive as the Fed in the United States continues to drive the dollar higher and puts pressure on emerging market economies. At the same time, the dollar strength and its impact on oil may start to become a bit more limited as OPEC no doubt will react to plunging oil prices and more than likely cut production at the October fifth OPEC meeting.
It is very likely we’re going to see continued volatility in the energy complex and more downside price risk in the short term. Longer term the supply side is still going to be tight and even though the market is pricing in a major recession, they’re probably overdoing it. When China reopens its economy, it should offset any demand destruction that we see from a recession. It will keep the global oil markets very tight and it’s also very likely that OPEC is going to reduce supply. Use this weakness to put on long-term bullish option strategies and in the short term, play the swings because volatility is going to be high and we could see some more downside in the short term.
Natural gas also got caught up in the risk-off last week. The potential for a hurricane in Florida also could mean demand destruction. If we see some power outages Fox Weather says that an “ominous warning has been announced from Tampa, Florida, Mayor Jane Castor as rapidly intensifying Hurricane Ian nears the Gulf of Mexico—“Now is the time to prepare. Don’t wait until it’s too late.” The warning comes as Hurricane Ian continues to spin across the Caribbean Sea and is projected to rapidly intensify, possibly becoming a major hurricane (Category Three or higher) when it enters the Gulf of Mexico and moves closer to the Sunshine State. Florida Gov. Ron DeSantis has declared a state of emergency in Florida and is encouraging all Floridians to prepare now. In addition, Joe Biden approved Florida’s emergency declaration and ordered federal assistance to supplement state, tribal, and local response efforts due to Tropical Storm Ian.
EBW Analytics says that the October contract crashed through technical support last week on a bearish 103 Bcf injection and the formation of Tropical Storm Ian—opening the door to potential further tumultuous short-term declines into the mid-$6.00/MMBtu level this week. Still, natural gas is nearing technically oversold levels and could move higher into October. The final settlement is on Wednesday. The seasonal fundamental outlook, however, remains weak as enormous injections pile up and storage deficits collapse into October.
Learn more about Phil Flynn by visiting Price Futures Group.