(Bloomberg) -- Oil retreated as concerns about the scope for higher US interest rates hurt risk assets, offsetting some of the lift for crude that came from Russia’s plan to curb supply in retaliation for western sanctions.
West Texas Intermediate sank below $79 a barrel, after gaining more than 2% on Friday after Moscow said it will cut supply by half a million barrels a day. Investors remain wary the Federal Reserve needs to keep pushing rates higher to tame inflation, aiding the dollar. That’s a headwind for most commodities.
Oil has had a bumpy start to 2023 as investors contend with the continued fallout for the energy market from the war in Ukraine, as well as the positive impact from China’s reopening after Covid Zero curbs were dropped. In addition, there has been a host of minor supply disruptions in Europe, plus the backdrop of concern about the outlook for even tighter US monetary policy.
“The slowdown of global growth will be on investors’ minds as we push through 2023 but the challenge is trying to balance that with a China recovery,” said Warren Patterson, head of commodities strategy at ING Groep NV. “We are seeing some profit-taking after the scale of the move last week.”
Investors have been reassessing prospects for how much higher US borrowing costs will likely go this year after a run of robust data, coupled with Fed policymakers warning that there’s scope for further tightening. Key inflation figures due on Tuesday will shape the next stage of that debate.
The White House said Russia’s plan to slash oil output, which was announced on Friday, showed the extent to which President Vladimir Putin is willing to use resources like energy as a weapon. Despite the move, Moscow’s partners in the OPEC+ coalition signaled they won’t boost production to fill in for the cutback.
In addition in the oil market, both the Organization of Petroleum Exporting Countries and the International Energy Agency are due to release monthly market reports on Tuesday and Wednesday, respectively, offering them an opportunity to comment on the impact of Russia’s supply cutback.
“In the short term, I suspect prices are going to remain fairly range-bound due to the first-quarter surplus,” Patterson said. “As we approach mid-year, we expect the market to tighten, which should push prices toward $100.”