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LONDON, March 9 (Reuters) – What a difference a year makes.

In the past twelve months, the oil market has absorbed the impact of Russia’s invasion of Ukraine and the sanctions imposed in response by the United States, the European Union and their allies in Asia.

Russia’s crude and fuel exports have been redirected to South and East Asia, while former markets in Europe have been backfilled with crude and products from the Middle East and Asia.

The United States and EU have imposed broad sanctions on Russia’s exports, including ancillary financial and shipping services, but softened them with significant exceptions and a relaxed approach to enforcement.

And a global slowdown in manufacturing and freight activity has trimmed consumption of diesel and other middle distillates, easing the introduction of sanctions while avoiding any physical shortages.

As a result, benchmark oil prices have retreated by nearly 40% from their post-invasion high on March 8, 2022, after adjusting them for core inflation.

Following the initial shock, crude prices have traded in a tight range since late November, with spot prices, calendar spreads and volatility all converging towards long-term averages:

• Brent’s front-month futures contract finished trading below USD 83 per barrel on March 8, 2023, in the 43rd percentile for all months since the turn of the century, after adjusting for inflation.
• Front-month prices have settled back from an inflation-adjusted post-invasion high of USD 134 a year ago (76th percentile), when traders were concerned about a possible cessation of Russian exports.
• Brent’s six-month calendar spread closed in a backwardation of USD 2.50 per barrel on March 8 (75th percentile), reflecting the low level of inventories, but still down from a record high of USD 22 a year ago.
• Realised price volatility in the front-month contract has fallen to an annualised rate of less than 25% (34th percentile) down from a peak of 88% (98th percentile) a month after the invasion.
• In the physical market, dated Brent’s five-week spread is in a backwardation of just 9 cents (50th percentile), down from USD 7 (99th percentile) a year ago.

 

Chartbook: Brent prices, spreads and volatility

 

Traders have found a temporary equilibrium, with prices bounded above by fears about a business cycle slowdown and rising interest rates, and below by expectations for a rebound in China and the low level of inventories.

Reflecting that balance, fund managers held a fairly average combined position across the six major futures and options contracts of 576 million barrels (47th percentile) on February 14, the most recent data available.

Like all equilibria in the oil market, this one is likely to prove temporary and fragile – lasting until one or more of the risks around recession, inflation and China’s post-pandemic rebound materialise or fade away.

Global petroleum inventories remain well below the prior ten-year seasonal average and there is little (unsanctioned) spare capacity in either the crude production or refining systems.

If the global economy and petroleum consumption growth accelerate again, inventories and spare capacity will become critically low rapidly, contributing to the next price cycle.

Conversely, if the global economy slides into a full-blown recession, inventories will rise and prices and spreads are likely to soften further.

For the moment, however, the oil market has returned to balance less than twelve months after one of the largest shocks since the World War Two.

 

Related columns:

– Oil prices slump as receding price-cap threat unmasks worsening demand (December 8, 2022)

– Oil prices fall on relaxed Russia price cap (December 6, 2022)

– Global recession a bigger risk to Russia’s oil revenue than price cap (November 11, 2022)

– Recession would make tough oil sanctions on Russia more likely (July 14, 2022)

 

John Kemp is a Reuters market analyst. The views expressed are his own

 

(Editing by Paul Simao)

((john.kemp@thomsonreuters.com; +44 207 542 9726 on twitter @JKempEnergy; Reuters Messaging: john.kemp.thomsonreuters.com@reuters.net))

TOKYO, March 10 (Reuters) – The Bank of Japan (BOJ) is set to maintain ultra-low interest rates on Friday and hold off on making major changes to its controversial bond yield control policy, leaving options open ahead of a leadership transition in April.

The meeting will be the last one to be chaired by Governor Haruhiko Kuroda, who leaves behind a mixed legacy with his massive stimulus praised for pulling the economy out of deflation – but straining bank profits and distorting market function with prolonged low interest rates.

With inflation exceeding its 2% target, the BOJ has been forced to ramp up bond buying to defend a 0.5% cap set for the 10-year bond yield – at the cost of distorting the shape of the yield curve and causing dysfunction in the bond market.

US Federal Reserve Chair Jerome Powell’s comments on Tuesday signaling the need for bigger-than-expected rate hikes also point to the likelihood Japanese yields will remain under upward pressure.

Many analysts thus see the days of yield curve control (YCC) numbered, though recent BOJ policymakers’ speeches underscore their preference to hold off on big policy changes at least until Kuroda’s successor, Kazuo Ueda, takes the helm in April.

“Under Ueda’s new leadership team, the BOJ will keep monetary conditions accommodative but tweak (YCC) to mitigate its side-effects,” said Mari Iwashita, chief market economist at Daiwa Securities.

“After conducting an examination of its policy framework, the BOJ will either abandon the 10-year yield target or shift to one targeting a shorter duration,” she said.

At the two-day meeting ending on Friday, the BOJ is set to maintain its short-term interest rate target at -0.1% and that for the 10-year bond yield around 0%.

Some market players bet the BOJ could widen the band set around the 10-year yield target, allowing the yield to rise up to 0.75%, from the current 0.5%, as early as Friday.

But many analysts polled by Reuters expect any tweak in YCC to happen after Ueda takes over as new governor.

Kuroda has repeatedly said consumer inflation, now running at double the pace of the BOJ’s 2% target, will begin to slow as the effect of past spikes in fuel and raw material prices fades.

Data released on Friday showed Japan’s wholesale prices rose 8.2% in February from a year earlier to mark the second straight month of year-on-year slowdown, heightening the chance the rise in consumer inflation will start to moderate in coming months.

The lower house of parliament on Thursday approved the government’s appointment of Ueda and his two new deputies, Shinichi Uchida and Ryozo Himino.

A lower house vote is expected later on Friday, with approval seen as a done deal due to the ruling coalition’s majority in both chambers of Diet.

Ueda will chair his first policy meeting on April 27-28, when the board will produce closely watched, fresh quarterly growth and price forecasts extending through fiscal 2025.

(Reporting by Leika Kihara; Editing by Sam Holmes)

SINGAPORE, March 9 (Reuters) – Oil prices were in a holding pattern on Thursday, as a larger-than-expected draw in US crude stocks and hopes for China demand contended with worries that more aggressive US interest rate rises would slow economic growth and dent oil consumption.

Brent crude futures edged up by 1 cent to USD 82.67 per barrel by 0645 GMT, while US West Texas Intermediate (WTI) crude futures were flat at USD 76.66 a barrel.

Both benchmarks declined between 4% and 5% over the previous two days.

They posted their largest daily fall since early January on Tuesday after comments by US Federal Reserve Chair Jerome Powell that the central bank would likely need to raise interest rates more than expected in response to recent strong data.

“Oil prices are still under the influence of Powell’s hawkish tone recently, and the increasing possibility of another 50 basis points hike rather than a 25 basis points one,” said Suvro Sarkar, lead energy analyst at DBS Bank.

“Oil prices will be caught in the tug of war between sentiment surrounding rate hikes and inflation targeting on the one hand, and China reopening on the other for much of the year, at least the first half.”

While China’s crude oil imports fell 1.3% in the first two months of 2023 from a year earlier, analysts pointed to accelerating imports in February as a sign that fuel demand was rebounding after Beijing scrapped COVID-19 controls.

At a conference in Houston on Tuesday, the secretary general of the Organization of the Petroleum Exporting Countries said China’s oil demand would grow 500,000 to 600,000 barrels per day in 2023, and the organization was “quite optimistic, cautiously.”

Meanwhile, data from the US Energy Information Administration (EIA) showed on Wednesday that US crude stocks fell 1.7 million barrels last week, defying analysts’ expectations for a build of 395,000 barrels and ending a 10-week streak of inventory builds.

Adding to demand concerns, however, US gasoline stocks fell by 1.1 million barrels, according to official data, less than the 1.9 million barrel drawdown analysts had forecast, and distillate inventory grew by 138,000 barrels, compared with expectations for a 1-million-barrel drawdown.

Despite the EIA inventory report showing the first crude draw of the year, crude demand uncertainty over the short term is “keeping oil prices heavy,” said OANDA senior analyst Edward Moya in a note.

“Until we see clear signs of China’s recovery gaining steam, oil prices look like they want to stay heavy.”

(Reporting by Stephanie Kelly and Emily Chow in Singapore; Editing by Bradley Perrett and Sonali Paul)

March 9 (Reuters) – Gold prices traded in a tight range on Thursday as some investors stayed on the sidelines ahead of US jobs data that could influence the Federal Reserve’s monetary policy path.

Spot gold was flat at USD 1,813.20 per ounce, as of 0716 GMT, trading in a USD 5 range, after hitting its lowest since February 28 on Wednesday. US gold futures eased 0.1% to USD 1,816.70.

Gold is considered a hedge against inflation, but interest rate hikes to control rising prices make non-yielding bullion less attractive.

“The (gold) market has been muted … the market is still trying to digest where the Fed will go after Powell mentioned the final interest rates might be higher than initially expected,” said Brian Lan, managing director at Singapore-based dealer GoldSilver Central.

Fed Chair Powell on Wednesday reaffirmed his message of higher and potentially faster interest rate hikes, but emphasized that debate was still underway with a decision hinging on data to be issued before the US central bank’s policy meeting in two weeks.

Markets are now pricing in a 50-basis point hike at the Fed’s March 21-22 policy meeting.

“Gold traders are waiting for the non-farm payroll report on Friday before we see any major repositioning,” Edward Moya, senior market analyst at OANDA, said in a note.

The US jobs report is expected to show non-farm payrolls increased by 205,000 in February, according to economists polled by Reuters.

Private employment increased by 242,000 jobs last month, according to the ADP National Employment report, while separate data on Wednesday showed US job openings fell less than expected in January.

The dollar index was near a three-month high, making bullion less affordable for overseas buyers.

Gold may bounce again to USD 1,825 per ounce before turning around and falling towards its February 28 low of USD 1,804.02, Reuters technical analyst Wang Tao said.

Spot silver was flat at USD 20.00 per ounce, platinum was unchanged at USD 937.43, while palladium lost 0.9% to USD 1,361.13.

(Reporting by Kavya Guduru in Bengaluru; Editing by Sherry Jacob-Phillips and Sonia Cheema)