Crude trades at lows as market anticipates possible rate hike that may slowdown global economy

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Crude oil prices are trading at levels not seen since late January this year as slowing global economy coupled with fears of more rate hikes continues to spook markets.

Brent crude was trading at about US$ 90/barrel, the lowest level seen since late January 2022 and lower than the time Russia invaded Ukraine, as investors anticipate central banks to hike rates. The US Federal Reserve (FED) is set to raise rates by as much as 0.75% to 1.00% today (US Time). A move by the US to raise the rates by 100 basis points would likely spook both commodities and equity markets across the world.

Brent crude futures for November contract was trading at US$ 90.52/barrel, still higher than the level seen on September 7th when it was trading at US$ 88/barrel. US West Texas Intermediate crude was trading at US$ 83.85/barrel, as it was also heading towards the low seen on September 7th of US$ 82/barrel.

The slowing global economy and the continued uncertainty in the mismanagement of the Covid-19 outbreak in China has also slowed the demand for oil, although the coming of winters and the shortage of gas supply in Europe is likely to be the driving factor that could push the prices of crude higher in the weeks or months ahead.

Both Brent and WTI are on track for their worst quarterly drops in percentage terms since the beginning of the Covid-19 pandemic. Brent had hit a high of US$139/barrel in March, the highest level seen since 2008.

“Headline GRM (gross refining margin) dropped sharply last week, squeezed by slimmer crack spreads across all product categories. The global economic slowdown is the key factor to watch as it could derail global demand recovery,” Suppata Srisuk, analyst at Bualuang Securities says.

Suppata adds that despite the decline in the GRM and crude oil prices, there is a possibility that it could turn around as this is the ‘peak season for hurricanes’, which might disrupt refinery operations. Also, the autumn refinery maintenance season is approaching. These factors may tighten supply and thus boost GRM.

“Last week the mean Singapore GRM plunged by $5.70 WoW (week-on-week) to $2.68/barrel, squeezed by slimmer crack spreads across all product categories. Slower ASEAN demand and concerns over a potential increase in exports from China pushed the gasoline spread down by $2.21 WoW to $8.64/ barrel,” Suppata says.

Suppata says that softer demand from South Asia (end of summer season) and plentiful supply availability pushed the high Sulphur fuel oil spread down by $2.72 WoW to -26.22/barrel (much weaker than its former normal pre-IMO2020 era range of negative-$4-5/barrel). Crude cost (crude premium) will tend to rise year-on-year (but remain flat or increase slightly quarter-on-quarter) in Q3 2022 in tandem with crude prices. Given these trends, Bualuang expects the effective GRM to expand year-on-year but soften quarter-on-quarter in Q3 2022.

The drop in crude has also had an impact on other chemical spreads with ethylene spread decreasing; Propylene spread was flat WoW as sluggish regional demand pushed the Ethylene price down by $30 WoW to $955/ton last week.

Meanwhile, anticipation of supply tightness regionwide tied to the planned shutdowns of several plants pushed the Propylene price up by $5 WoW to $880/ton.

Because the Naphtha cost rose by $5 WoW to $637/ton, Ethylene spread weakened $35 WoW to $318/ton, but Propylene spread remained unchanged WoW at $243/ton.

HDPE and PP spreads strengthened WoW rising feedstock costs and expectations of tight product availability pushed the prices of HDPE and PP up by $20 WoW to $1,020/ton and by $10 WoW to $1,050/ton, respectively, last week.

Because the cost of Naphtha increased more slowly than the product prices, the HDPE Naphtha spread inched up $15 WoW to $383/ton (most positive for PTTGC) and the PP-Naphtha spread expanded $5 WoW to $413/ton.

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