Oil Struggles in New Week as Yields Spike, El-Erian Talks Down $100 Crude

By Barani Krishnan

Investing.com - Oil prices struggled in the start of a new week as inflation worries dominated the narrative across markets.

A spike in U.S. Treasury yields and notable economist and fund manager’s Mohamed El-Erian’s dismissal of talk that $100 pricing would be the way forward for crude added to the bearish undertone in energy.

West Texas Intermediate, the U.S. crude benchmark, settled up 9 cents, or 0.1%, to $80.88 per barrel, after falling to as low as $78.30 earlier. WTI had lost 4% over the past three weeks after gaining a net 30% over the previous seven months. The U.S. crude benchmark hit seven-year highs above $85 in mid-October and remains up 64% on the year.

London-traded Brent crude, the global benchmark for oil, settled down 12 cents, or 0.2%, at $82.05, after an intraday low at $80.67. Like WTI, Brent also lost 4% in three previous weeks. The global benchmark scaled a three-year high above $86 last month and remains up 58% for the year.

Oil rallied with few interruptions from end-March through mid-October, adding some $20 a barrel, as producer group OPEC and its allies continued to choke the market of supply amid soaring demand for energy from economies rebounding aggressively from the Covid-19 pandemic.

Oil bulls had delighted then in OPEC+’s continuous rebuffing of the Biden administration’s plea for more oil above the miserly 400,000 barrels per day addition offered by the alliance. 

The music for oil bulls, however, came to a stop three weeks ago as the White House said it will do whatever it takes to stop inflation, particularly from crude prices, from halting U.S. growth. 

The administration’s caution took on an added tone of gravity after the Labor Department reported last week that the U.S. Consumer Price Index, which represents a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% during the year through October.  It was the fastest growth of the so-called CPI since November 1990, an acceleration driven mostly by pump prices of gasoline at seven-year highs.

On Monday, U.S. stock markets tanked as well after the 10-year Treasury note, a key indicator of real interest rates, hit a three-week high of 1.62%. That suggested that the Federal Reserve may have to dump its “patient-for-now” stance over inflation and raise rates faster than its planned timeline of between July and December 2022.

El-Erian, chief economic advisor at Allianz and chair of Gramercy Fund Management, added to the dark clouds in oil when he dismissed suggestions that crude at above $100 per barrel would be the way of the future.

“If you were to focus only on the supply side, you could get to oil at $100, because there has been underinvestment in the industry in general, and demand will stay robust,” El-Erian said.

“But if you look at what is happening on the demand side, there you get some questions. Demand is robust today but will it be robust in six months’ time? There (are) really big questions in terms of demand destruction — people buying less because prices are higher — and in terms of whether policy becomes contractionary or not.”

While he’s widely respected for his knowledge of the economy during his time as CEO at U.S. bond market giant PIMCO, El-Erian is not necessarily known for his insights into oil. Yet, his comments on Monday served to weigh further on energy markets fearing counter actions against the oil rally from the Biden administration.

The White House has so far indicated that it may release oil from the U.S. Strategic Petroleum Reserve or impose a ban of U.S. crude exports — bringing back a 40-year embargo lifted in 2015 — to ensure adequate supply at home.  Both measures may have limited success due to runaway demand for energy, say experts in the sector.

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