Oil drops as US moves towards releasing more crude reserves

Oil prices fell as the US moved towards another release of emergency reserves to tackle inflation, easing pressure on the $23tn Treasury market that is on track to post its worst quarterly performance on record.

International oil benchmark Brent crude dropped 4.2 per cent to $108.60 a barrel as US president Joe Biden was expected to detail plans to cool oil prices that have spiralled since Russia’s invasion of Ukraine, exacerbating already elevated inflation. The Opec+ group of oil-producing nations on Thursday said it would aim to raise production by 432,000 barrels a day in May, continuing with a monthly plan agreed last year.

The yield on the benchmark 10-year US Treasury note, which moves inversely to its price and underpins global borrowing costs, fell 0.01 percentage points to 2.34 per cent.

This key debt yield has almost doubled since last August, as supply chain disruptions related to the coronavirus crisis drove inflation to multi-decade highs and the US central bank responded with signals of aggressive interest rate rises ahead.

“As oil prices come down, inflation expectations come down and that has helped bonds rally,” said Bhanu Baweja, chief strategist at UBS’s investment banking unit.

A Bloomberg index of total returns from Treasuries has fallen 5.6 per cent in the three months to March, leaving it on course to post its weakest quarterly performance since the inception of the index in 1973.

Germany’s 10-year Bund yield, which trades substantially below US borrowing rates to reflect the European Central Bank’s looser monetary policies, dropped 0.08 percentage points to 0.57 per cent.

In equity markets, Wall Street’s benchmark S&P 500, down almost 4 per cent this year, slipped 0.4 per cent lower. The technology-heavy Nasdaq Composite also lost 0.4 per cent. 

The moves came as fresh data showed the Federal Reserve’s preferred inflation gauge — the core personal consumption expenditures index — rose 0.4 per cent in February from the previous month. The figure marked a moderation from January but took the annual increase in the core PCE index to 5.4 per cent, the quickest pace in about 40 years. 

Line chart of Year on year change in core PCE price index (%) showing Fed's preferred inflation gauge shoots higher

European equity markets slipped on Thursday as analysts warned a one-off release of oil reserves was unlikely to alter the supply outlook for the long term.

The regional Stoxx 600 share index dropped 0.5 per cent, Germany’s Xetra Dax lost 0.9 per cent and the UK’s FTSE 100 was down 0.6 per cent by the afternoon in London. The Stoxx was on track to end the first three months of the year more than 6 per cent lower, marking its first negative quarter in two years.

Column chart of Stoxx 600 (% change) showing European shares have worst quarter in two years

Oil prices have risen almost 40 per cent so far in 2022, spurred higher by Moscow’s invasion of Ukraine and western sanctions on exports from Russia, which is the world’s third-biggest producer behind the US and Saudi Arabia.

A reserve release of 180mn barrels would reduce the amount of “price-induced demand destruction” needed to bring supply and demand back into balance, analysts at Goldman Sachs estimated.

“This would remain, however, a release of oil inventories, not a persistent source of supply for coming years,” Goldman analyst Damien Courvalin cautioned in a note to clients.

There were doubts about the longer-term impact of the plan, said Tamas Varga, analyst at PVM.

“After all, the [International Energy Agency] warned of a potential loss of 3mn barrels per day of Russian crude oil and products due to financial boycotts and self-sanctioning,” Varga said, “and history also tells us” that emergency reserve releases “usually fail to achieve the desired effect”.

Hong Kong’s benchmark Hang Seng index fell 1.1 per cent, while China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks was down 0.7 per cent. Japan’s Topix shed 1.1 per cent.


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