Interest Rates do impact the price of oil
Posted: Wed Jun 28, 2023 6:32 pm
From the Rystad Energy article:
"US interest rates have risen to their highest levels since the 2008-2009 financial crisis in an effort by the administration to tackle soaring inflation. This policy has had a profound impact on asset allocation strategies – in the current environment marked by recessionary fears and even financial uncertainty, there has been a shift in asset allocation from riskier assets to safer ones. At the same time, soaring inflation last year meant that commodities – notably crude oil – were used as a means of inflation hedging. Since the start of the year, with inflation already peaked and declining, and oil prices not growing, the incentive for such a hedging strategy through oil has dropped. Partly because of these asset allocation decisions, speculative positioning on the oil basket plummeted to its lowest levels since the peak of the pandemic in 2020.
Another critical development has been the direct impact that higher interest rates have been having on opportunity costs in the physical markets. In fact, higher interest rates have led to an increase in the cost of holding oil stocks, which manifested in global crude and condensate volumes in floating storage declining in the last few months from around 80 million barrels in January to less than 65 million barrels in April, its lowest level since early 2020, information from the IEA shows."
MY TAKE: Refiners don't want to pay the costs of building up large crude oil inventories. Lower crude oil inventories sets up the higher risk of running short on feed stock in the future. This is not an industry were "Just in Time" inventories is a good idea.
"US interest rates have risen to their highest levels since the 2008-2009 financial crisis in an effort by the administration to tackle soaring inflation. This policy has had a profound impact on asset allocation strategies – in the current environment marked by recessionary fears and even financial uncertainty, there has been a shift in asset allocation from riskier assets to safer ones. At the same time, soaring inflation last year meant that commodities – notably crude oil – were used as a means of inflation hedging. Since the start of the year, with inflation already peaked and declining, and oil prices not growing, the incentive for such a hedging strategy through oil has dropped. Partly because of these asset allocation decisions, speculative positioning on the oil basket plummeted to its lowest levels since the peak of the pandemic in 2020.
Another critical development has been the direct impact that higher interest rates have been having on opportunity costs in the physical markets. In fact, higher interest rates have led to an increase in the cost of holding oil stocks, which manifested in global crude and condensate volumes in floating storage declining in the last few months from around 80 million barrels in January to less than 65 million barrels in April, its lowest level since early 2020, information from the IEA shows."
MY TAKE: Refiners don't want to pay the costs of building up large crude oil inventories. Lower crude oil inventories sets up the higher risk of running short on feed stock in the future. This is not an industry were "Just in Time" inventories is a good idea.