The economy and financial markets have faced potent challenges in 2023. These include concerns of an imminent recession, a hawkish Federal Reserve, stubbornly high inflation, a sputtering banking system, etc. Unlike last year, the price of oil hasn’t been a major headwind as it’s traded between $60 and $70 per barrel for most of the year.
The situation is now changing as the front month contract for WTI crude oil settled above $90 for the first time this year. Higher oil prices are a negative for the economy and markets as it detracts from consumer spending and contributes to inflationary pressures. Until inflationary pressures fully recede, there is unlikely to be a change in Fed policy.
So while there has been constructive news on the finaltion front regarding real estate and the labor market, the mild tailwind from lower oil prices is now becoming a headwind. For oil, the major catalyst is on the supply front as OPEC producers have been cutting production in anticipation of an economic slowdown.
But, demand has been less impaired than anticipated even accounting for the weakening Chinese economy. Another factor supporting demand is that the US is a buyer of crude oil given the need to restock the strategic petroleum reserve.
Finsum: Crude oil prices moved past $90 per barrel for the first time in 2023. Here are some of the reasons behind its recent strength.