Oil prices are facing a 'battle royale' between Saudi Arabia and the Federal Reserve, Bank of America says

AP Photo/Gene J. Puskar

  • Oil prices will remain under pressure until the Fed eases up on monetary tightening, Bank of America said.

  • Meanwhile, Saudi Arabia is trying to boost oil prices by cutting production.

  • Energy markets are facing a “battle royale” between the top oil exporter and the Federal Reserve.

Saudi Arabia and the Federal Reserve are locked in a “battle royale” over oil, and crude prices are likely to remain under pressure until the Fed pulls back on its tight monetary policy, according to Bank of America.

In a note last week, BofA commodities strategist Francisco Blanch pointed to the downward trend in oil prices compared to last summer, when oil hit triple digits.

Those price drops over the past year are largely due to the Fed’s aggressive monetary tightening policy, which has raised expectations of weaker economic growth, overriding the impact of production cuts from Saudi Arabia and other major suppliers, he said.

“At their core, markets are witnessing a battle royale between Saudi Arabia and the US Federal Reserve, pitting Prince Abdulaziz bin Salman against Chairman Jay Powell,” Blanch said in the note, later adding, “In this battle royale, oil has the losing hand until money starts easing again.”

Brent crude, the international benchmark, traded around $74 a barrel on Tuesday, down 11% year to date and down 25.5% from a year ago.

That price is too low for the Saudis, who need oil to be above $81 per barrel to pay for their mega-projects, according to a recent Wall Street Journal report.

Earlier this month, Saudi Arabia announced a production cut of 1 million barrels per day starting in July, piling onto prior cuts from earlier this year.

But it won’t be the Saudis who will determine prices. Blanch predicted that oil would rise to $80 a barrel by the end of the year, as the Fed is likely approaching the end of its rate hiking cycle as inflation continues to ease.

Markets are pricing in a 93% chance that central bankers pause rate hikes at the conclusion of their policy meeting on Wednesday, per the CME FedWatch tool.

That could be supplemented by a stronger rebound in China’s economy, Blanch added, since China is one of the largest crude importers in the world.

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