Fed Talk Hits Oil Rally Like Drone, China Import Quotas Don’t Help

Crude prices reversed from their one-way track of the past five sessions to settle lower on Monday as the dollar and U.S. bond yields took flight instead over renewed worries about impending Federal Reserve rate hikes.

Like a drone that never misses its target, Fed Vice Chair Lael Brainard‘s latest words on impending U.S. rate hikes flattened whatever appetite risk markets had for extending last week’s rally.

Brainard (pictured above) said U.S. monetary policy will have to be restrictive in the near term and cumulative tightening of monetary policy by the central bank will take time in producing desired results against inflation.

“I see a limited second-half GDP rebound, with GDP growth remaining flat this year,” Brainard said, appearing on a live-streamed discussion about the economy.

Oil import quotas for China, released during the Asian trading session of New York‘s West Texas Intermediate crude and London’s Brent oil weren‘t helpful either in reigniting last week’s rally.

“The Chinese PMI data overnight highlighted the challenges facing the world's largest crude importer as it tries to balance its zero-Covid policy with economic growth,” said Craig Erlam, analyst at online trading platform OANDA. “That may have helped take some steam out of the rally today.”

WTI settled the day down $1.51, or 1.6%, at $91.13 per barrel. The U.S. crude benchmark rose 17% through last week, registering a powerful start for October, after a 12.5% drop in September and 24% loss for the third quarter.

Brent settled Monday‘s session down $1.73, or 1.8%, at $96.19. Brent rose 11% last week, making up all of September’s loss and recovering partially from its 22% loss in the third quarter.

The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, rose for a fourth day in a row, showing potential signs of reprising the 20-year highs seen through September. A strong dollar typically weighs on dollar-denominated commodities such as crude.

The benchmark 10-year Treasury note was also up, egging the dollar higher.

Oil rallied last week after OPEC+, which groups the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 oil exporters steered by Russia, announced what was billed as a “deep” production cut of 2 million barrels per day.

But that figure was well below the 3.5-million-barrel daily shortfall in the groups previously announced output target.

Whats more, there was no breakdown on where the reductions would come from — i.e. which countries would be cutting and how they would be doing.

On the Ukraine war front, Russia rained cruise missiles on busy Ukrainian cities on Monday in what the United States called “horrific strikes,” killing civilians and knocking out power and heat with its most widespread air attacks since the start of the war.

A foreign ministry spokeswoman at the Kremlin later said Moscow was willing to engage in diplomacy, reinforcing Russian leader Vladimir Putins stance of saying one thing and doing another.