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Oil prices down, investors expect big Fed rate hike
Global Banking & Finance Review®
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By David Gaffen
NEW YORK (Reuters) -Oil prices dipped on Tuesday, following other risk assets lower, as the dollar stayed strong and investors anticipated more central bank interest-rate hikes designed to quell inflation.
The U.S. Federal Reserve is likely to raise interest rates by another 75 basis points on Wednesday to rein in inflation. Those expectations are weighing on equities, which often move in tandem with oil prices. Other central banks, including the Bank of England, meet this week as well.
Higher rates have bolstered the dollar, which remained near a two-decade high against peers on Tuesday, making oil more expensive for holders of other currencies.
“The oil market is caught between downward concerns and upside hopes. The concerns are driven by the aggressive monetary tightening in the U.S. and Europe, which is increasing the likelihood of a recession and might weigh on oil demand prospects,” said Giovanni Staunovo, commodity analyst at UBS.
Brent crude futures settled down $1.38, or 1.5%, to $90.62 a barrel, while U.S. West Texas Intermediate crude for October delivery ended at $84.45, down $1.28, on the day of its expiration. The more active November contract settled down $1.42 to $83.94 a barrel.
Both Brent and WTI are on track for their worst quarterly drops in percentage terms since the beginning of the COVID-19 pandemic. Brent hit about $139 a barrel in March for its highest since 2008.
“The dollar is key and the Fed is key; they’re going to kill demand for anything inflationary,” said Robert Yawger, director of energy futures at Mizuho in New York.
The oil markets have also been reacting to weak consumption out of the United States and China. Motorists in the United States drove less in July than the previous month, a second straight monthly decline, due to high gas prices. Retail gas prices have retreated from their peak as demand has slipped.
“We’re going to roll into turnaround season here, so it’s neither driving season or heating season for the next six to seven weeks,” Yawger said.
U.S. crude oil stocks are estimated to have risen last week by about 2 million barrels, a Reuters poll showed.
A document from the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia showed the group fell short of its output target in August by 3.58 million barrels per day (bpd) – about 3.5% of global oil demand.
(Reporting by Shadia Nasralla; Additional reporting by Isabel Kua; Editing by Mark Potter, David Goodman, Will Dunham, David Gregorio and Jonathan Oatis)
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. It is typically measured by the Consumer Price Index (CPI) or Producer Price Index (PPI).
Interest rates are the amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal. They can influence economic activity and are set by central banks.
Crude oil futures are contracts to buy or sell a specific amount of crude oil at a predetermined price on a specified future date. They are used by investors to hedge against price fluctuations.
The dollar index measures the value of the United States dollar relative to a basket of foreign currencies. It is an important indicator of the dollar's strength in the global market.
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