Oil plunges on increased rate hike expectations

Oil prices plummeted on Thursday, with WTI prices dropping below the $69 per barrel level. If the WTI price declines, it may encounter support near $66.7 per barrel, while resistance may be found near $74.3 per barrel.

The U.S. Federal Reserve kept its interest rate steady at its policy meeting last week for the first time in well over a year. Fed officials have voted to keep the central bank’s interest rate at a target range of 5.00% to 5.25%. The Fed has signaled, however, that its tightening cycle is not over yet and that its peak rate might be higher than anticipated. 

Fed Chair Jerome Powell delivered his much-anticipated testimony about the Semi-Annual Monetary Policy Report this week before the House Financial Services Committee. His testimony came in two parts and was delivered on Wednesday and Thursday. Powell’s speech on Wednesday had hawkish undertones, pointing to further rate hikes up ahead. Powell stated that inflation still has a long way to go, increasing the odds of another rate hike in July’s meeting. Powell resumed his testimony on Thursday along the same lines, stressing the need to bring US inflation down. Power said on Thursday that a strong majority of FOMC members feel that interest rates should go up further and hinted at the possibility of two more rate hikes. Expectations of additional monetary tightening reduce oil demand expectations, putting pressure on oil prices. 

Global economic concerns have been weighing oil prices down, raising concerns about further oil production cuts. OPEC+ members have opted to keep production cuts unchanged for the remainder of 2023. Saudi Arabia, on the other hand, will cut production by an additional one million barrels per day, starting in July for a month that can be extended. This will reduce Saudi Arabian production to 9 million barrels per day. 

OPEC output cuts, however, have been offset by a deterioration in China’s economic outlook. Uncertainty over China’s economic recovery put a cap on oil prices this week. China is the world’s largest importer and signs of growing demand provided support for oil prices. Economic data released last week for China were underwhelming, with growth in industrial output and retail sales slowing from April. China's central bank lowered short-term borrowing costs to assist the country’s economic recovery last week, but the boost to oil prices was short-lived. The weaker Chinese oil demand outlook has put pressure on oil prices.

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Written by:
Myrsini Giannouli

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