Oil prices rise as tight supply offsets rate hike concerns

Oil prices edged higher on Thursday, with WTI price touching the $70 per barrel level. If the WTI price declines, it may encounter support near $67.1 per barrel, while resistance may be found near $72.5 per barrel.

Oil prices surged this week as US inventories declined, offsetting worries about further interest rate hikes. The U.S. Energy Information Administration announced a higher-than-expected drop in US crude oil inventories on Wednesday. Crude oil inventories dropped by 9.6 million barrels in the week ending on June 23rd, far exceeding expectations of a 1.4-million-barrel decline. Political instability in Russia also provided support for oil prices this week. Geopolitical tensions held oil prices up, as the crisis in Russia raised oil supply concerns. 

Further rate hike expectations put a lid on oil prices’ ascent this week, though. Final US GDP data on Thursday showed that the US economy expanded by 2.0% in the first quarter of the year. A strong economic backdrop, combined with high inflationary pressures increases the odds of another rate hike in July.  

Fed Chair Jerome Powell, speaking on Thursday at the Conference on Financial Stability in Spain, reinforced this notion. Powell stressed that US inflation is still at twice the Fed’s 2% target and warned that getting inflation back to target still has a long way to go. Powell stated that after a pause in rate hikes, the Fed is ready to resume a moderate pace of interest rate decisions.

Powell also delivered a hawkish speech at the ECB Central Bank Forum in Sintra. Powell warned that further tightening would be required, hinting at two more rate hikes up ahead. Expectations of additional monetary tightening reduce oil demand expectations, putting pressure on oil prices.

The U.S. Federal Reserve kept its interest rate steady at its June policy meeting 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. 

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. 

Deterioration in China’s economic outlook is pushing oil prices down. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and the weaker Chinese oil demand outlook has put pressure on oil prices.

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Written by:
Myrsini Giannouli

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