Oil rally halted on reduced demand expectations

Oil prices extended gains early on Wednesday, but their rally was halted after the Fed rate decision, with WTI price dropping to $68 per barrel. If the WTI price declines, it may encounter support near $67 per barrel again, while resistance may be found near $73.2 per barrel.

The U.S. Federal Reserve kept its interest rate steady at its policy meeting on Wednesday 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 signaled on Wednesday, however, that its tightening cycle is not over yet and that its peak rate might be higher than anticipated. The FOMC policy statement following the conclusion of the meeting was hawkish, hinting at further rate hikes. Expectations of additional monetary tightening reduced oil demand expectations, driving oil prices down.

Expectations of increased demand from China boosted oil prices this week. China is the world’s largest importer and oil prices climbed on Tuesday after China's central bank lowered short-term borrowing costs to assist the country’s economic recovery. In addition, the Energy and Information Administration reported on Wednesday that Chinese oil demand in April hit record highs of 16.3 million barrels per day.

Reports that Goldman Sachs cut oil price forecast put pressure on oil prices on Monday. Goldman Sachs has lowered its forecast for oil prices by nearly 10%, citing weak demand in China and increased supply by countries such as Russia, Iran, and Venezuela. 

Global economic concerns have been weighing oil prices down, raising concerns about further oil production cuts. OPEC+ members, however, opted to keep production cuts unchanged for the remainder of 2023. This includes the 2 million barrels-per-day cut announced last October. Saudi Arabia, on the other hand, announced substantial voluntary cuts in its oil output. Saudi Arabia will reduce 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. The Kingdom will also extend a production cut of 500,000 barrels per day, which was announced in April, through 2024. Supply concerns drove oil prices up after the announcement.

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Written by:
Myrsini Giannouli

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