Oil rally halted as markets anticipate further tightening

The rally of oil prices was halted on Wednesday as markets anticipated further tightening. Oil prices had risen to yearly highs in the previous days, with WTI price touching the $93.0 per barrel level. The Fed’s hawkish message on Wednesday, though, brought WTI back to $89.5 per barrel. If WTI price declines, it may encounter support near $85.0 per barrel, while resistance may be found near $93.0 per barrel.

FOMC members unanimously voted on Wednesday to keep interest rates unchanged at a target range of 5.25% to 5.50%. The Fed decided to pause rate hikes but that does not necessarily mean it has reached its rate ceiling. The Fed policy statement following the meeting left the door open for further rate hikes. Market odds of another rate hike within the year are increasing, although it is clear that the Fed’s future policy direction will be data-driven. Even if the Fed has reached its interest rate ceiling, rates are likely to stay high for longer to bring inflation down. 

Signs of diminishing oil reserves provided support for oil prices on Wednesday. The Energy Information Administration reported on Wednesday that US crude oil inventories dropped by 2.1M barrels for the week ending on September 15th. Wednesday’s print exceeded expectations of a 1.3 M barrel drop, indicating that oil reserves are dwindling faster than anticipated. 

Reports that the Saudi Energy Minister will announce further production cuts this week are boosting oil prices. OPEC has been limiting oil production to keep oil prices up. Saudi Arabia and Russia are extending production cuts that have already been in place for some months now, through the end of the year. Saudi Arabia has been reducing its output by one million barrels a day since early summer and Russia followed shortly after with a reduction of 300,000 barrels a day. 

In addition, OPEC maintained its forecasts of oil demand growth for 2023 and 2024 at 2.4 million barrels per day and 2.2 million barrels per day respectively. The organization’s forecast of economic growth was also optimistic, anticipating global economic growth to remain unchanged at 2.7% and 2.6% for this year and the next respectively.

Deterioration in China’s economic outlook is keeping oil prices down, however. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and a weaker Chinese oil demand outlook has put pressure on oil prices. China’s economy showed signs of improving this week, though, boosting oil prices.

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Written by:
Myrsini Giannouli

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