Oil prices pressured by increased US rate hike expectations

Oil prices were volatile on Thursday, with WTI dropping to the $90.5 per barrel level, before paring some of the day’s losses. If WTI continues to decline, it may encounter support near $90 per barrel, while resistance can be found near the $105 per barrel level and higher up at $112 per barrel. 

Heightened global recession fears have recently reduced the oil demand outlook, putting pressure on oil prices. Concerns that interest rate hikes could slow global economic growth reducing energy demand have pushed oil prices down. The Fed is expected to raise its interest rates again considerably this month to tackle skyrocketing US inflation. A 75 bps Fed rate hike has been priced in by markets, with several market participants expecting even a 100 bps rate hike this month. Stalling economic growth combined with fiscal tightening and soaring inflation gives rise to fears of recession, halting the ascend of oil prices. 

Uncertainty over China’s oil demand is causing fluctuations in oil prices. China is the largest importer of crude oil and Covid lockdowns have dampened oil demand, pushing prices down. Last week, reports that China plans to stimulate its economy via a large stimulus package boosted the oil demand outlook. This week, however, reports of massive Covid testing in China and renewed restrictions have reignited fears of extensive lockdowns, pushing oil prices down.

US oil inventories rose to 3.3M barrels this week, exceeding expectations. Oil supplies remain tight, however, supporting oil prices. In its latest meeting, OPEC+ maintained its output policy and kept its production goals for August to the same levels agreed in its previous meeting, raising its output by approximately 648,000 barrels a day. It remains to be seen, however, whether the bans on Russian oil will allow the organization to reach its output quotas. 

Many OPEC members continue to underperform, raising doubts about whether the organization can maintain its output goal, and adding to supply concerns. This week, OPEC+ data showed that the organization produced 24.8 million barrels per day of crude oil in June, with production falling 1 million BPD short of the target levels. In addition, OPEC’s first forecast report for 2023 indicated that demand will continue to outpace supply, leading to oil shortages.

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Written by:
Myrsini Giannouli

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