Oil slips as Fed’s expected rate hike rattles investors

Beijing — Oil prices fell on Thursday as the US dollar strengthened following signs that the US Federal Reserve will tighten monetary policy in the world’s biggest oil user.

Futures pulled back amid a broader decline in financial markets triggered by the March interest rate increase telegraphed by the Fed and as the dollar climbed against its major peers. Dollar-denominated oil becomes more expensive for buyers using other currencies when the greenback gains.

Brent crude futures were down 57 US cents, or 0.9%, to $89.18 a barrel at 4.40am GMT, after earlier falling by as much as 1.1% to $89. Brent climbed 2% on Wednesday.

US West Texas Intermediate (WTI) crude futures were down 83 US cents, or 0.9%, to $86.52 a barrel, after falling by as much as 1.2% to $86.34. WTI gained 2% in the previous session.

“It could be a strong US dollar at play after the federal open markets committee signalled rates will rise,” said Commonwealth Bank analyst Vivek Dhar.

The dollar rose on higher US treasury yields, lifting the US dollar index, which measures the greenback against major peers, to 96.604, near five-week highs.

Crude prices surged on Wednesday, with Brent climbing to $90 a barrel for the first time in seven years, amid the tensions between Ukraine and Russia, the world’s second-largest oil producer, that has fanned fears of energy supply disruptions to Europe.

Dhar echoed those concerns, listing that along with the Omicron coronavirus variant not affecting oil demand as badly as initially feared and efforts by oil cartel Opec and its allies, known as Opec+, to boost supply not materialising as supportive for oil prices.

Opec missed its planned supply increase target in December, highlighting capacity constraints that are limiting supply as global demand recovers from the Covid-19 pandemic.

Opec+ is gradually relaxing 2020’s output cuts as demand recovers from the demand collapse that year. But many smaller producers can’t raise supply and others have been wary of pumping too much in case of renewed Covid-19 setbacks.

“Continued supply challenges and mounting Russia-Ukraine tensions continue to support crude oil prices. It is down slightly today but I think it is nothing more than a technical move,” said Howie Lee, economist at OCBC in Singapore.

An increase in crude oil and petrol inventories in the US alleviated some of the concerns about supply.

Crude inventories rose by 2.4-million barrels in the week to January 21 to 416.2-million barrels, compared with analysts’ expectations in a Reuters poll for a 728,000-barrel drop, the Energy Information Administration (EIA) said on Wednesday.

Petrol stockpiles rose by 1.3-million barrels last week to 247.9-million barrels, the EIA said, the most since February 2021.

Reuters