Oil drops on Fed interest rate expectations

Oil prices extended losses on Wednesday on expectations the US Federal Reserve is likely to indicate it will continue to raise interest rates in comments due out later, raising concerns of lower global economic growth and fuel demand.

Brent crude futures for April delivery fell by 23c to $82.82 a barrel by 4.20am GMT after recording a 1.2% decline on Tuesday. West Texas Intermediate (WTI) crude futures for April declined 21c to $76.15 a barrel. The March WTI contract expired on Tuesday down 18c.

The US Fed will release the minutes of its latest meeting on Wednesday, which will give traders a glimpse of how high officials are projecting interest rates will go after recent data showed stronger-than-expected US employment and consumer prices.

Higher interest rates tend to lift the dollar, making dollar-denominated oil more expensive for holders of other currencies.

Other economic reports from the US, the world’s biggest oil consumer, showed some troubling signs however. Sales of existing homes fell in January to their lowest since October 2010, the 12th monthly drop, which is the longest streak since 1999.

“Growing recessionary concerns are keeping a lid on oil prices, but the market is cautiously optimistic on China’s demand recovery especially in gasoline and jet fuel,” said Vortexa’s head of APAC analysis, Serena Huang.

A preliminary Reuters analyst poll on Tuesday also showed a rise in US crude inventories, worsening the demand worries.

However, expectations of tighter global supplies and rising demand from China cushioned the overall price weakness. Analysts expect China’s oil imports to hit a record high in 2023 to meet increased demand for transportation fuel and as new refineries come on stream.

This comes as China expects its tourism market to flourish this year, starting with a busy and robust summer travel season as travellers flock to vacation destinations after the government ended its zero-Covid policy that kept people home for almost three years.

In a note on Wednesday, Daniel Hynes, senior commodity strategist at ANZ Bank, pointed to state-owned PetroChina and Unipec booking 10 supertankers to import oil from the US next month, equal to about 20-million barrels of crude, as signs of rising Chinese demand. China is the world’s largest oil importer. 

Reuters