Stocks rattled and oil falls to lowest since May as Fed looks to roll back purchases

The relaxation of the US quantitative easing programme hinges on labour market recovery

Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hub in Cushing, Oklahoma. Oil's latest decline follows the publication of the Fed's July meeting minutes, which indicated a Show more

Markets tumbled and oil prices sank to their lowest levels since May on concerns the US Federal Reserve may taper its quantitative easing programme before the end of the year.

Brent, the international benchmark, fell 3.03 per cent to trade at $66.16 per barrel at 3.46pm UAE time. West Texas Intermediate, which tracks US crude grades, plunged 3.59 per cent to $63.11 per barrel. Abu Dhabi's Murban crude futures contract for October settlement also trended low, down 3.5 per cent at $65.52 per barrel at 3.30pm UAE time.

Brent and WTI fell 8.2 per cent and 10.4 per cent respectively, this month as the highly-transmissible Delta variant of coronavirus has forced new lockdowns in some parts of the world.

Fresh outbreaks including a case at the world's third-busiest container port at Ningbo-Zhoushan in China have further dampened demand for crude from the world's top importer of crude.

Chinese demand for the third quarter is expected to decline by 250,000 barrels per day, while consumption in the US, the biggest consumer of oil is set to fall 220,000 bpd.

"But our downgrades are more modest than consensus because we believe concerns around China are overblown. Cases have likely already peaked," Energy Aspects said in a note.

Oil's latest decline follows the release of the minutes of Fed’s July meeting, which indicated a roll back of the US central bank's quantitative easing policy that has been in place since the onset of the pandemic to support the economy.

"Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS [mortgage-backed security] proportionally in order to end both sets of purchases at the same time," according to the minutes of the Fed meeting.

The easing of the monetary policy hinges on labour market recovery. Should the US economy continue to add around a million jobs per month, the Fed can ease its purchases of around $120 billion per month from November, according to Mansoor Mohi-uddin, Bank of Singapore’s chief economist.

The Fed is expected to slow purchases by $15bn in December, including $10bn of US treasuries and $5bn of mortgage-backed security bonds.

"This is one month earlier than we had previously thought," Mr Mohi-uddin said.

"Afterwards, however, we expect the Fed will keep slowing its bond-buying by $15bn only at each further meeting with its final taper announced in September 2022," he added.

The US' apex financial institution will continue to print money through to the final quarter of 2022, supporting the world's largest economy's recovery from the pandemic.

The comments by the Fed have boosted the dollar index, exerting downward pressure on oil.

Crude trades in inverse proportion to the dollar. The higher the dollar, the lower the price of crude, and vice versa.

"The US dollar index rallied upwards to 0.1 per cent, its highest mark since April. As crude oil is priced in dollars, oil prices move opposite to the dollar index," Naeem Aslam, chief market analyst at AvaTrade, said.

"So, when the American dollar appreciates in value, oil becomes more expensive for international buyers. This pushes oil prices down with the appreciation of the US dollar."

Contracts on the S&P 500 Index fell about 1.1 per cent while European stocks also tumbled on concerns over US monetary policy and the spreading of the coronavirus Delta variant.

London’s FTSE 100 dropped about 2 per cent, Europe's Stoxx 600 fell 1.4 per cent, Frankfurt’s Dax slipped 1.3 per cent and France's Cac 40 was down 1.8 per cent in the morning trading sessions on Thursday.

Copper, considered the most critical metal for global economies, dropped to a four-month low below $9,000 a tonne. Iron ore futures fell more than 10 per cent on concerns of slowing steel production in China.