Oil swings on tight supply ahead of Fed rate rise

The US Federal Reserve is expected to approve another big interest rate increase this week to tame surging inflation

Oil prices fluctuated on Monday before this week’s expected Fed rate increase and the impact it may have on demand. Reuters

Oil prices fluctuated on Monday before this week’s expected rate increase by the US Federal Reserve and its potential impact on demand.

Oil declined in the earlier sessions of trading as recessionary fears grow, but rose later on supply concerns brought on by the ongoing Ukraine conflict.

Brent, the benchmark for two thirds of the world's oil, was trading 1 per cent higher at $104.20 a barrel at 3.45pm UAE time on Monday. West Texas Intermediate, the gauge that tracks US crude, was up 1.05 per cent at $95.69 a barrel.

The Fed is expected to approve another big interest rate rise this week to tame surging inflation, which is at a 40-year high in the US as a result of the coronavirus pandemic, rising oil prices and Russia’s military offensive in Ukraine.

Consumer prices rose by 9.1 per cent year-on-year in June, the largest gain since 1981, data from the US Labour Department indicated this month.

“The big question for investors and traders will be if we see the final sight of the hawkish Fed, meaning if this will be the last time that the Fed will increase the interest rate by 75 basis points,” Naeem Aslam, chief market analyst at Avatrade, said.

Last month, the Fed raised the policy rate by a larger-than-expected three-quarters of a percentage point, its third interest rate increase in three months and the biggest since 1994.

“There are some indications in terms of economic data and also oil prices that we have seen a peak in inflation in the US, and if this holds true, then it is highly likely that the Fed will slow down its dice roll,” Mr Aslam said.

The slowdown in global economic growth is also affecting demand.

The International Monetary Fund is expected to downgrade its global economic growth projections for this year and next when it releases its World Economic Outlook Update this week.

In April, the IMF lowered its 2022 global growth forecast to 3.6 per cent, down from its estimate of 4.4 per cent in January amid the Ukraine conflict and supply chain disruptions caused by the pandemic.

“Futures markets remain deeply in backwardation, suggesting that in the real world, prompt supplies are as tight as ever, however rising recession fears globally do suggest that gains are likely to be limited in the shorter-term, geopolitics aside,” Jeffrey Halley, senior market analyst of Asia Pacific at Oanda, said.

The International Energy Agency also trimmed its global oil demand forecast for this year and the next as the worsening macroeconomic outlook and fears of a recession dampen market sentiment.

Oil demand is now expected to expand 1.7 million barrels per day in 2022 (down slightly from the IEA's forecast of 1.8 million bpd in June) and 2.1 million bpd in 2023 (compared with the 2.2 million bpd June forecast), to reach 99.2 million bpd and 101.3 million bpd, respectively, the Paris-based agency said in its latest monthly Oil Market Report.

On the supply side, Libya's National Oil Corporation (NOC) aims to bring back production to 1.2 million bpd in two weeks after production in the North African country was hit by political turmoil.

“National Oil Corporation and its companies achieved a relative increase in oil production, with current production reaching 860,000 barrels per day, while the pre-reopening production rate was 560,000 barrels per day,” NOC said on Saturday.

“NOC is striving to increase production and bring it back to its normal rates of 1.2 million barrels per day in two weeks.”

Libya on July 1 shut down two of the country's biggest export terminals and an oilfield, with NOC declaring a state of force majeure, which refers to an unforeseen set of circumstances preventing a party from fulfilling a contract.

However, oil prices are being supported by growing supply concerns amid the Ukraine conflict and sanctions by the US and its allies on Russian crude.

The EU agreed in May to ban most of Russia's oil imports by the end of the year, raising concerns about a tighter market.