Oil prices fall on interest rate concerns and stronger dollar

Markets are also awaiting the minutes of the Fed’s latest policy meeting

TAFT, CA - JULY 22:  Oil rigs just south of town extract crude for Chevron at sunrise on July 22, 2008 in Taft, California. Hemmed in by the richest oil fields in California, the oil town of 6,700 with a stagnant economy and little room to expand has hatched an ambitious plan to annex vast expanses of land reaching eastward to Interstate 5, 18 miles away, and taking over various poor unincorporated communities to triple its population to around 20,000. With the price as light sweet crude at record high prices, Chevron and other companies are scrambling to drill new wells and reopen old wells once considered unprofitable. The renewed profits for oil men of Kern County, where more than 75 percent of all the oil produced in California flows, do not directly translate increased revenue for Taft. The Taft town council wants to cash in on the new oil boom with increased tax revenues from a NASCAR track and future developments near the freeway.  In an earlier oil boom era, Taft was the site of the 1910 Lakeside Gusher, the biggest oil gusher ever seen in the US, which sent 100,000 barrels a day into a lake of crude.  (Photo by David McNew/Getty Images)
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Oil prices fell in morning trade on Tuesday on a strong dollar and concerns about further monetary tightening by the US Federal Reserve.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.51 per cent lower at $83.64 a barrel at 12.47am UAE time.

West Texas Intermediate, the gauge that tracks US crude, was up 0.56 per cent at $76.77 a barrel.

"There is undoubtedly more optimism around the Chinese economy which will stimulate more demand this year but at the same time, sentiment is cooling on the global economy as interest rates are projected to go a little higher than previously anticipated," said Edward Moya, senior market analyst at Oanda.

"This was always likely to be a quarter of big swings in sentiment as it was too much to ask for the inflation data to simply retreat back without any setbacks along the way."

Last week’s US economic data pointed to stubborn inflation in the world’s largest economy, making a case for larger interest rate increases.

Earlier this month, the Fed increased interest rates by 25 basis points — the eighth increase since March 2022. It also hinted at the possibility of further rate increases in the future.

The current target range for interest rates set by the Fed is 4.5 per cent to 4.75 per cent, which is about 50 bps below the end-of-year projection of 5.1 per cent.

Markets are also awaiting the minutes of the Fed’s February policy meeting, due on Wednesday.

Meanwhile, the US Dollar Index — a measure of the value of the greenback against a weighted basket of major currencies — was up 0.19 per cent at 104.06.

A stronger dollar makes oil more expensive for holders of other currencies.

On Monday, the Saudi Arabia’s Energy Minister said the Opec+ group of 23 oil-producing countries could alter its output policy if market conditions changed.

“We are flexible enough to adjust Opec+ decisions if needed,” Prince Abdulaziz bin Salman said at a conference in the kingdom, according to a Bloomberg report.

At its meeting this month, the group agreed to stick to existing production output cuts of 2 million barrels per day.

However, the belief that Opec+ can keep prices supported “wherever they want is waning as global growth outlooks take a turn for the worse”, said Mr Moya.

“As long as supplies seem ample, Opec+ will be playing catch-up to keep the market tight.”

Global oil demand climbed in December by 1.3 million bpd to hit a record, driven by rising consumption in Japan, Indonesia and South Korea, according to data from the Joint Organisations Data Initiative (Jodi).

Meanwhile, global crude production in the month declined by 274,000 bpd to a five-month low, led by losses in the US and the UK, Jodi said.

On Tuesday, the International Monetary Fund said that although there are continuing challenges for regional economies such as China due to the slowing global momentum, the easing of economic headwinds was a positive sign pointing to a stronger recovery in Asia this year.

Economies in the Asia-Pacific region are set to grow by 4.7 per cent this year, up from 3.8 per cent in 2022, the fund has said.

The global economy is expected to experience growth of 2.9 per cent in the current year, following a 3.4 per cent expansion in 2022, according to IMF’s Economic Outlook released in January.

The American Petroleum Institute is expected to publish its weekly US crude inventories report today.

Updated: February 21, 2023, 9:56 AM