Oil prices drop on expectations of further interest rate increases

US crude stocks, an indicator of fuel demand, fell by 2.7 million barrels last week. Reuters.

Oil prices fell sharply on Wednesday on fears of further potential interest rate increases despite tight crude supply prospects.

Brent, the benchmark for two thirds of the world’s oil, was down 2.09 per cent at $83 a barrel at 2.58pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 1.97 per cent at $79.27 a barrel.

“Oil prices are off almost 2 per cent today and earlier tested the gap open from a couple of weeks ago,” said Craig Erlam, senior market analyst at Oanda.

“That came on the back of the surprise weekend Opec+ output cut, which propelled the price back towards the highs of the previous few months, where it has since hovered around.”

The sell-off on Wednesday comes on the back of slightly more hawkish expectations on interest rates, Mr Erlam said.

“In the UK, that refers to the higher terminal rate we're now seeing while elsewhere, like the US, it's fewer rate cuts later in the year.”

Inflation in the UK remained in the double digits in March, at 10.1 per cent, down slightly from 10.4 per cent the month before, the Office for National Statistics said on Wednesday.

Stubbornly high prices continue to weigh on British consumers, especially in the food sector.

Meanwhile, the US Federal Reserve is also expected to raise interest rates as it looks to tame high inflation, said Raphael Bostic, president of the Atlanta Federal Reserve.

“The economy still has a lot of momentum and is performing quite strongly, and inflation remains too high,” Mr Bostlic told CNBC in an interview on Tuesday.

“By pretty much every measure that you look at, current inflation is more than double what our target is,” he said.

Last month, the Fed raised interest rates by a quarter of a percentage point and indicated that it may pause future rate increases after the collapse of three major US banks triggered fears of a new financial crisis.

Rising interest rates limit economic growth and strengthen the dollar, making oil more expensive for holders of other currencies.

The US Dollar Index — a measure of the value of the greenback against a weighted basket of major currencies — was slightly higher at 101.77 on Wednesday.

Meanwhile, US crude stocks — an indicator of fuel demand — fell by 2.7 million barrels last week, Emirates NBD said, citing data from the American Petroleum Institute.

Oil futures settled lower on Tuesday despite positive economic data from China, the world’s largest crude importer.

“The details behind China’s impressive first quarter included lacklustre March industrial output,” said Edward Moya, a senior market analyst at Oanda.

China's economy, the world’s second-largest, grew at a faster-than-expected pace in the first quarter as the lifting of Covid-19 curbs earlier this year helped to improve consumer spending.

The country’s gross domestic product increased by 4.5 per cent on a yearly basis in the first three months of the year, higher than the 2.9 per cent recorded in the previous quarter, according to data from the National Bureau of Statistics.

The market was expecting China’s economy to grow by 4 per cent in the first quarter, Emirates NBD said.

“A key German investor sentiment survey also weighed on crude, as optimism for the eurozone’s largest economy remains downbeat in the coming quarters,” said Mr Moya.

Brent is still up since Opec+ producers announced voluntary oil production cuts of 1.16 million bpd on April 2.

The output cuts, which will be in place starting from May until the end of December, are aimed at supporting oil market stability.

Russia, a part of the 23-member alliance of producers, also said it would extend its output cut of 500,000 bpd until the end of this year.

Moscow had previously pledged to curb its production until June in response to the price caps imposed by the West on exports of its crude oil and refined products.