Oil prices fall on expectations of further interest rate increases

US crude inventories, an indicator of fuel demand, dropped by 1.2 million barrels last week, industry data shows

Pump jacks operate in an oil field in Midland, Texas. Reuters

Oil prices were down on Thursday as prospects of further interest rate increases by the US Federal Reserve offset a surprise drop in US crude stocks.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.30 per cent lower at $76.89 a barrel at 11.49am UAE time, while West Texas Intermediate, the gauge that tracks US crude, was down 0.29 per cent at $72.32 a barrel.

On Wednesday, Brent settled 1.61 per cent higher at $77.12 a barrel, while WTI was up 1.88 per cent at $72.53.

Fed chairman Jerome Powell informed US Congress on Wednesday that the majority of the Federal Open Market Committee expected there to be a need for additional interest rate increases “by the end of the year".

The speed of the policy tightening is “not very important” right now and the pace of future rate increases will be guided by data, Mr Powell said.

Last week, the Fed paused increases on US interest rates to assess its tightening cycle on the economy, but signalled that it would resume raising rates again this year.

Higher interest rates could slow the global economy and dampen crude demand. The Fed has increased interest rates by a combined 500 basis points since March 2022.

Inflation in the UK rose more than expected in May, with the annual headline reading increasing by 8.7 per cent, unchanged from the April level.

Core inflation rose to an annual 7.1 per cent, its fastest level since 1992.

The rising prices dash hopes of the Bank of England pausing its monetary policy tightening and leaving interest rates on hold.

Meanwhile, US crude inventories, an indicator of fuel demand, dropped by 1.2 million barrels last week, the American Petroleum Institute said.

Analysts were expecting an increase of 300,000 barrels, Reuters reported.

The US Energy Information Administration will release its official data today.

“The oil market is going to remain tight thanks to Opec+, so that should make trading a little easier for energy traders,” said Edward Moya, senior market analyst at Oanda.

“Most energy analysts envision $80 oil at some point this year, so any bullish headline could get us there.

“Oil was getting near the bottom of its recent trading range, and it could continue rebounding if the headlines for China remain upbeat.”

China, the world’s second-largest economy and leading crude importer, cut two market-based benchmark lending rates this week, but the loosening of the monetary policy was less aggressive than what some analysts expected.

China’s economy, which rebounded after Covid-19 restrictions were lifted at the start of the year, lost momentum in May, posting weaker retail sales and manufacturing output, while registering a slowdown in the property sector.

This week, US investment bank Goldman Sachs trimmed its 2023 gross domestic product growth forecast for the China from 6 per cent to 5.4 per cent.

It also reduced its 2024 growth forecast to 4.5 per cent, from 4.6 per cent.

“Going down the old route of boosting short-term growth with massive property and infrastructure stimulus goes against the top leadership's 'high-quality growth' model,” Goldman Sachs analysts said.

“But policy support in areas such as high-end manufacturing and new energy vehicles has already been ongoing and is unlikely to generate large growth impulses.”

Last week, Chinese Premier Li Qiang said at a State Council meeting that the government was considering the introduction of a basket of stimulus measures.

MUFG cut its short-term oil price forecasts on Wednesday, citing higher-than-expected supply from Russia and other countries under sanctions.

The Japanese bank now expects Brent to average about $81 a barrel this year, lower than its previous estimate of $88. It also slashed its 2024 forecast to $84 from about $98.

"Drip-fed Chinese stimulus continues to underwhelm, failing to spur any meaningful oil support. The critical backdrop to explain the inability to sustain any oil rally remains focused on excess supply from sanctioned Opec+ countries," MUFG said on Thursday.

"While it is tempting to blame the 8 per cent year-to-date sell-off in commodities on financial liquidation given extraordinary paper market selling, physical weakness is also beginning to appear in the data."

Meanwhile, Opec's crude oil exports have fallen to their lowest since June 2022 following the introduction of voluntary production cuts by the Opec+ alliance, UBS said.

Opec crude exports are running at about 900,000 barrels a day lower over the first three weeks of June than in April, the Swiss bank said, quoting data from tanker tracker Petro-Logistics.

Opec+ has announced total production curbs of 3.66 million bpd, or about 3.7 per cent of global demand – a two million bpd reduction was agreed to last year and the alliance set out voluntary cuts of 1.66 million bpd in April.

On June 4, top crude exporter Saudi Arabia announced a unilateral output cut of one million bpd for July and said it could be extended.

"We expect Opec exports to fall further in July," UBS strategist Giovanni Staunovo said.

"The last time the kingdom unilaterally cut its production by the same amount in February 2021, the move translated to a similar drop in crude exports.

"With oil demand seasonally rising during the Northern Hemisphere summer alongside the lower supply, the result should be larger oil inventory declines ahead."