Oil prices post steep weekly loss on concerns about monetary tightening

For the week, Brent and WTI shed more than 3.5%

An oil pump jack in Stoughton, Canada. US crude stocks, an indicator of fuel demand, fell by 3.8 million barrels in the week that ended on June 16. AFP

Oil prices settled lower on Friday and posted steep weekly losses as prospects of further monetary tightening triggered concerns about economic growth and crude demand.

Brent, the benchmark for two thirds of the world’s oil, declined 0.39 per cent to close at $85 a barrel, while West Texas Intermediate, the gauge that tracks US crude, slid 0.50 per cent to settle at $69.16 a barrel.

For the week, both Brent and WTI shed more than 3.5 per cent.

“Oil prices are going to remain heavy as central bank tightening will kill the global growth outlook,” said Edward Moya, a senior market analyst at Oanda.

“The oil market will remain heavy until European inflation eases. ​ Brent crude could make a run towards the $70 region but should rebound once we finally see significant easing come from Beijing.”

On Thursday, the Bank of England raised interest rates by 0.5 percentage points to 5 per cent, after inflation in the UK rose more than expected in May.

The rate increase was the sharpest since February and double the figure that many economists had been expecting.

That caused Brent to slide 3.86 per cent to $74.14 and WTI to drop 4.16 per cent to $69.51.

“The prospect of further tightening from the Bank of England looks high as the inflation picture remains stark for the UK, with market expectations of rates getting to as high as 6 per cent by the end of the year,” said Edward Bell, senior director of market economics at Emirates NBD.

“We expect at least another 50 bps [basis points] of tightening spread over the upcoming meetings taking the bank rate to 5.5 per cent, where it will be held until the end of the year and into 2024,” Mr Bell said.

US Federal Reserve Chairman Jerome Powell informed the US Congress on Wednesday that the majority of Federal Open Market Committee members 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.

The American central bank has increased interest rates by a combined 500 bps since March 2022.

Meanwhile, US crude stocks, an indicator of fuel demand, fell by 3.8 million barrels in the week that ended on June 16, according to the US Energy Information Administration.

Analysts were expecting an inventory build-up of 300,000 barrels, according to Reuters.

However, total petroleum stocks rose by 500,000 barrels last week and distillate inventories increased by 400,000 barrels, EIA data showed.

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.

“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 were running at about 900,000 barrels a day lower over the first three weeks of June than they were 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 a 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.”