Oil prices gain after near 3% slump amid interest rate fears

European Central Bank president Christine Lagarde says it is too early to 'declare victory' over inflation

Drilling platform at Norway's giant offshore Johan Sverdrup field. Reuters

Oil prices gained on Wednesday on a drop in US crude stocks after concerns of further interest rate increases dragged futures lower by nearly 3 per cent the previous day.

Brent, the benchmark for two thirds of the world’s oil, was trading 1.95 per cent higher at $73.74 a barrel at 7.35pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was up 2.2 per cent at $69.19 a barrel.

On Tuesday, Brent settled 2.59 per cent lower at $72.26 a barrel, while WTI was down 2.41 per cent at $67.70.

“It’s going to take a lot to change the minds of energy traders. Fears of a weaker global growth outlook are not going away anytime soon,” said Edward Moya, senior market analyst at Oanda.

“In the US, good news is bad news as that will suggest the [Federal Reserve] might have to do more tightening. Inflation is stubbornly high in Europe that could trigger a lot more rate hikes and a harsher recession,” Mr Moya said.

On Tuesday, European Central Bank president Christine Lagarde said it was too early to “declare victory” over inflation.

“We are seeing a decline in the inflation rate as the shocks that originally drove up inflation wane and our monetary policy actions are transmitted to the economy,” Ms Lagarde said.

“But the pass-through of those shocks is still ongoing, making the decline in inflation slower and the inflation process more persistent.”

Higher interest rates could slow the global economy and lower crude demand.

US consumer confidence soared this month due to optimistic views on the labour market and business conditions, as well as a more positive outlook on family finances.

The Consumer Confidence Index increased to 109.7 this month, up from 102.5 in May, the Conference Board reported on Tuesday.

Consumers' assessment of current business and labour market conditions also rose to 155.3.

Meanwhile, US crude stocks, an indicator of fuel demand, fell by 2.4 million barrels last week, according to media reports citing data from the American Petroleum Institute.

Analysts were expecting inventories to drop by 1.76 million barrels, according to Reuters.

Oil time spreads, the price difference between front month and second month futures contracts, are “dislocated” versus current inventory levels, raising concerns over recession and the forward demand path, Goldman Sachs said in a research note.

Front-to-back Brent time spreads are $10 a barrel lower than the US investment bank’s current forecasts, it said.

Higher interest rates and recessionary concerns can cause inventory destocking and weaker time spreads, the bank said.

“While our analysis is consistent with existing theory of commodity carry, the impact is often ignored. This is likely due to the dominance of balances and inventories in determining time spreads,” Goldman Sachs said.

“However, [interest] rates are now having the largest impact on carry in decades.”

Last week, US Federal Reserve chairman Jerome Powell informed Congress 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.

Earlier this month, the Federal Reserve hit pause on increasing interest rates for the first time since its started its monetary tightening cycle in March 2022 as it assesses the impact on the economy. It signalled it would resume raising rates again this year if needed. Its next meeting will be on July 25-26.