Oil prices fall on expected US rate increases despite tightening supply

Inventories at the Cushing storage hub in the US drop for sixth week in a row

An oil pump jack in California. Opec said it expected a supply shortfall of 3.3 million bpd over the next three months. EPA

Oil prices fell on Thursday despite tightening supply on expectations of US interest rate increases later this year that could limit economic growth and hit overall fuel demand.

The US Federal Reserve on Wednesday hit pause on raising interest rates following the Federal Open Market Committee meeting, but signalled that there could be another rate increase by the end of the year.

The committee will hold its next meeting from October 31 to November 1.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.49 per cent lower at $93.07 a barrel at 4.23pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.41 per cent at $89.29 a barrel.

Brent slid 0.9 per cent to close at $93.5 per barrel on Wednesday while WTI closed down 1 per cent to $90.3 per barrel.

“After its blistering climb, oil’s rally has hit the pause button, as the Fed’s higher for longer signal eclipses declines in stockpiles,” said Ehsan Khoman, head of ESG, commodities and emerging markets research at MUFG.

“While we believe that most of the rally is behind us, we do not rule out a transitory breach for Brent crude north of $100 per barrel given how deep the market deficit is, alongside severely depleted inventories,” he said.

But an oil rally above $100 per barrel “will not be sustainable”, Mr Khoman added.

The oil market is expected to tighten as Opec+ members Saudi Arabia and Russia announced this month that they would extend supply cuts of a combined 1.3 million barrels per day to the end of the year.

As part of the voluntary cuts, the kingdom is extending its output reduction of one million bpd until December.

Meanwhile, Russia is rolling over its export cut of 300,000 bpd until the end of the year.

In its monthly oil market report last week, Opec said it expected a supply shortfall of 3.3 million bpd over the next three months.

“The fall in oil prices came despite further evidence of a tightening market as US inventories at the Cushing storage hub fell for the sixth week in a row to 22.9 million barrels, near minimum levels for the unit and at the lowest level since last July,” said Daniel Richards, Mena economist at Emirates NBD.

Brent is forecast to trade in the range of $90 to $100 a barrel over the coming months, before ending the year at $95, Swiss lender UBS said in a research note on Tuesday.

It does not expect Brent crude to move above $100 a barrel on a “sustained basis” as it would lead to higher US crude supply.

"The US economy showing resilience may be viewed as a positive in the short term as it supports demand, [but] if that then prompts the Fed to tighten further and hold rates higher for longer, it risks tipping the economy over the edge and into recession," said Craig Erlam, senior market analyst at Oanda.

"And it seems it's those fears that are now weighing on crude prices after such a powerful rally over the last four weeks."

However, the market remains tight and is running a large deficit, which could push prices higher, he said.

On Monday, Saudi Arabia’s Energy Minister said the Opec+ group was not aiming for price control through its output cuts, but less volatility in the market.

The group wants to be “proactive” and “pre-emptive”, Prince Abdulaziz bin Salman said. There was continuing uncertainty regarding Chinese demand, European economic growth and interest rate actions, he added.