Oil prices tumble as Fed rate hike worries stoke demand

  • Oil prices fell on Friday on demand concerns with the prospect of further and more aggressive Fed rate hikes.
  • WTI and Brent oil prices were lower for a fourth session in a row.
  • The stronger US dollar contributed to further downward pressure on oil prices.

Oil prices fell on Friday, extending losses for the week, as investors weighed the possibility that the Federal Reserve will return to more aggressive rate hikes as inflationary pressures have been slow to decompress.

Both US and international benchmarks for crude oil were on track to log four straight declines. West Texas Intermediate crude, the US benchmark, fell 3% during Friday’s session. It hit an intraday low of $75.71, heading for a loss of more than 5% for the week.

Brent crude lost nearly 3% in Friday’s trading, and with an intraday low of $82.29, the international benchmark swung to a loss of nearly 5%. Oil prices in dollars also felt the weight of an increase in the dollar’s value.

Oil prices have fallen this week in part as US inflation reports showed a monthly increase in consumer and wholesale prices, raising expectations that the Fed may need to push interest rates further. Higher borrowing costs for businesses and consumers could damage demand for oil and other fuel products.

A fall in oil demand can take place at a time when the oil in the global markets is sufficiently stored. The International Energy Agency said last month that the oil balance was “well supplied” at the start of the year, although supplies could tighten if Western sanctions drive down Russian oil exports.

Meanwhile, the prospect of further Fed rate hikes has underpinned the dollar’s gains. The US dollar index on Friday was around a one-month high, hovering above 104. It was also on track to rise for a third week in a row. So far this year, the increase has been modest, at 0.7%.

The Federal Reserve scaled back the size of its rate hikes to 50 basis points in December and to 25 basis points earlier this month. But St. Louis Fed President James Bullard said Thursday that he would not rule out policymakers returning to a 50-basis-point rate hike at their March meeting as their inflation battle continues.

Also, Cleveland Fed President Loretta Mester said Thursday that she “saw a compelling economic case for a 50 basis point hike” at the February meeting and larger rate hikes are not out of the question.

“The US dollar has had a fantastic week,” Fawad Razaqzada, market analyst at Forex.com, said in a Friday note. “Feds Mester and Bullard were characteristically hawkish on Thursday, pushing the idea of ​​more aggressive 50bp rate hikes, although we don’t necessarily think that will be necessary.”

For oil, “a major upside risk to prices is China and the country’s recovery from the transition to living with COVID. Russian production remains another, following reports that output will fall by half a million barrels per day from March as a result of the price cap, Craig Erlam, senior market analyst at Oanda, said in a note.

“There are of course downside risks, not least a slower global economy as a result of much higher interest rates. But for now, traders seem content with (oil) staying in the range.”

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