Oil Prices Dip as Central Banks Signal Higher Interest Rates

Oil prices fell on Tuesday as concerns over the economic outlook outweighed the tight supply. The world’s top crude oil exporter, China, has lowered its economic growth target this year, prompting analysts to wonder whether the country will increase demand enough to offset weakening global oil use caused by measures taken against the coronavirus outbreak.

In addition, a stronger U.S. dollar compounded worries that the major central banks may hold higher interest rates for more extended to tame inflation, which will slow economic growth and reduce oil demand. The dollar is the main currency used for pricing crude oil, meaning that a rise in the greenback makes the commodity more expensive for importers.

Despite the bearish outlook, oil prices are still well above their summer lows, averaging around $73 a barrel. This is mainly because a shortage of spare capacity in the shale sector and falling production in OPEC producer Russia are tightening markets.

However, the recovery in oil prices is expected to be short-lived as China’s economic recovery remains sluggish despite lifting restrictions on people traveling from the country, and the global economy is weaker than expected due to the coronavirus outbreak.

On the technical side, traders said Brent crude has moved into overbought territory and could face a pullback. Investors will watch data on domestic oil inventories as a further decline would support prices. The industry report is due on Wednesday and will be followed by government data on Thursday.

Investors are also waiting to see whether OPEC will extend output cuts at next week’s meeting. The cartel is expected to extend the production curbs for another six months, but it is unclear how much oil producers can cut in practice, given a strong rebound in shale output.

The dollar jumped against the euro and the British pound after U.S. President Joe Biden announced plans to release 1 million barrels daily from the Strategic Petroleum Reserve for six months to tackle high gasoline prices. The dollar index rose 0.2% to 95.916, while the pound was down 0.4% at $1.4828.

Oil stocks fell due to the stronger dollar, while refinery demand and U.S. consumer confidence also weighed on the market. Investors were cautious ahead of Tuesday and Wednesday’s second-quarter earnings reports from Apple Inc. and Microsoft Corp.

Traders will also closely monitor the political landscape, with the U.S. midterm elections scheduled for November 6. The results are expected to significantly impact the U.S. Federal Reserve’s future path of monetary policy. They may influence the direction of the rest of the developed world’s central banks. The Fed is widely expected to raise interest rates at its next meeting on December 19-20, but it will be a close call as to whether the bank can deliver the third rate hike of this year.

Most Popular