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Global Oil Market Feels the Heat as Interest Rates Surge

Interest rate hikes worldwide and weaker economic indicators lead to a dip in oil prices.


Oil Price Decline Amid Interest Rate Concerns

Oil prices experienced a fall on Friday, hinting towards a weekly decline. The primary concern among traders is the potential drop in demand triggered by anticipated interest rate hikes, despite signals of tighter supplies such as a decrease in US crude stocks.

Brent and WTI Crude Bear the Brunt

On its second day of consecutive losses, Brent crude saw a drop of 60 cents, representing a 0.8% slip, which brought the price per barrel to $73.56 by 1:20 p.m. ET. US West Texas Intermediate (WTI) crude also suffered a 61 cent, or 0.9%, drop, bringing it down to $68.89.

Central Banks and Interest Rate Hikes

On Thursday, a significant $3 fall per barrel was recorded for Brent after the Bank of England raised interest rates by a larger than anticipated half percentage point. Central banks from Norway and Switzerland followed suit. Furthermore, the possibility of more US interest rate hikes seems more likely, as stated by San Francisco Federal Reserve Bank President Mary Daly.

Trading Reactions and Market Sentiments

The current trading environment reflects a 'risk off' mentality, triggered by the interest rate hikes in the European Union and disappointing stimulus numbers from China, according to Dennis Kissler, senior vice president of trading at BOK Financial. He also highlighted that the rate rise from the Bank of England has initiated fund liquidation and energy producers are transitioning towards a "hedge now" mentality.

The Impact of Higher Interest Rates and a Strong Dollar

An increase in interest rates results in a rise in borrowing costs for both businesses and consumers, which could potentially slow economic growth and reduce oil demand. The risk-averse nature of investors coupled with the strengthening US dollar also puts pressure on oil prices, making the commodity more expensive for those dealing in other currencies.

US Business Activity and Global Economic Indicators

US business activity fell to a three-month low in June due to a contraction in the manufacturing sector and ease in services growth. Concurrently, Wall Street's primary indexes declined, and gold prices were set for their most significant weekly decline since early February. China's once-promising economic recovery has also lost momentum with several consecutive months of softer-than-expected consumption, production, and property market data.

Supply-side Factors and Market Tightening

Despite the recession and demand worries, supply-side tightness continues to be a factor. US energy firms cut oil rigs for an eighth consecutive week, bringing the US oil rig count to its lowest since April 2022. Furthermore, a surprising decline of 3.8 million barrels was shown in this week's U.S. inventory report. An additional market tightening factor is Saudi Arabia's planned production cut of 1 million barrels per day in July, alongside an OPEC+ deal to limit supplies into 2024.