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Oil Prices Drop 4% as Interest Rate Hike Looms

Oil prices fell by 4% on Wednesday, extending losses from the previous session, as investors worried about the health of the U.S. economy before an anticipated Federal Reserve interest rate increase later in the day.


Brent Futures and WTI Experience Significant Declines

Brent futures decreased by $2.85 or 3.8% to $72.47 a barrel, reaching its lowest since March 20. Meanwhile, U.S. West Texas Intermediate crude (WTI) fell $2.92 or 4.1% to $68.74, dropping to its lowest point since March 24. Both benchmarks experienced a 5% decline during the previous session, marking their largest daily percentage drops since early January.

Fed's Battle Against Inflation Continues

The Federal Reserve is predicted to announce another quarter-point increase later today as part of its ongoing fight against inflation, according to PVM Oil analyst Stephen Brennock. He added that concerns about the health of the U.S. banking sector and disappointing U.S. jobs data intensified fears of a looming shallow recession in the U.S. economy.

Impact of Rate Hikes on Economic Growth and Energy Demand

The Fed is expected to hike interest rates by 25 basis points, with the European Central Bank also likely to raise rates at its policy meeting on Thursday. These rate hikes could slow economic growth and negatively affect energy demand.

Unexpected Rise in U.S. Gasoline Inventories

Oil prices continued to fall after government data revealed an unexpected increase of 1.7 million barrels in U.S. gasoline inventories last week, contrary to analysts' expected 1.2 million-barrel drop. Andrew Lipow, president of Lipow Oil Associates in Houston, highlighted that gasoline demand reversed previous increases.

China's Manufacturing Activity Decline Affects Energy Prices

Energy prices were further pressured by data from China indicating an unexpected drop in April manufacturing activity in the world's largest energy consumer and top crude oil buyer. The International Monetary Fund raised its economic forecast for Asia, emphasizing the importance of China's post-pandemic economic reopening. It warned of risks from persistent inflation and global market volatility due to Western banking sector issues.

Morgan Stanley Lowers Brent Price Forecast

Morgan Stanley lowered its year-end forecast for Brent prices to $75 a barrel, noting that downside risks to Russia's supply and upside risks to China's demand have mostly played out, and prospects for tightness in the year's second half have weakened.