In a challenging week for oil, prices settled lower on Friday amid growing concerns over interest rate hikes impacting oil demand. Despite signs of tighter supplies, including lower U.S. crude stocks, traders remained worried about the potential consequences of increasing interest rates.
Interest Rate Hikes and their Impact on Oil Prices
Brent Crude and WTI Crude Experience Losses
Both Brent crude and U.S. West Texas Intermediate (WTI) crude faced a second consecutive day of losses. Brent crude closed down 29 cents, or 0.4%, at $73.85 per barrel, while WTI crude fell 35 cents, or 0.5%, reaching $69.16.
Bank of England’s Rate Hike and Global Central Banks Follow Suit
On Thursday, Brent crude witnessed a significant drop of about $3 per barrel following the Bank of England’s unexpected interest rate hike of half a percentage point. Central banks in Norway and Switzerland also announced rate hikes.
Weekly Decline of More than 3.5%
The benchmarks, Brent crude and WTI crude, experienced a decline of over 3.5% throughout the week.
Potential for More U.S. Interest Rate Hikes
San Francisco Federal Reserve Bank President Mary Daly projected that two more rate hikes would occur within the year. This projection further increased the likelihood of additional interest rate hikes in the United States.
Impact of Interest Rate Rises and Disappointing Stimulus Numbers
Interest rate rises in the European Union and disappointing stimulus numbers from China triggered a “risk back off” trade in the crude oil market. This shift in sentiment caused concern among traders.
Relationship Between Interest Rates, Economic Growth, and Oil Demand
Borrowing Costs and Economic Growth
Higher interest rates lead to increased borrowing costs for both businesses and consumers. This rise in borrowing costs can potentially slow down economic growth, ultimately impacting oil demand.
U.S. Dollar’s Influence on Oil Prices
Investors’ risk-aversion led to a boost in the value of the U.S. dollar. The appreciation of the U.S. dollar exerts pressure on oil prices by making the commodity more expensive for holders of other currencies.
Economic Indicators and Manufacturing Sector Performance
Decline in U.S. Business Activity
In June, U.S. business activity reached a three-month low as services growth slowed down for the first time this year. Additionally, the manufacturing sector experienced a deepening contraction, as indicated by survey data.
Wall Street and Gold Prices
Wall Street’s primary indexes experienced a decline, while gold prices were on track for their most significant weekly drop since early February. These trends reflect the concerns and uncertainties prevailing in the market.
Global Economic Factors Impacting Oil Market
China’s Economic Recovery
China’s much-anticipated economic recovery faced hurdles with several months of softer-than-expected consumption, production, and property market data. The faltering recovery in China further contributed to the overall downward pressure on oil prices.
Recession Concerns Overshadow Supply-Side Tightness
Despite signs of supply-side tightness, including a decline in U.S. crude stocks and a reduction in the number of operating oil rigs, concerns regarding the global recession and oil demand remained prominent.
Saudi Arabia’s Production Cut
Saudi Arabia announced a production cut of 1 million barrels per day for July. This decision, along with the OPEC+ deal to limit supplies until 2024, is expected to contribute to market tightening.
Money Managers’ Positions and Market Speculation
Money managers demonstrated an increase in their net long U.S. crude futures and options positions in New York and London. In the week ending June 20, they raised their positions by 4,790 contracts to 78,064, as reported by the U.S. Commodity Futures Trading Commission (CFTC) on Friday.
In conclusion, oil prices experienced a decline due to concerns surrounding interest rate hikes and their potential impact on oil demand. Despite signs of tighter supplies, economic indicators, global factors, and market sentiment influenced the downward pressure on prices. Traders and investors continue to closely monitor interest rate developments and economic data to gauge the future trajectory of the oil market.