Oil prices experienced a decline in Asian trading on Thursday due to the Federal Reserve’s warning regarding higher U.S. interest rates. This prompted investors to secure recent profits, even though expectations of tight supply continued to paint a positive picture for crude.
West Texas Intermediate (WTI) crude futures slipped below the $90 per barrel mark, while Brent oil futures also saw a significant drop from their 10-month highs earlier in the week as profit-taking swept through the markets.
These concerns were driven by the Fed’s stance. While the central bank decided to keep rates steady during its Wednesday meeting, it warned that persistent inflation could necessitate at least one more rate hike this year. The Fed also hinted at fewer rate cuts in the coming year.
The Fed’s comments contributed to a stronger dollar and resulted in losses across various financial markets. Brent oil futures fell by 0.4% to reach $93.08 a barrel, while WTI futures dropped by 0.6% to $89.17 a barrel by 20:17 ET (00:17 GMT), marking their third consecutive session of declines after reaching 10-month highs earlier.
The fear in the markets revolves around higher interest rates potentially dampening economic activity and affecting crude demand. In addition to the Fed, this week also features interest rate decisions from the Bank of England and the Bank of Japan.
However, the factors that pushed crude oil to its 2023 highs, especially the prospect of tighter supply, continue to play a role. Some analysts have even warned that oil prices could climb higher.
U.S. Inventories Shrink; Gasoline and Distillates Surprise with Drawdowns
Government data released on Wednesday showed that U.S. crude inventories decreased slightly less than expected for the week ending September 15. More notably, there was an unexpected draw in gasoline and distillates as refiners slowed down production with the end of the summer season.
The overall reduction in inventories was driven by strong oil exports, suggesting that global crude demand remains resilient. This data indicates that U.S. oil markets remain tight, strengthening expectations of further tightening in global supplies in the coming months.
JP Morgan Forecasts Brent at $120 a Barrel on Tighter Supply
Analysts at JP Morgan issued a warning that Brent oil prices could potentially rise as high as $120 a barrel, especially with markets tightening further due to supply cuts by Saudi Arabia and Russia. These supply cuts played a pivotal role in the nearly 30% rally in crude over the past two months and are expected to continue supporting prices in the short term.
However, JP Morgan also cautioned that higher oil prices might impact global economic growth, particularly with interest rates poised to remain elevated. Additionally, higher oil prices have contributed to inflation, which, in turn, prompted the Fed’s hawkish stance.
