Commodities

Oil Prices Drop Amid Concerns Over US Interest Rate Hike

By Mike Dunn

May 23, 2024

87

Oil prices experienced a fourth consecutive day of decline on Thursday due to concerns that U.S. borrowing costs could potentially rise if inflation rates escalate, an eventuality which could impact oil demand negatively. 

 

Brent crude futures witnessed a decrease of 27 cents, or 0.3 per cent, bringing the price down to $81.63 per barrel at 0004 GMT. Similarly, U.S West Texas Intermediate (WTI) crude futures also dipped by 35 cents, translating into a drop of approximately 0.5 per cent and setting the price at $77.14. 

 

Both these significant benchmarks in the global oil market registered more than one percent fall on Wednesday. 

 

The Federal Reserve released minutes from its last policy meeting on Wednesday which indicated that their reaction to persistent inflation would be "maintaining" its current policy rate for now; however, there was discussion about potential further hikes as well. 

 

The report stated: "Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in such a way that such action became appropriate." 

 

Higher interest rates invariably increase borrowing costs leading to financial constraints which can hinder economic growth and subsequently dampen oil demand. 

 

Another factor causing apprehension in the market is the rise in U.S crude stocks by almost two million barrels over the past week as reported by Energy Information Administration; this figure contradicts previous estimates predicting about a draw of around two and half million barrels instead. 

 

On an international level, physical crude markets have been under pressure recently due largely because of weak refinery demands coupled with abundant supply availability. 

 

Adding another layer to this complex scenario is Russia's statement admitting it exceeded its OPEC+ production quota for April owing to "technical reasons''. The Russian Energy Ministry announced late Wednesday that they will soon present plans outlining how they intend making amends for this error before OPEC Secretariat representatives. 

 

Citi Research maintains expectations regarding OPEC+, inclusive of both original OPEC members and allies spearheaded by Russia, to continue with their production cuts through the third quarter of this year. The group is scheduled for a meeting on June 1st. 

 

Citi Research also forecasts Brent crude oil prices averaging at around $86 per barrel in Q2 of 2024. 

 

In summary, the global oil market is currently facing significant pressure due to various factors both domestic and international. From potential hikes in borrowing costs spurred by inflation concerns in the U.S., increases in U.S crude stockpiles, weak refinery demands globally, to exceeding production quotas by key players like Russia; all these elements are contributing towards creating an environment of uncertainty leading to declining trends observed over four consecutive days.



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