Oil prices in early Asian trade on Thursday fell after experiencing the largest drop in a month in the previous session. This decline was due to U.S. interest rate hike expectations outweighing the impact of drawdowns in U.S. crude stockpiles. Brent futures for November delivery dropped to $92.86 a barrel, while U.S. West Texas Intermediate crude (WTI) fell to $88.95, the lowest since September 14.
According to ING analysts, the Federal Reserve’s decision to keep interest rates unchanged at the recent FOMC meeting was seen as a hawkish pause, which put pressure on risk assets like oil.
The U.S. Federal Reserve maintained interest rates after its Federal Open Market Committee (FOMC) meeting but projected a rate increase by year-end, signaling a more hawkish stance. This could potentially dampen economic growth and overall fuel demand. Fed policymakers anticipate the bank’s benchmark overnight rate range to peak this year at 5.50% to 5.75%.
The hawkish stance also led to a surge in the U.S. dollar, reaching its highest level since early March. This increase in the dollar placed downward pressure on oil prices, as commodities like oil become more expensive for buyers using other currencies.
Data from the U.S. Energy Information Administration (EIA) showing a decline in crude inventories last week had little impact on energy markets. Some analysts found the decline to be smaller than expected. The EIA reported a 2.14 million barrel drop, while the American Petroleum Institute reported a 5.25 million barrel drop.
Despite the smaller inventory drawdown, concerns about tight supply globally entering the fourth quarter limited the decline in oil prices. Crude stocks at Cushing, the WTI delivery hub, are at their lowest level since July 2022. Additionally, production cuts by the Organization of the Petroleum Exporting Countries and associates (OPEC+) continue to support prices.
Analysts anticipate prices to remain supported in the near term due to the expectation of further drawdowns and record-low inventories. The production cuts by Saudi Arabia and the broader OPEC+ alliance are expected to continue for the rest of the year, contributing to the tightness in the market.
According to ING analyst Warren Patterson, there is a deficit of more than 2 million barrels per day projected through the fourth quarter of this year. This tightness, combined with strong refinery margins, suggests that oil prices are likely to see further strength in the short term.
Overall, oil prices fell in response to U.S. interest rate hike expectations, despite drawdowns in U.S. crude stockpiles. The hawkish stance of the Federal Reserve and the surge in the U.S. dollar contributed to the decline. However, concerns about tight supply and production cuts by OPEC+ limited the price drop, with analysts expecting prices to remain supported in the near term.
