Oil falls as US rate hike expectations offset tight supply outlook

Oil prices dipped in early Asian trade on Thursday, following the worst drop in a month in the previous session, as expectations for US interest rate hikes outweighed the impact of drawdowns in US oil stocks.

By 0608 GMT, Brent futures for November delivery were down 71 cents, or 0.76 per cent, to $92.82 per barrel. West Texas Intermediate crude (WTI) in the United States slid 70 cents, or 0.78 per cent, to $88.96, the lowest since 14 September.

“The Fed kept rates unchanged at yesterday’s FOMC meeting, as widely expected. However, it was still seen as a hawkish pause, which put some pressure on risk assets” such as oil, said ING analysts in a client note.

The US Federal Reserve kept interest rates unchanged following its Federal Open Market Committee (FOMC) meeting but increased its hawkish tone by projecting a rate hike by year’s end, which might reduce economic growth and total fuel consumption.

Fed officials continue to expect the bank’s benchmark overnight rate range to peak this year at 5.50% to 5.75%, a quarter percentage point higher than the current range.

The hawkish posture also pushed the US currency to its highest level since early March, putting downward pressure on oil prices. A higher dollar often raises the price of commodities such as oil for purchasers using foreign currencies.

Energy markets responded little to data released by the US Energy Information Administration (EIA) on Wednesday indicating that crude stocks decreased in line with forecasts last week, with some experts claiming that the drop was lower than expected.

“EIA data showed US stockpiles fell 2.14 million barrels last week, well short of the 5.25 million barrel drop reported by the American Petroleum Institute. The disappointing inventory drawdown gave impetus for traders to lock in profits following the 10 per cent gain since the start of the month,” ANZ analysts said in a note. [API/S]

The EIA noted in a weekly report that the stock draw was mostly driven by increased oil exports, while petrol and diesel stockpiles were depleted as refiners began regular autumn maintenance.

However, price declines were limited by ongoing concern about global supply as the fourth quarter began, with crude stocks at Cushing – the WTI delivery hub – at their lowest since July 2022 and production cuts by the Organisation of the Petroleum Exporting Countries and allies, known as OPEC+, continuing.

Some experts believe prices will stay sustained in the short term.

“A few more drawdowns could revive talks of tanks reaching their operational minimum … With the production cuts by Saudi Arabia and the broader OPEC+ alliance expected to remain for the rest of the year, inventories will likely touch record lows,” said ANZ analysts.

“Our balance shows a deficit of more than 2 million barrels per day through the fourth quarter of this year,” said ING analyst Warren Patterson.

“This tightness, along with strong refinery margins (largely a result of tightness in middle distillates) suggests that oil prices are likely to see further strength in the short term,” he said.