Oil takes a breather ahead of widely expected Federal Reserve rate increase
- The Federal Reserve’s tightening cycle risks tipping the US, the world’s largest economy, into recession and potentially harming oil demand
- West Texas Intermediate fell below US$77 a barrel after closing at a three-month high on Friday
Oil fell after four weekly gains as traders weighed prospects for another rate increase from the Federal Reserve against signs of a tighter market.
West Texas Intermediate dropped below US$77 a barrel after closing at a three-month high on Friday. That upswing was driven by expectations that supply cuts by Opec+ would reduce inventories, with International Energy Agency executive director Fatih Birol saying at the weekend the market could return to a deficit.
US central bank policymakers are widely expected to deliver another rate increase at this week’s meeting in their push to rein in inflation, and give guidance on the likelihood of additional moves. The tightening cycle risks tipping the world’s largest economy into recession, potentially harming demand.
Oil remains lower this year despite the recent run of gains and production cuts by the Organization of Petroleum Exporting Countries and its allies including Russia. On the demand side, China’s stalled recovery has been a persistent headwind for industrial commodities including crude.
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“Expectations of a Fed rate hike may be putting some pressure on the market but this hike should already be largely priced in,” said Warren Patterson, head of commodities strategy at ING Groep. “Ultimately, we believe oil prices will break out to the upside given the tightening fundamentals. However, there is some strong technical resistance nearby in the short term, in the form of the 200-day moving average.”