Oil prices experienced a modest decline of approximately 1% on Wednesday as two significant factors impacted the market. First, data revealed that U.S. crude inventories fell below expectations. Second, the Federal Reserve implemented a 0.25% increase in interest rates.
The decline affected both Brent crude futures and U.S. West Texas Intermediate (WTI) crude. Brent crude futures closed down 72 cents (0.9%) at $82.92 per barrel, while U.S. WTI crude settled at $78.78, a decrease of 85 cents (1.1%).
Earlier in the session, both benchmarks saw a decline of over $1 after reaching three-month highs on Tuesday.
The Federal Reserve’s decision marked its 11th rate hike in the last 12 meetings, setting the overnight interest rate in the 5.25%-5.50% range. The accompanying policy statement indicated the possibility of another increase.
As interest rates rise, businesses and consumers face higher borrowing costs, which could potentially lead to a slowdown in economic growth and a reduction in oil demand.
Simultaneously, U.S. crude inventories experienced a drawdown of 600,000 barrels the previous week, falling short of the estimated 2.35 million barrels drawdown. Industry figures from the American Petroleum Institute also indicated a 1.32 million-barrel build, further contributing to the market’s reaction.
Gasoline and diesel stocks also showed less drawdown than anticipated, based on data from the Energy Information Administration (EIA).
John Kilduff, a partner at Again Capital LLC in New York, commented on the situation, stating, “The drawdowns weren’t all that spectacular. It was a neutral to bearish report, plus the Federal Reserve rate hike can have a dampening hit on demand and prices.”
In the preceding weeks, oil prices had rallied due to signs of tighter supplies, largely influenced by output cuts from Saudi Arabia and Russia, as well as assurances from Chinese authorities to stabilize their economy as the world’s second-largest consumer of oil.
While the market expected Saudi Arabia to continue its output cuts into September, Reuters reported that Russia is planning to significantly increase oil loadings during that month, putting an end to steep export cuts.
Concerns remain regarding China’s ability to fulfill its policy pledges as the second-largest oil consumer globally. Warren Patterson, ING’s head commodities strategist, emphasized, “We still need to wait for actual policies – the risk is that these policies fall short of expectations.”
Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities, added, “The market will continue to be in a tug-of-war between tightening global supply and fears of slowing demand due to the global economic slowdown.
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