Rising interest rates cast a shadow on demand expectations, oil drops below 90 dollars
Oil prices extended losses on Thursday after the Fed used a more hawkish tone than expected, raising concerns that rising interest rates and inflation will put pressure on crude oil demand in the coming months.
Crude oil prices fluctuated on Wednesday after the Fed raised interest rates by 75 basis points as expected. However, Fed Chairman Jerome Powell
's comments indicating the need for more aggressive measures to curb inflation shook the markets in anticipation of tighter monetary policy.
Powell said the central bank was prepared to risk weakness in the economy and labor market to rein in inflation. While other major central banks are also expected to raise interest rates to contain high inflation, the Bank of England (BoE) will take action today.
On Thursday, Brent fell 0.4% to $89.56 while US WTI dropped 0.3% to $82.72.
Rising interest rates and inflation are expected to negatively impact crude oil demand by slowing economic growth. High interest rates also limit consumers' spending power, reducing gasoline demand.
The strengthening dollar, which hit a 20-year high on Thursday, has also reduced overseas demand for crude this year by making oil imports more expensive.
Fears about these trends have pushed oil prices down from yearly highs reached at the start of the Russia-Ukraine war. With the White House steadily drawing oil from the Strategic Petroleum Reserve (SPR) this year, US government measures to lower fuel prices have also flooded the market with crude.
But an escalation of the Russia-Ukraine conflict could further disrupt Russian crude supplies, signaling a potential upside for prices. President Vladimir Putin this week declared partial military mobilization to "annex" parts of Ukraine.
When Russia first invaded Ukraine, oil prices spiked in February as major consumers in Europe and Asia relied heavily on Moscow for supplies. Tightening supplies, especially as the war escalates, could push oil prices even higher.
A harsh European winter is also expected to boost demand for crude as countries switch to heating fuel.
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