Oil slides with Fed’s hiking path souring financial markets

Oil erased earlier gains as the prospect of further large Federal Reserve interest rate hikes put markets on the back foot.

West Texas Intermediate futures slid 1.7 per cent.  The Fed raised interest rates by 75 basis points as it seeks to combat surging inflation. The US central bank signalled a willingness to accept a recession and a rise in unemployment in its resolve to contain elevated inflation. US equity futures signaled a potential rout when markets open. 

Despite the increasing risks for the global economy, crude is up more than 50% this year following a tightening of energy markets after Russia’s invasion of Ukraine. Global supply will struggle to meet rising demand in 2023, the International Energy Agency said in a monthly report on Wednesday. Goldman Sachs Group Inc. said on Thursday that the market has tightened quicker than they were expecting.

The war in Ukraine has fanned inflation worldwide, with US retail gasoline recently topping $5 a gallon. That has exacerbated inflation that is running at the hottest rate in 40 years and has forced central banks to embark on an aggressive rate tightening path.

“The rate hikes coming up triggered quite some profit taking on long positions,” said Hans van Cleef, senior energy economist at ABN Amro. “At the same time, downside was limited as the tight market conditions added a floor to the prices.”

Prices

  • WTI for July delivery fell two per cent to $113.02 a barrel at 8:06 a.m. in New York.
  • Brent for August settlement also declined 1.9 per cent to $116.20 a barrel.

The surge in prices is hitting consumers across the globe. Citigroup Inc. sees buyers of commodities paying producers about $5.2 trillion more in 2022 than they did three years ago. European airline Wizz Air said Thursday that it will reverse a post-pandemic policy of not hedging its fuel bill as oil prices surge. 

The slump in crude prices in recent days has been steep and WTI is trading more than $10 below its high for the week. That has also shown up in the structure of the futures curve where time spreads have weakened substantially. The US benchmark’s prompt spread – a gauge of how tight the market is – was trading at its weakest level in about a month on Thursday.

© 2022 Bloomberg L.P.

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