On Monday, the price of oil fell as concerns about the U.S. Federal Reserve potentially raising interest rates and weaker Chinese manufacturing data outweighed support from new OPEC+ supply cuts that were taking effect this month. Brent crude fell by 2% to $78.69 a barrel at 0947 GMT, while U.S. West Texas Intermediate (WTI) crude slid by 2.2% to trade at $75.12.
The U.S. Federal Reserve, which is meeting on May 2-3, is expected to increase interest rates by another 25 basis points. The U.S. dollar rose against a basket of currencies on Monday, making oil more expensive for other currency holders. This caused concern among experts, as “the prospect of further rate hikes to be announced by the Fed this week is expected to drive an increase in near-term price volatility,” according to Baden Moore, head of commodity and carbon strategy at National Australia Bank (NAB).
Furthermore, banking fears have weighed on oil in recent weeks. In the third major U.S. institution to fail in two months, First Republic Bank has been seized by United States regulators, and a deal was agreed to sell the bank to JPMorgan. The fear of further bank failures is contributing to the downward trend in oil prices.
Additionally, weak economic data from China is causing concern. China’s manufacturing purchasing managers’ index (PMI) declined from 51.9 in March to 49.2, slipping below the 50-point mark that separates expansion and contraction in activity on a monthly basis. This is an indication that China’s manufacturing sector is experiencing a contraction, which could negatively impact the demand for oil in the country.
Despite these concerns, there is some support for oil prices from voluntary output cuts by members of the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia. These cuts amount to around 1.16 million barrels per day and took effect from May. NAB’s Moore believes that the oil market will be in deficit through the remainder of the second quarter following these OPEC+ cuts. The bank expects the curbs plus higher demand to drive prices higher.
The combination of these factors has resulted in a mixed outlook for oil prices. While the OPEC+ cuts are expected to drive prices higher, the fear of further interest rate hikes by the Federal Reserve, weaker Chinese manufacturing data, and the fear of banking failures are weighing on oil prices. Experts are closely watching these factors to determine how they will impact the price of oil in the coming weeks and months.
The potential for interest rate hikes by the Federal Reserve is a major concern, as it could cause the dollar to strengthen further and make oil more expensive for other currency holders. This could negatively impact demand for oil and result in lower prices. On the other hand, the OPEC+ cuts are expected to reduce the supply of oil, which could lead to higher prices if demand remains steady or increases.
The weak manufacturing data from China is also a concern, as China is the world’s largest importer of crude oil. A contraction in China’s manufacturing sector could lead to a reduction in demand for oil, which could negatively impact prices.
The oil market is facing a mixed outlook due to a combination of factors. The fear of further interest rate hikes by the Federal Reserve, weaker Chinese manufacturing data, and the fear of banking failures are weighing on oil prices, while the OPEC+ cuts are expected to drive prices higher. Experts are closely watching these factors to determine how they will impact the price of oil in the coming weeks and months.