Oil buckles to lowest since May as US Fed signals intent to taper

[NEW YORK] Oil tumbled again, dropping to the lowest level since May as the US Federal Reserve signalled it was set to start tapering asset purchases within months, hurting commodities and lifting the US dollar.

West Texas Intermediate futures fell 3.2 per cent, declining for a sixth straight day and sinking in tandem with equities and other raw materials such as copper and iron ore.

The Fed delivered a fresh blow to crude, which had already been weakening as the Delta virus variant hit demand in Asia. A surprise jump in US petrol stockpiles underscored the risks.

Oil's impressive rally in the first half of the year has lost momentum in July and August amid the threat to demand posed by the spread of the Delta variant, including in key importer China.

Gains in the US dollar in recent weeks have also weighed on crude, making commodities priced in the US currency more expensive. At the same time, the grouping of the Organization of the Petroleum Exporting Countries and its allies (Opec+) has pushed ahead with gradually restoring supplies.

"Economic growth concerns, stronger dollar and a risk-off environment are not helping oil," said Giovanni Staunovo, an analyst at UBS Group AG. "Demand will continue to recover in an uneven way over the coming weeks and the oil market remains undersupplied. So that should still support prices down the road."

To cushion the US economy from the blow inflicted by the pandemic, the Fed has been buying US$120 billion of assets every month, buoying commodities and stocks.

The minutes of the bank's July meeting showed that most participants now judged it could be appropriate to start reducing the pace of stimulus.

"The overall environment was fragile to begin with, so I think the Fed minutes yesterday just added another layer of fragility to that," said Howie Lee, an economist at Oversea-Chinese Banking Corp. "It's just broad risk aversion across markets."

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