Oil prices slump as investors fear Federal Reserve rate hikes will hurt demand

OIL prices dropped by nearly US$2 a barrel on Thursday after another round of remarks from Federal Reserve Chair Jerome Powell fanned worries US interest rate hikes would slow economic growth.

Brent crude futures settled at US$110.05 a barrel, falling US$1.69, or 1.5 per cent. US West Texas Intermediate (WTI) crude futures settled at US$104.27 a barrel, down US$1.92, or 1.8 per cent.

Powell said the Fed’s focus on curbing inflation was “unconditional” and the labour market was unsustainably strong, comments that stoked fears of more rate hikes.

Investors have been paring positions in risky assets as they assess whether inflation-fighting central banks could push the world economy into recession with higher interest rates.

“If the US, and the rest of the world goes into a recession, you can significantly impact demand,” said Houston oil consultant Andrew Lipow.

Also, high petrol prices could be starting to slow demand, said Robert Yawger, director of energy futures at Mizuho in New York.

“That’s definitely worked its way into the conversation,” said Yawger, adding he thought petro still had room to rise.

US retail prices are currently averaging US$4.94 a gallon, down about 10 cents from the peak, according to AAA.

Major US oil refiners and Energy Secretary Jennifer Granholm emerged from an emergency meeting over the issue with no concrete solutions to lower prices, according to a source familiar with the discussions, but the two sides agreed to work together.

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The most recent estimates by the American Petroleum Institute, according to market sources, showed US crude and petrol inventories rising last week, which also weighed on prices, Yawger said.

Official weekly estimates for US oil inventories were scheduled to be released on Thursday but technical problems will delay those figures until next week, the US Energy Information Administration said, without giving a specific timeline.

Opec and allied producing countries including Russia will likely stick to a plan for accelerated output increases in August in hopes of easing crude prices and inflation as US President Joe Biden plans to visit Saudi Arabia, sources said.

The group known as Opec+ agreed at its last meeting on June 2 to boost output by 648,000 barrels a day in July, or 7 per cent of global demand, and by the same amount in August, up from the initial plan to add 432,000 bpd a month over three months until September. REUTERS