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Oil prices drop as Fed signals continued high rates

Oil prices drop

Oil prices experienced a notable decrease last Friday, with a drop of over 1%, which analysts attributed primarily to remarks from U.S. Federal Reserve officials. These comments indicated a likelihood of maintaining higher interest rates for a longer period than previously anticipated. This prospect alarmed investors who are sensitive to the cost of borrowing impacting economic growth and, consequently, the demand for commodities like oil.

On the trading floors, Brent crude oil's price fell by 1.38% closing at $82.72 per barrel, while its counterpart, U.S. West Texas Intermediate (WTI) crude, saw a decrease of 1.34%, ending the day at $78.20 per barrel. This downturn in oil prices on Friday contributed to a week that saw both major oil price benchmarks closing lower than they started, underscoring the market's nervousness about global economic robustness and ongoing inflationary pressures in the United States.

The drop in oil prices was further exacerbated by a strengthening U.S. dollar. The currency's rise came after comments from Lorie Logan, the President of the Dallas Federal Reserve, who voiced skepticism over whether the existing monetary policies were sufficiently strict to reduce inflation to the central bank's target level of 2%. A stronger dollar typically makes oil more expensive for holders of other currencies, which can dampen demand and push prices down.

John Kilduff, a partner at Again Capital LLC, highlighted how the Federal Reserve's recent communications have played a crucial role in tempering expectations for any imminent reductions in interest rates. The central bank's firm stance on maintaining higher rates to combat inflation has led to a recalibration of investor expectations, which has had a direct impact on the commodities market, including oil.

Additionally, the oil markets are facing pressure from a rise in U.S. fuel inventories, particularly at a time when the summer travel season is expected to ramp up, which usually leads to higher oil and gasoline consumption. The increase in stockpiles suggests that supply may be outpacing demand, which could further depress prices if the trend continues.

Jim Ritterbusch of Ritterbusch and Associates pointed to the current market dynamics, noting that recent declines in oil prices and lower-than-anticipated demand for gasoline and diesel in the U.S. might necessitate adjustments to demand forecasts. Such revisions would reflect the economic reality more accurately and could influence market expectations and pricing strategies.

Despite the decline in the number of active U.S. oil rigs, as reported by Baker Hughes, indicating a potential decrease in future oil supply, this data has had limited effect in supporting oil prices. The decrease in rig counts typically suggests a future drop in production, which could tighten supply and elevate prices. However, the current global economic context and the other pressures on prices have overshadowed this factor.

Looking ahead, the upcoming U.S. inflation data will be crucial. These figures are significant indicators for the Federal Reserve's monetary policy decisions regarding interest rates.

Higher inflation might lead the Fed to continue or even increase rates, which could cool economic activity and reduce oil demand. Conversely, lower inflation rates might ease these pressures. These dynamics are pivotal in shaping the global demand for oil and will influence future pricing strategies in the oil markets.

oil prices analysis, forex trading
XTI/USD daily chart, MetaTrader, 12.05.2024



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