As investors remained cautious due to lingering worries about a U.S. recession and declining oil demand, oil prices dropped in early trading on Thursday after increasing for the previous two sessions.
By 01:16 GMT, Brent crude had decreased by 19 cents, or 0.2%, to $87.14 per barrel, while U.S. West Texas Intermediate had decreased by 16 cents, or 0.2%, to $83.10.
The Federal Reserve is likely to stop raising interest rates, as evidenced by both benchmarks rising 2% on Wednesday to their highest levels in more than a month.
An urge to contain the oil price
Concerns are growing that the Fed’s focus on containing inflation may end up stifling economic growth and future oil demand in the United States due to the previous tightening, which has increased interest rates to their highest level since 2007.
According to Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd., the rally has ended because of concerns that a potential U.S. recession will reduce demand for crude oil. Investors also became more cautious as WTI increased above $83 a barrel, close to its highest technical cap since last December, he continued.
The Consumer Price Index (CPI) for the United States increased by 0.1% last month, less than the 0.2% gain that economists had predicted and down from a 0.4% increase in February. This has increased expectations that the Fed will likely stop raising rates after a potential increase in May.
However, a “mild recession” was predicted for later this year by the Fed staff assessing the potential effects of banking stress.
An analysis for oil price rise
The slight increase in U.S. crude oil stocks was ignored by the markets on Wednesday; they attributed it, in part, to lower exports at the beginning of the month and the release of oil from the country’s emergency reserve, which was required by Congress.
The Energy Information Administration reported on Wednesday that crude inventories increased by 597,000 barrels in the previous week, exceeding analysts’ expectations in a Reuters poll for a 600,000-barrel decrease. Distillate and petrol stocks did not draw as much as anticipated.
According to U.S. Energy Secretary Jennifer Granholm on Wednesday, the Biden administration intends to restock the U.S. Strategic Petroleum Reserve soon and hopes to do so at lower oil prices if doing so benefits taxpayers throughout the rest of the year.
However, the Organization of the Petroleum Exporting Countries (OPEC) and allies like Russia agreed to reduce output two weeks ago, sending the oil market surging higher.
Why is Opec+ reducing oil production?
Following a cut of two million barrels per day in October 2022, the most recent reduction of 1.16 million barrels per day was made. It immediately caused the price of oil to increase by 5% on global exchanges.
Since Saudi Arabia had recently stated that its production quotas would remain in place for the remainder of the year, Ms. Dourian says, “it came as a complete surprise.” It’s possible that Opec+ is acting preventively because it believes that oil demand will not be as strong as initially anticipated.
In response to the pandemic in 2020, the group reduced production by more than 9 million barrels per day. Because there were fewer buyers as nations went into lockdown, the price of crude oil fell. Prices peaked at over $130 per barrel after Russia invaded Ukraine, but by March of this year, they had dropped to 15-month lows, barely rising above $70.
Increased cost of living pressures will likely result from higher petrol prices in the UK and around the world. The latest action by Opec+ has been deemed “inadvisable” by the US.
As a result, the second half of 2023 may see tighter conditions on the world oil market, which would lead to higher prices, according to Fatih Birol, executive director of the International Energy Agency, on Wednesday.