Brent plummets as interest rate hikes outweighs demand growth optimism

The front-month ICE Brent contract has plunged by $3.60/bbl on the day, to $72.99/bbl at 09.00 GMT.

PHOTO: Getty Images

Upward pressure:

Brent was supported modestly after the Energy Information Administration’s (EIA) latest weekly report suggested a surprise draw in commercial US crude stocks. Crude inventories were reduced by 3.8 million bbls to 463.3 million bbls in the week that ended on 16 June.

"A rebound in crude exports, dip in imports, and ongoing strength in refining activity have encouraged a draw to crude inventories," said Matt Smith, an analyst at Kpler.

The US rig count has also been reduced, OANDA analyst Ed Moya points out. “This supports the idea that production won’t be going up much further from the current level,” he writes in a note.

Downward pressure:

Brent futures reversed course, shedding previous gains after the Bank of England raised its interest rate by half a percentage point. Central banks in Switzerland and Norway followed with interest rate hikes of their own.

A rise in interest rates can increase borrowing costs for consumers and trigger speculations of a weakening global economy, ultimately affecting oil demand.

Moreover, hawkish signals from the US Federal Reserve’s (Fed) chairman Jerome Powell for further US interest rate hikes have put downward pressure on Brent. In a congressional testimony, the Fed’s chairman said this week that two more 25-basis point rate hikes by the end of 2023 was “a pretty good guess.”

“Oil prices are going to remain heavy as central bank tightening will kill the global growth outlook,” comments Ed Moya.

By Aparupa Mazumder 

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