By Adedapo Adesanya
Crude oil dropped over 4 per cent to a three-month low on Tuesday despite a drop in the pace of inflation in the United States amid fears of a financial crisis that could reduce future oil demand.
Brent futures fell $3.32 or 4.1 per cent to settle at $77.45 a barrel, as the US West Texas Intermediate (WTI) crude declined by $3.47 or 4.6 per cent to trade at $71.33 per barrel.
Data released on Tuesday showed that US Consumer Price Index (CPI) rose 0.4 per cent to 6 per cent in February from 0.5 per cent in January.
That slight slowdown in consumer price growth prompted investors to price in a smaller rate hike by the Federal Reserve in March.
This poses a dilemma for the US Federal Reserve, whose fight to bring inflation to 2 per cent has been complicated by the collapse of two regional banks.
The US central bank uses higher interest rates to reduce inflation. But those higher rates increase consumer borrowing costs, which can slow the economy and reduce oil demand.
The markets widely expect the US central bank to approve another 0.25 percentage point increase to its benchmark federal funds rate.
The Fed’s next two-day meeting starts next Tuesday, March 21.
The failure of both Silicon Valley Bank (SVB) and Signature Bank in New York, which fell on Sunday, continues to send shockwaves through the markets, including the oil market, despite moves by US regulators to avoid a sector-wide collapse.
Goldman Sachs has predicted that the bank collapse will cause the Feds to change course and pause rate hikes during the meeting next week.
The Organisation of the Petroleum Exporting Countries (OPEC) lent support to prices after projecting higher oil demand in China, the world’s biggest oil importer, in 2023.
Following freedom from COVID-19 curbs, the cartel is optimistic that travels will rise again to pre-pandemic levels.
OPEC, however, left unchanged its forecast for world oil demand to increase by 2.32 million barrels per day, or 2.3 per cent, in 2023.
Dipo Olowookere