By Adedapo Adesanya
The crude oil market took a hit on Wednesday after the United States Federal Reserve increased the interest rate by 0.75 per cent, causing the Brent to nosedive by $2.7 or 2.2 per cent to $118.51 a barrel, with the West Texas Intermediate (WTI) depreciating by $3.62 or 3.04 per cent to $115.31 a barrel.
The action of the US apex bank yesterday was the highest hike since 1994, though the oil market was expecting it because of the rising inflation.
Earlier expectations were for a 50-basis-point hike but the shift in sentiment came after a strong consumer price index report for May raised expectations of a much higher rate hike.
The Fed also signalled that more rate hikes were to come, especially by another 0.75 per cent in July and 0.50 per cent in September.
In a Wednesday press release, the Federal Open Market Committee (FOMC), said “overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures”.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks,” the FOMC statement read.
The biggest hike by the US central bank since 1994 also sent the US Dollar higher with the Dollar index rising to its highest since 2002.
A stronger greenback makes oil more expensive for holders of other currencies, curtailing demand.
In addition, demand woes from China’s latest COVID outbreak have raised fears of a new phase of lockdowns.
This is happening as the Organisation of the Petroleum Exporting Countries and allies (OPEC+) is struggling to reach their monthly crude production quotas, recently hit by a political crisis that has reduced Libya’s output.
Analysts noted that because OPEC production is still falling short of the announced level, this would result in a supply deficit of around 1.5 million barrels per day on the oil market in the second half of the year.
These developments reduced the market’s focus on US stockpile data after the US Energy Information Administration (EIA) reported a crude oil inventory build of 2 million barrels for the week to June 10 compared with a build of 2 million barrels for the previous week.
