Oil falls as looming U.S. rate hikes spook investors

The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant/File Photo

BEIJING, Jan 27 (Reuters) – Oil prices fell on Thursday as the U.S. dollar strengthened following signs that the Federal Reserve will tighten monetary policy soon in the world’s biggest oil user.

Futures pulled back amid a broader decline in financial markets after the Fed telegraphed a March interest rate increase and as the dollar climbed against its major peers. Dollar-denominated oil becomes more expensive for buyers using other currencies when the greenback gains. read more

Brent crude futures were down 31 cents, or 0.6%, to $89.44 a barrel at 0720 GMT, after earlier falling by as much as 1.1% to $89. Brent climbed 2% on Wednesday.

U.S. West Texas Intermediate (WTI) crude futures were down 58 cents, or 0.6%, to $86.77 a barrel, after falling by as much as 1.2% to $86.34. WTI gained 2% in the previous session.

“It could be a strong U.S. dollar at play after the Federal Open Markets Committee signalled rates will rise,” said Commonwealth Bank analyst Vivek Dhar.

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The dollar rose on higher U.S. Treasury yields, lifting the U.S. dollar index, which measures the greenback against major peers, to 96.604, near five-week highs.

Crude prices surged on Wednesday, with Brent climbing to $90 a barrel for the first time in seven years, amid tensions between Ukraine and Russia, the world’s second-largest oil producer, that have fanned fears of energy supply disruptions to Europe. read more

Commonwealth Bank’s Dhar echoed those concerns, while noting that efforts by OPEC and its allies, known as OPEC+, to boost supply also were not materialising and that demand has not been hit as badly by the rapid spread of the Omicron coronavirus variant as earlier feared.

OPEC missed its planned supply increase target in December, highlighting capacity constraints that are limiting supply as global demand recovers from the COVID-19 pandemic. read more

OPEC+ is gradually relaxing 2020’s output cuts as demand recovers from the demand collapse that year. But many smaller producers can’t raise supply and others have been wary of pumping too much in case of renewed COVID-19 setbacks.

“Continued supply challenges and mounting Russia-Ukraine tensions continue to support crude oil prices. It is down slightly today but I think it is nothing more than a technical move,” said Howie Lee, an economist at OCBC in Singapore.

Still, an increase in crude oil and gasoline inventories in the United States alleviated some of the concerns about supply.

Crude inventories rose by 2.4 million barrels in the week to Jan. 21 to 416.2 million barrels, compared with analysts’ expectations in a Reuters poll for a 728,000-barrel drop, the Energy Information Administration (EIA) said on Wednesday. read more

Gasoline stockpiles rose by 1.3 million barrels last week to 247.9 million barrels, the EIA said, the most since February 2021.

Reporting by Emily Chow; Editing by Christian Schmollinger and Kim Coghill

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