Oil drops as likely Fed hike weighed against tightening market
Oil fell after four weekly gains as traders weighed prospects for another hike from the Federal Reserve against signs of a tighter market.
West Texas Intermediate dropped below $77 a barrel after closing at a three-month high Friday. That upswing was driven by expectations that supply cuts by OPEC+ would reduce inventories, with International Energy Agency Executive Director Fatih Birol saying at the weekend the market could return to a deficit.
US central bank policymakers are widely expected to deliver another rate increase at this week’s meeting in their push to rein in inflation, and give guidance on the likelihood of additional moves. The tightening cycle risks tipping the world’s largest economy into recession, potentially harming demand.
Oil remains lower this year despite the recent run of gains and production cuts by the Organization of Petroleum Exporting Countries and its allies including Russia. On the demand side, China’s stalled recovery has been a persistent headwind for industrial commodities including crude.
“Expectations of a Fed rate hike may be putting some pressure on the market but this hike should already be largely priced in,” said Warren Patterson, head of commodities strategy at ING Groep NV. “Ultimately, we believe oil prices will break out to the upside given the tightening fundamentals. However, there is some strong technical resistance nearby in the short term, in the form of the 200-day moving average.”
US benchmark WTI neared the 200-day moving average in April but failed to manage a close above that level. Prices have again approached the figure this month, which is less than 30 cents away. A similar challenge looms for Brent.
Among other metrics, there are signs of strength in the market’s underlying structure. WTI’s prompt spread — the difference between its two nearest contracts — was 30 cents a barrel in backwardation, a bullish pattern that’s at the widest since mid-November on a closing basis.
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Source: moneyweb.co.za
