Oil prices drop for fourth consecutive session amid Fed rate hike concerns

Oil prices have dropped for the fourth consecutive session, following the release of minutes from a U.S. Federal Reserve meeting which suggested potential interest rate hikes if inflation remains high, a move that could negatively impact oil demand.

Brent crude futures fell 46 cents, or 0.6%, to $81.44 a barrel at 0424 GMT on Thursday. U.S. West Texas Intermediate (WTI) crude futures were down 54 cents, or 0.7%, at $77.03. Both benchmarks experienced a drop of more than 1% on Wednesday.

The minutes, released on Wednesday, indicated that the U.S. central bank may maintain its current policy rate but also discussed the possibility of further tightening if inflation risks materialize.

“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the minutes stated.

Higher interest rates increase borrowing costs, potentially limiting economic growth and oil demand in the world’s largest oil-consuming nation.

Market pressures were further exacerbated by the rise in U.S. crude stocks, which increased by 1.8 million barrels last week, as reported by the Energy Information Administration. This contrasts with the anticipated 2.5 million-barrel draw.

Globally, physical crude markets have been pressured by weak refinery demand and ample supply. Analysts from Citi highlighted recent market softness, noting “weaker data, including rising oil inventories, tepid demand, and refinery margin weakness and the increasing risk of run cuts.”

In related news, Russia reported exceeding its OPEC+ production quota in April for “technical reasons.” The Russian Energy Ministry stated it will soon present its compensation plan to the Organization of the Petroleum Exporting Countries (OPEC) Secretariat.

Despite these developments, Citi maintains its expectation that OPEC+, which includes OPEC and allies led by Russia, will continue its production cuts through the third quarter of this year, with the group set to meet on June 1. Citi also reiterated its forecast of Brent averaging $86 a barrel in the second quarter of 2024.