Oil futures took a step back, falling about 1.0%, boosted by profit-taking following a rise to 10-month highs. There is also growing apprehension about the impact of high interest rates on oil declines.
Brent futures for November delivery, on their penultimate day as a front-month contract, fell 1.2% to $95.38 a barrel. Meanwhile, December Brent futures fell approximately 1.3% to $93.10 per barrel. On the US front, West Texas Intermediate (WTI) crude oil fell 2.1% to $91.71 per barrel.
Earlier, tight supply and inventory levels pushed the first-month Brent price to $97.69, its highest level since November 2022. At the same time, WTI hit a new high since August 2022. of $95.03.
Edward Moya, senior market analyst at OANDA, emphasized that oil was set for a pullback, with energy traders quickly locking in profits after coming within a few dollars of the $100 level.
Interest rate jitters, inflation concerns in focus
Some traders are expressing concern that high oil rig prices could exacerbate inflation, which could lead central banks, including the U.S. Federal Reserve, to persist with high interest rates.
High oil prices are currently acting as a driver of bearish sentiment among investors. Analysts at energy consulting firm Gelber & Associates have noted that these high oil prices could lead the Federal Reserve to maintain high interest rates for a longer period than initially anticipated in its efforts to combat inflation.
The US economy has maintained a fairly strong growth rate of 2.1% in the second quarter and appears to be gaining momentum, with a strong labor market driving substantial wage increases. Growth projections for the July-September quarter reach 4.9%. Still, concerns remain about a possible slowdown in the fourth quarter due to the possibility of a US government shutdown on October 1.
Fed officials are closely monitoring the super core price move after major interest rate increases since March 2022.
Crude oil inventories and dynamics of the oil trading platform
U.S. crude inventories have seen substantial declines due to combined cuts of 1.3 million barrels per day by Saudi Arabia and Russia, part of OPEC+.
In Cushing, Oklahoma, crude oil reserves, a crucial point for U.S. crude futures, are hovering near record lows, boosted by strong refining and export demand. However, concerns remain about the quality of the remaining oil.
The first-month WTI premium over the second month remains near a 14-month high, indicating a market structure known as forwardation. This occurs when spot prices exceed future prices, discouraging energy companies from storing fuel for future months.
The impact of rising oil prices on inflation and deficits
Rising oil prices could potentially affect inflation as well as fiscal and current account deficits. This could pose a challenge in the Reserve Bank of India’s upcoming monetary policy review.
India Ratings and Research does not foresee further falls in oil. However, that may greatly delay inflation relief beyond the current fiscal year. Wholesale inflation is expected to rise, leading to adjustments in the RBI’s inflation forecasts.
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