Crude Oil Higher; Fed Hike Decision in Spotlight

By Peter Nurse   

Investing.com -- Oil prices rose Monday, benefiting from a weaker dollar and rising risk sentiment, but expectations that the U.S. Federal Reserve will increase interest rates this week, potentially weighing on global economic growth and fuel demand, limited gains.

By 10:10 AM ET (1410 GMT), U.S. crude futures traded 1.4% higher at $96.05 a barrel, while the Brent contract rose 1% to $99.38.

U.S. Gasoline RBOB Futures were up 1.1% at $3.0608 a gallon.

The crude market has suffered over the last month, with both benchmark contracts over 12% lower in July, on fears that aggressive interest rate hikes, particularly by the U.S. central bank, could limit economic activity and thus cut fuel demand growth.

The European Central Bank surprised with a 50 basis point hike late last week, and the Fed is expected to continue tightening on Wednesday, with a 75 basis point increase widely expected.

The tone is more positive Monday, with risk sentiment on the rise at the start of the week, resulting in a weaker U.S. dollar. This helps the crude market as it makes it cheaper for foreign buyers to obtain the dollar-denominated commodity.

These gains have occurred despite OPEC member Libya stating over the weekend that it intends to bring back production to 1.2 million barrels per day in two weeks, from around 860,000 barrels per day.

“It is likely that domestic output will remain fairly volatile, something that the market has become accustomed to over recent years,” said analysts at ING, in a note.

That said, even with this additional supply the market remains tight overall and is expected to remain so for the foreseeable future given the disruptions in trading of Russian barrels because of Western sanctions amid the Ukraine conflict.

“Widely-expected plans for a price cap on Russian oil may have the opposite effect on oil prices than hoped for,” added ING. “The governor of Russia’s central bank has said that Russia would not supply crude oil to any country which caps prices.”

Gazprom resumed gas flows via Nord Stream 1 last week after a 10-day maintenance break, a move that had been in doubt given fears that Moscow would try to use this suspension for political purposes. However, the resumption has occurred at only 40% of the pipeline's capacity.

“EU energy ministers are planning to hold an emergency meeting tomorrow in order to discuss what steps member states can take to prepare for a potential stoppage in gas flows ahead of next winter,” ING added.