Oil Dips Ahead of Fed Rate Decision, Anticipated U.S. Crude Build

By Barani Krishnan

Investing.com -- Oil prices fell a day before a Federal Reserve rate decision that’s likely to deliver a third straight substantial rate hike for the United States. 

The dollar also rallied for a third time in four sessions, adding to the weight on oil prices as industry analysts forecast a third straight weekly build in domestic crude stockpiles.

The dollar jumped on bets that the Fed will raise rates by 75 basis points for a third time in a row when it meets Wednesday to rein in inflation. Those expectations weighed across risk assets on Tuesday, including stocks, with Wall Street key indexes from the Dow to S&P 500 and Nasdaq all down nearly 2% each.

“The dollar is key and the Fed is key; they're going to kill demand for anything inflationary," Robert Yawger, director of energy futures at Mizuho in New York, said in comments carried by Reuters.

The Fed isn’t the only one considering higher rates – central bank policymakers in the United Kingdom, Switzerland and Japan will also meet during the week as the global fight against inflation intensifies. China, however, left its benchmark lending rates unchanged on Tuesday as the world's second-biggest oil user tries to balance sluggish economic growth against its weakening yuan currency. 

“Energy traders await a wrath of central bank decisions that will trigger mid-cycle slowdowns that will cripple the short-term crude demand outlook,” Ed Moya, analyst at online trading platform OANDA, said. “Commodities are broadly weaker as this week is all about aggressive monetary policy tightening to combat inflation.”

New York-traded West Texas Intermediate, which serves as the U.S. crude benchmark, settled down $1.28, or 1.5%, at $84.45 per barrel, after a session low at $83.03. 

Brent, the London-traded global benchmark for oil, settled down $1.38, or 1.5%, at $90.62 per barrel, versus its intraday low of $89.83.

Also weighing on oil was U.S. Transportation Department data showing domestic vehicle travel in July fell 3.3% to 286.6 billion miles, the second consecutive monthly decline in American driving in the face of high fuel prices.

Market participants are, meanwhile, on the lookout for U.S. weekly oil inventory data, due after market settlement from API, or the American Petroleum Institute.

API will release at approximately 16:30 ET (20:30 GMT) a snapshot of closing balances on U.S. crude, gasoline and distillates for the week ended September 16. The numbers serve as a precursor to official inventory data on the same due from the U.S. Energy Information Administration on Wednesday.

For last week, analysts tracked by Investing.com expect the EIA to report a crude stockpile build of 2.161 million barrels, versus the 2.442-million barrel rise reported during the week to September 9.

On the gasoline inventory front, the consensus is for a draw of 431,000 barrels over the 1.767-million barrel decline in the previous week.

With distillate stockpiles, the expectation is for a climb of 420,000 barrels versus the prior week’s gain of 4.219 million.