Oil Slips Below $90 as Rising Interest Rates Dim Demand Prospects

By Ambar Warrick

Investing.com-- Oil prices extended losses on Thursday after the U.S. Federal Reserve struck a more hawkish tone than expected, raising concerns that heightened interest rates and inflation will weigh on crude demand in the coming months.

Crude prices sank in choppy trade on Wednesday after the Fed hiked interest rates by 75 basis points, as expected. But comments from Fed Chair Jerome Powell, who stated that more aggressive measures were needed to curb inflation, rattled markets with the prospect of tighter monetary policy.

Powell said the central bank is now willing to risk weakness in the economy and the labor market as it moves to rein in inflation. Other major central banks are also expected to hike rates to curb high inflation, with the Bank of England set to act later today.

On Thursday, London-traded Brent oil futures fell 0.4% to $89.56 a barrel, while U.S. West Texas Intermediate WTI crude futures dropped 0.3% to $82.72 a barrel by 20:39 ET (00:39 GMT).

Rising rates, coupled with heightened inflation, are expected to weigh on crude demand by eventually slowing economic growth. High interest rates also limit the spending ability of consumers, weighing on gasoline demand.

Strength in the dollar, which hit a 20-year high on Thursday, has also dented overseas crude demand this year by making oil imports more expensive.

Fears of these trends have dragged oil prices down from annual highs hit during the onset of the Russia-Ukraine war. Measures by the U.S. government to lower fuel prices have also flooded the market with crude, as the White House steadily drew from the Strategic Petroleum Reserve this year.

But an escalation in the Russia-Ukraine conflict could further disrupt Russian crude supply, indicating a potential upside for prices. President Vladimir Putin this week announced a partial mobilization of troops to “annex” certain Ukrainian territories.

Russia’s initial invasion of Ukraine had caused oil prices to skyrocket in February, given that major consumers in Europe and Asia rely heavily on Moscow for supplies. Tightening supply, particularly as the war escalates, could push oil prices higher.

A harsh European winter is also expected to boost crude demand as more countries switch to heating oil.