Oil Drops to $88 as Markets Brace for High Interest Rates to Stay Longer
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Oil Drops to $88 as Markets Brace for High Interest Rates to Stay Longer

Oil prices retreated on Wednesday as Fed's pledge to keep interest rates 'higher for longer' sparked demand concerns.
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Oil prices declined notably on Wednesday as the Federal Reserve’s ‘higher for longer’ approach continues to spook investors. Higher interest rates indicate that global economies can lower the oil output in the coming period, sending crude oil prices lower on demand concerns. 

Macroeconomic Challenges Offset Russia and S. Arabia’s Output Cuts

Oil prices slipped on Wednesday as demand fears triggered by the “higher for longer” interest rates overshadowed pledges by Saudi Arabia and Russia to continue cutting crude output until the end of 2023. As a result, Brent crude oil futures fell 3% to $88.15 a barrel at the time of writing, while the US WTI futures slid 3.04% to $86.5 a barrel. 

Meanwhile, the OPEC+ Joint Ministerial Monitoring Committee (JMMC) reiterated the organization’s output policy during the online meeting on Wednesday. The JMMC’s next meeting is scheduled for November 26. 

“Market attention has shifted from the focus on the short-term tightness to the implications of interest rates staying higher for longer, the subdued macro environment that entails, and how OPEC+ plans to deal with that when it meets on 26th November.”

– Investec analyst Callum Macpherson said.

In the meantime, Saudi Arabia’s Ministry of Energy said on Wednesday it will stick with its voluntary 1 million barrel per day (bpd) supply cut until the end of the year. Further, Russia will also keep up with 300,000 bpd export cuts and pledged to review its voluntary 500,000 output cut in November. 

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Fed’s ‘Higher for Longer’ Message 

The pressure on crude oil demand comes amid persistent macroeconomic headwinds caused by the recent Federal Reserve’s message that interest rates are set to stay higher for longer than anticipated.

The central bank reaffirmed its hawkishness after a strong batch of economic data and a still-hot US labor market showed that the fight against inflation is far from over. The latest US Consumer Price Index (CPI) print showed that the annual inflation rate rose to 3.7% in August – still notably higher than the Fed’s 2% target. 

While the Fed policymakers held its main interest rate steady in the 5.25% – 5.5% range, projections signaled that one more hike is likely coming in 2023. As a result of this ‘higher for longer’ rate narrative, the global bond yields have soared to multi-year highs while stocks and oil prices retreated.

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Do you think oil prices will continue declining throughout the remainder of 2023? Let us know in the comments below.