On Thursday, oil futures plunged 4%, as a larger than expected rate hike by the Bank of England triggered worries over the state of the economy, as well as fuel demand which outstripped support due to a surprise draw on US oil supplies.
Brent futures fell $2.98, or 3.9%, to $74.14 a barrel while U.S. West Texas Intermediate (WTI) crude futures dropped $3.02, or 4.2%, landing at $69.51.
The drop erased the previous session’s gains, which had been produced by US corn and soybean prices hitting multi-month highs. That triggered expectations that shortfalls in those crops might lower the amounts of biofuels available for blending, thereby increasing the demand for crude oil.
Meanwhile the Bank of England hiked interest rates by a larger-than-expected 50 basis points, in its battle with the persistent inflation domestically. It was the 13th straight rate hike by the central bank.
Oil fell in response off fears that higher interest rates will slow economic growth, which will reduce the demand for oil.
US Federal Reserve Chair Jerome Powell said it was “a pretty good guess” that in the US, there would be two more rate hikes by the end of the year, each raising rates by 25 basis points.
Phil Flynn, an analyst at Price Futures Group said, “We’re locked in a trading range but prices are held back by the concerns about the economy, the larger economy.”
Stocks, which will often follow oil, were also trading down.
On the supply side, in the US, crude inventories fell 3.8 million barrels over the last week to 463.3 million barrels. In a Reuters poll, analysts had predicted a 300,000 barrel rise.
The Energy Information Administration (EIA) released data showing gasoline stocks rose by roughly 480,000 barrels in the week, reaching 221.4 million barrels. Analysts polled by Reuters had expected a rise of 100,000 barrels.
EIA data also showed that distillate stockpiles, including diesel and heating oil were up by roughly 430,000 barrels for the week to 114.3 million barrels. Analysts had expected a 700,000 barrel rise.
Andrew Lipow, president of Lipow Oil Associates in Houston said, “Given the decline in crude oil and the very modest increases in refined products inventories, I would have thought we would get a better response from the market, but the crude oil and refined product market is simply being weighed down by higher interest rates.”
Now investors are awaiting factory activity data out of China which will come next week. That will give an idea of the strength of China’s economy and what its demand of crude will look like going forward.
One executive at US shale producer EOG Resources speculated that oil prices could still rise, as somewhat tepid increases at US producers would mix with cuts by OPEC+ producers to limit supply in the coming months.
