Oil Plummets After UK Bank Raises Interest Rates Half A Percentage Point

But analysts stick to predictions that prices will rebound later this year: File Image/Pixabay

After a momentary blip, the bearish sentiment that has plagued oil trading for most of 2023 returned  with a vengeance on Thursday, with the commodity plunging over 4 percent due to panic over a bigger than expected rate hike in the UK.

The Bank of England for its 13th consecutive rate hike jacked up interest rates by half a percentage point, and this was accompanied by the U.S. Federal Reserve chair stating that two more 25 basis point hikes by the end of the year was "a pretty good guess."

As a result, jittery traders caused Brent to settle down $2.98, or 3.9 percent, to $74.14 per barrel; West Texas Intermediate dropped $3.02, or 4.2 percent, at $69.51.

Thursday’s price declines extended to time spreads, with Brent’s prompt spread slumping to the weakest since late May and signalling robust supplies in the short term.

The rate hikes and the Fed’s hawkish stance completely eclipsed what would normally be considered good news: U.S. crude inventories fell by 3.8 million barrels in the last week to 463.3 million barrels, compared to expectations of a 300,000 barrel rise.

However, the Energy Information Administration also disclosed that gasoline stocks rose by about 480,000 barrels in the week to 221.4 million barrels, compared to expectations for a 100,000 barrel rise.

Still, the reaction to Thursday’s news baffled some analysts: Andrew Lipow, president of Lipow Oil Associates, 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."

For his part, John Kemp, commodities analyst at Reuters, wrote on Thursday that  Brent prices and spreads indicate the oil market is close to balance, “with upside risks from low inventories and supply restraint by Saudi Arabia and its OPEC allies offset by downside risks from a slowing global economy.”

Kemp added, “The prolonged calm has disappointed producers as well as investors hoping output cuts announced by OPEC⁺ in early April and an extra voluntary cut by Saudi Arabia announced in June would quickly push prices higher.”

Bart Melek, global head of commodity strategy at TD Securities, was another pundit who seemed bewildered by Thursday’s sell off and the craven attitude among traders of late; he noted, “The current negativity may very well be based on fears of the worst-case scenario, rather than the likely facts on the ground for the balance of the year.”

Melek went on to report that his bank still expects U.S. crude futures to approach $90 per barrel in the latter part of the year.