Rate Hike Obsessions Cause More Weekly Losses For Crude

Disappointing China stimulus also accounted for Friday's losses: File Image/Pixabay

Crude traders on Friday continued to obsess over impending bank rate hikes, stoked mainly by the San Francisco Federal Reserve Bank stating that two more hikes this year were likely – and as a result oil extended its losses, albeit much less severely than in the previous session.

Brent declined 29 cents, or 0.4 percent, to $73.85 per barrel, while West Texas Intermediate fell 35 cents, or 0.5 percent, at $69.16; both benchmarks declined nearly 4 percent for the week, the most since May 5.

Dennis Kissler, senior vice president of trading at BOK Financial, summarized the trading environment by saying, "There seems to be a growing 'risk back off' type of trade now in crude, triggered by the interest rate rises in the European Union and disappointing stimulus numbers out of China."

Mary Daly, president at the San Francisco bank, told media that more hikes were "very reasonable" and added, "It is, in my judgment, prudent policy... to slow the pace of policy as you near the destination" of where rates need to be.

More bad news for investors on Friday came from data showing that Germany's economic activity lost more momentum than anticipated in June, while indications are strong that France's economy contracted in the second quarter.

As for China, media speculated that investors are waiting for a big burst of stimulus before they make more aggressive bets on a full economic recovery; however, Andy Maynard, head of equities at China Renaissance, remarked, "I can't believe that there is anymore bad news to absorb: the market has seemingly already discounted all negativities into the equation."

Compounding China's problems is that aggregate financing fell to 1.6 trillion yuan ($224 billion) in May, considerably lower than the median estimate of 1.9 trillion yuan.

But the central fear remains higher rates, and Robert Yawger, director of the futures division at Mizuho Securities USA, pointed out that higher rates increase the cost of carry, making everything from storing oil to shipping oil more expensive: "Fear of higher rates and the associated slowdown in economic activity is putting pressure on the oil patch."