Oil Rally Dashed By Fed Fears And Despite Optimistic IEA Outlook

Also, a U.S. stock build was explained as entirely predictable: File Image/Pixabay

Although the meeting of the U.S. Federal Reserve on Wednesday met with expectations that interest rates would be left unchanged for the time being, the bank's projections of more hikes to come caused another drop in oil prices, this time by 1.5 percent.

Brent settled down $1.09, or 1.5 percent, at $73.20 per barrel, while West Texas Intermediate settled down $1.15, or 1.7 percent, at $68.27.

Fed officials stated that a strong economy will likely cause  borrowing costs to rise by another half percentage point by the end of this year; Fed chairman Jerome Powell said, "we've covered a lot of ground and the full effects of our tightening have yet to be felt," and he added that nearly all Fed officials expect more rate rises this year.

Phil Flynn, senior market analyst at Price Futures Group Inc. noted that "Markets fear that a higher interest rate environment is going to lower oil demand; the knee jerk reaction is pushing oil down."

Bearish sentiment on Wednesday was aided by the Energy Information Administration reporting that U.S. crude oil stocks rose by about 8 million barrels in the week ended June 9, compared to expectations for a 500,000 barrel decline; gasoline and diesel stocks also rose unexpectedly.

While Matt Smith, lead oil analyst for the Americas at Kpler said the builds ruined what was shaping up to be an oil price rally on Wednesday, "builds to the products are somewhat inevitable given strong refinery runs." 

Ironically, fears of demand destruction have repeatedly failed to be fulfilled in 2023 despite analytical hand-wringing, and the International Energy Agency accordingly increased its oil demand growth forecast for this year by 200,000 barrels per day (bpd) to 2.4 million bpd for a projected record total of 102.3 million bpd.

Projecting over the longer term, the IEA believed increasing use of electric vehicles will reduce growth to 400,000 bpd in 2028, for overall demand of a still impressive 105.7 million bpd.

The IEA even expressed optimism over something that has disappointment many analysts: China's economy post Covid lockdowns.

The agency pointed out that world oil markets may tighten "significantly" over the next few months as the country's fuel consumption rebounds; the IEA also acknowledged that a large batch of crude import quotas added to an improved outlook for consumption.