Oil prices on Wednesday received another brutal pummelling from nervous traders, whose fear that the U.S. Federal Reserve would raise interest rates came true.
Brent settled down $2.99, or 4 percent, to $72.33 per barrel, the lowest close since December 2021; West Texas Intermediate settled down $3.06, or 4.3 percent, to $68.60.
The Fed raised rates by an expected quarter of a percentage point to the 5.00-5.25 percent range; chair Jerome Powell delivered mixed messages by stating it was unclear whether further increases will be warranted, and that there were signs of inflation slowing down – but risks of a tough credit crackdown by banks was still on the horizon (the European Central Bank is expected to raise rates at its policy meeting on Thursday)
Powell added that he hoped credit tightening and other fiscal measures would be enough to avoid a recession.
Phil Flynn, senior market analyst at Price Futures Group Inc., said, "The Fed going into a pause mode should be very supportive for the price of oil; the big question is whether or not we're going to have more shoes drop in the banking sector."
Flynn's remarks pertained to First Republic Bank being the third major U.S. institution to fail in two months, although JPMorgan Chase & Co agreed to take $173 billion of its loans, $30 billion of securities and $92 billion of deposits.
Crude traders on Wednesday were also spooked by government data showing U.S. gasoline inventories rising by 1.7 million barrels last week instead of the 1.2 million barrel drop they had anticipated; however, crude inventories fell by 1.3 million barrels compared with forecasts for a 1.1 million barrel drop.
All of this, combined with earlier reports of manufacturing in China falling unexpectedly, caused Morgan Stanley to lower its forecast for Brent prices to $75 per barrel by year-end, and the bank stated in a note that "prospects for a second half tightness have weakened."
The lone voice of optimism on Wednesday for the oil market came from Grant Smith, analyst at Bloomberg, who wrote that "Prices should still pick up from here: Brent futures for immediate delivery continue to command a premium known as backwardation, a reliable indicator that underlying demand is solid.
"And global oil markets remain on track to flip into a supply deficit this summer as Asia's economic rebound gathers momentum and supply growth around the world stays subdued."
But Smith concede that "as prices continue to sink, traders are showing that their faith in a year-end rally is fading."