Oil Plummets As Fed Announces Massive Interest Rate Increase

Meanwhile, analysts clash on demand outlook for 2022, '23: File Image/Pixabay.

West Texas Intermediate on Wednesday settled below $116 for the first time in two weeks after the Federal Reserve announced a 75 basis point rise in interest rates to curb inflation.

The Fed's biggest hike since 1994 also caused the dollar index to rise to its highest since 2002, with the stronger greenback making U.S. dollar-priced oil more expensive for holders of other currencies.

Traders also responded to gasoline demand falling to the lowest seasonally since 2013 (except for 2020 and the Covid lockdowns), resulting in WTI settling down $3.62 to $115.31 per barrel, and Brent settling down $2.66 to $118.51 per barrel.

According to the Energy Information Administration, crude inventories rose by 2 million barrels in the last week to 418.7 million barrels, compared with analysts' expectations of a 1.3 million barrel drop.

However, inventories in the Strategic Petroleum Reserve fell by 7.7 million barrels, the largest ever decline.

Rebecca Babin, senior energy trader at CIBC Private Wealth Management, remarked, "There is growing angst under the bull thesis and each data point is going to be heavily scrutinized for evidence of demand falling off.

"This leaves the market susceptible to both large moves higher and lower as investors are on a knife's edge."

Meanwhile, even though the previous session saw analysts forecasting a substantial drop-off in demand towards the end of this year and moving into 2023, the International Energy Agency in its latest monthly report said that a recovered China economy will bolster consumption and the sanctions against Russia will curtail production output – resulting in global oil supply struggling to meet rising demand throughout 2023.

The IEA stated that next year global demand growth will rise to 2.2 million barrels per day (bpd), while non-OPEC+ supplies will expand by 1.9 million bpd; and world consumption will average 101.6 million bpd, surpassing pre-pandemic levels.

But Toril Bosoni, head of the IEA's markets and industry division, conceded that this year at least "Higher prices, the weaker economic outlook is denting oil demand…we're seeing signs of a slowdown in transport fuels and in 2022 we're seeing oil supplies rising, being able to meet that demand mostly."

Similarly, the Organization of Petroleum Exporting Countries forecast global oil demand growth falling back after a strong performance in Q1 2022; however, the cartel expects consumption will continue to increase year-on-year by over 2 million bpd for the remainder of 2022.

In other oil related news on Wednesday, Gwede Mantashe, mineral resources and energy minister for South Africa, told media his government is considering joining China, India, and other countries in buying deeply discounted Russian oil to offset steep fuel prices.

"It is an idea," he said, adding that "Russian oil is not on the sanctions list."