Oil Incurs Massive Daily Loss In Aftermath Of U.S. Fed Interest Hike

But analysts say market is too tight for more losses to occur: File Image/Pixabay

For the first time since April, oil on Friday was headed towards a weekly loss and incurred a massive daily loss due to monetary tightening by the U.S. Federal Reserve in a bid to curb skyrocketing inflation.

In the aftermath of the Fed announcing a 75 basis point rise in interest rates earlier this week, West Texas Intermediate fell a whopping $8.03 to close at $109.56 per barrel; Brent lost $6.69 to settle at $113.12 per barrel.

Edward Moya, senior market analyst at Oanda, said, "All the headlines seem to have turned bearish for oil and that could see further technical selling target the psychological US$100 a barrel level.

"Once this move lower is complete, oil should stabilize and trade comfortably above the US$100 a barrel level as potential disruptions from either further sanctions on Russia oil or hurricane season will keep supplies at dangerously low levels."

Christyan Malek, global head of energy strategy at JPMorgan, expressed a similar view: "I don't think the selloff will continue as we have major supply shortfalls such as in non-OPEC non-U.S. production and OPEC spare capacity; fundamentals for energy remain bullish and we recommend buying the dips."

Factors contributing to the tight market include Libya, which has suffered severe production cuts and whose oil minister said his country's output was down by 1.1 million barrels daily from 1.2 million barrels daily earlier this year; and also the fading hopes of a nuclear deal between the U.S. and Iran, which would have brought extra barrels online.

Another perceived negative factor is the Organization of the Petroleum Exporting Countries, which has refused to pump to the degree many nations would like to see; however, all eyes have refocused on the cartel as a possible means to alleviate the market shortage because by August the last of the output cuts the group made in 2020 will have been rolled back and OPEC delegates say they are now determining their next move.

Data from the International Energy Agency shows that once OPEC reaches reach its targets specified for August, Saudi Arabia and the United Arab Emirates will have roughly another 2.2 million daily barrels of unused output to deploy, or about 2 percent of global supply.

In other oil related news on Friday, alarm bells heralding another possible energy shortage in Europe this winter sounded in the wake of Russia's energy giant Gazprom stating that Russia will play by its own rules after the firm halved supplies to Germany.

Gazprom further limited supplies via the Nord Stream 1 pipeline running from Russia to Germany under the Baltic Sea, and reduced flows to Italy.

Alexei Miller, CEO of Gasprom, said  during the St. Petersburg International Economic Forum, "Our product, our rules; we don't play by rules we didn't create."

Robert Habeck, economy minister for Germany, slammed Russia's supply curbs – which include Finland, Poland, Bulgaria, Denmark's Orsted, Dutch firm GasTerra and energy giant Shell for its German contracts - as a "political decision" designed to unsettle the region and ramp up gas prices.

As for the efficacy of the sanctions against the former Soviet Union, Russia's deputy energy minister said on Friday that it expects its oil exports to increase in 2022 despite Western and European embargoes.