Fed Fears Propel Crude Prices Further Downward As Aramco Warns Of Spare Oil Wipeout

Meanwhile, Russia's oil exports are falling: File Image/Pixabay

Presumably to the consternation of those who believe the recent fall in oil prices does not reflect the harsh physical realities of a tight global market, crude on Tuesday matched declining equity markets and dropped by over $1 per barrel in expectation that the U.S. Federal Reserve and other central banks from Europe to Asia will raise interest rates to curtail inflation.

West Texas Intermediate dropped $1.28 to settle at $84.45 per barrel, and Brent dropped $1.38 to $90.62 per barrel.

Dennis Kissler, senior vice president at Bok Financial Securities, said, "Macro-economic pressures from the Federal Reserve set to raise interest rates this week has added pressure back on the US stock market, which seems to be capping crude prices.

"Near term, prices are vulnerable to the Fed's rate rises and more Strategic Petroleum Reserve releases scheduled through November."

The idea that interest rate hikes will lead to all-out demand-crippling recession did not prevent Saudi Aramco on Tuesday from warning that spare production capacity in the oil market might be wiped out once economies rebound.

Amin Nassar, CEO of Aramco, said a lack of investment in fossil fuels was to blame for the global energy crisis and that when world economies rebound they will eliminate "the little spare oil production capacity out there; by the time the world wakes up to these blind spots, it may be too late to change course.

"I am seriously concerned."

Nasser added that oil and gas investments slumped from $700 billion in 2014 to $300 billion in 2021, and increases this year are "too little, too late."

Adding to Tuesday's gloomy news was a report that U.S. motorists drove less in July than the previous month, a second straight monthly decline, due to high gas prices, and this caused Robert Yawger, director of energy futures at Mizuho, to remark that "We're going to roll into turnaround season here, so it's neither driving season or heating season for the next six to seven weeks."

With regards to the interest rate hikes, Yawger commented that "The dollar is key and the Fed is key; they're going to kill demand for anything inflationary."

In other oil related news on Tuesday, Bloomberg reported that Russia's seaborne crude exports have fallen by almost 900,000 barrels per day (bpd) in two weeks, averaging 2.54 million bpd in the week to Sept. 16, compared with 3.42 million in the seven days to Sept. 2.

The news agency also noted that, "Flows to the big Asian buyers - China and India - aren't offsetting a drop in volumes for Europe."