Oil Falls For Third Straight Day On Hawkish Sentiment From U.S. Fed

However, fundamentals show a tight market that would let up any time soon: File Image/Pixabay

Oil prices on Thursday continued their downward trajectory, with traders this time influenced by the U.S. Federal Reserve raising the prospect of restrained economic growth – however, tight global supplies due to high demand continued to dominate analytical concerns.

West Texas Intermediate fell 20 cents to settle at $96.03 per barrel and Brent fell 49 cents to settle at $100.58 per barrel after Federal Reserve Bank of St. Louis president James Bullard said he favours raising interest rates significantly to counter inflation – a move that would presumably slow the economy.

Additionally, the U.S. Central Bank signalled that it will reduce its bond holdings at a maximum pace of $95 billion per month.

Ed Moya, senior market analyst at Oanda Corp, said, "This could drag down all risky assets, including commodities like oil."

Concerns were also stoked by the fact that while oil markets are still in backwardation, a significant narrowing of key differentials has occurred in recent days as traders reassess the outlook.

Still, in terms of fundamentals the market remains perilously tight, a situation exacerbated by the sanctions against Russia for its invasion of Ukraine and the widespread release of emergency reserves perceived as an ineffective solution.

Stewart Glickman, energy equity analyst at CFRA Research, noted that "The inability to replace Russian oil is really weighing on markets" and "these are short-term salves that the International Energy Agency and the U.S. are trying to apply to a situation that could persist for a very long time."

The sanctions are also taking a toll on energy companies: Shell on Thursday announced that it will write off between $4 and $5 billion in the value of its assets after pulling out of Russia; the company previously calculated that the Russia write-downs would reach $3.4 billion.

Shell also said its cash flow is expected to be hit by "very significant working capital outflows as price increases impacting inventory have led to a cash outflow of around $7 billion."

However, share prices for the energy giant is expected to remain resilient, and Russ Mould, investment director at AJ Bell, said this "reflects the fact that the company is also pointing to a big benefit from surging energy prices."

Meanwhile, yet another influence on Thursday's trading was news that some sanctions against Russia will take longer to implement than expected, case in point: sources told media that the European Union's ban on coal imports from the former Soviet Union is expected to take full effect in August instead of July.

One source remarked, "There seems to have been an effective German lobby to extend the phase out period for existing coal contracts to four months."