Oil Prices Fall As Economic Fears Override Fundamentals

Hamilton Nwosa
Writer

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Crude oil prices fell early this morning after closing Wednesday with a gain. Data showing China’s service sector contracted for the second month in a row and expectations that the U.S. Fed will continue with its aggressive rate-hiking approach have added to downward pressure.

Earlier in the week, unverified reports about a pending relaxation of China’s Covid restrictions pushed oil temporarily higher but in the absence of official confirmations either way the effect fizzled out quickly.

Now, it’s the latest reading of the Chinese Purchasing Managers’ Index that has weighed on oil prices. The October PMI reading, according to HSBC, stood at 48.4, which was lower than expectations and also lower than 50 – the level that separates growth from contraction.

Meanwhile, the Federal Reserve on Wednesday announced yet another rate hike, of 75 basis points suggesting it would stick to its hawkish stance, although Chairman Jerome Powell hinted that any further hikes may be more moderate.

So far, the Fed has been tightening monetary policy at the fastest rate in history, Reuters noted in a report on the news. What could perhaps be a cause for concern is the apparent lack of certainty about where these rate hikes would lead, and, by inference, how long the Fed would need to continue tightening, with all inherent risks,

The final destination of the rate-hike drive was “very uncertain… We’re going to find it over time,” the Fed’s Chairman said, as quoted by Reuters.

On the other hand, another weekly decline in U.S. crude oil inventories pushed oil prices higher yesterday. More bullishly perhaps, diesel inventories inched up very modestly last week, which, with total inventories much below the five-year average is bad news ahead of winter season when demand for diesel and other distillates increases.

“Every week that goes by, the U.S. is drawing hydrocarbon inventories, and that leads to the question of where does the industry turn when there are no more supplies from strategic petroleum reserve releases,” Reuters quoted Andrew Lipow from Lipow Oil Associates as saying. NB: Irina Slav wrote this article for Oilprice.com

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