Oil prices rose early on Wednesday in Europe in subdued and choppy trade as the markets expect the Fed’s interest rate decision in the early afternoon ET.
As of 2:30 a.m. ET, the U.S. benchmark WTI Crude was up by 1.04% at $84.78. Brent Crude, the international benchmark, traded 1.09% higher at $91.57.
Oil prices settled lower on Tuesday, amid expectations that the Fed would announce another rate hike of 75 basis points, a third consecutive such increase.
Fears that the aggressive rate hikes would accelerate the economic slowdown and lead to a recession – thus depressing oil demand growth – have been weighing on the oil and equity markets in recent days.
The Fed has more work to do in taming inflation and the key interest rate needs to move up to above 4% by early 2023 and stay there, Cleveland Federal Reserve Bank President Loretta Mester said at the end of August.
The Fed’s current target policy rate is in the 2.25%-2.5% range, after two consecutive hikes of 75 basis points, or 0.75%.
Most analysts expect today’s Fed hike to be another 75 basis points, but many say it will be more important what the Fed says about future rate hikes to fight inflation and their expected impact on the economy.
According to the September CNBC Fed Survey, the Fed is expected to continue with the tightening policy until the rate peaks at 4.26% in March 2023.
Concerns about oil supply with the coming EU embargo on Russian oil provided some support to oil prices in the early morning in Europe on Wednesday. Seaborne crude oil exports out of Russia have dropped by 900,000 barrels per day (bpd) in the past two weeks compared to the last week of August, according to estimates by Bloomberg from earlier this week.
Yet, most oil traders – as well as the global financial markets – are not showing risk appetite as they await the Fed’s policy decision later today.
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By Tsvetana Paraskova for Oilprice.com
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In normal circumstances, a recession causes the global economy to shrink and also causes some destruction of oil demand. But we are currently in unusual circumstances where the global economy is headed towards a unique form of a harsh recession with hardly any spare demand to destruct.
The reason is that the global oil market is very tight while the global spare oil production capacity including OPEC+’s is continuing to shrink fast against a robust global oil demand.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert