By Nicholas Earl
Oil prices dropped heavily today, amid growing expectations of interest rate hikes from the US Federal Reserve and European Central Bank this week.
Brent Crude has fallen 3.1 per cent to $76.85 per barrel in Tuesday’s afternoon trading, while US benchmark WTI Crude has dipped 3.4 per cent to $73.10 per barrel.
Prices were also weighed down by official data from Sunday which revealed that manufacturing activity in China, the world’s top crude importer, fell unexpectedly in April.
This marks the first contraction in the manufacturing purchasing managers’ index since December last year.
Rather than hoping for China’s economic resurgence, investors will likely look for market direction from expected interest rate hikes by inflation-fighting central banks, which could slow economic growth and dent energy demand.
The US Federal Reserve is expected to increase interest rates by another 25 basis points on Wednesday – while the ECB is also anticipated to raise rates at its regular policy meeting on Thursday.
Currently, US interest rates are set at 4.75-five per cent – as the central bank looks to tame inflation, which has been slowly declining over recent months.
Eurozone inflation has eased significantly from double-digit readings last year.
Nevertheless, it remains high – with ECB policymakers split between a move of 25 or 50 basis points.
As for other potential tailwinds for oil prices such as rebounding holiday demand from the pandemic, Saxo Bank’s head of commodity strategy Ole Hansen argued this was already predicted by investors.
He said: “The prospect for a busy holiday period has most likely already been cooked into the price of crude oil and not least the related fuel products. I do not believe a strong holiday season will have a material supportive impact on prices. Instead the market remains focused on the risk of an economic slowdown in the US and Europe together with Chinese recovery not being as strong as initially thought .”
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