- Risk appetite fell on Wednesday as investors panicked due to a spike in US Treasury yields.
- Recent US data shows that the Fed might have to keep interest rates higher for longer.
- Crude inventories fell by 6.49 million barrels, beating.
Oil prices fell by 1% on Wednesday as investors worried about fuel demand due to the Fed’s higher-for-longer policy outlook. At the same time, a rally in the dollar made oil expensive for overseas buyers, leading to a drop in demand.
Oil vs dollar (Source: Nymex, Bloomberg)
Risk appetite fell on Wednesday as investors panicked due to a spike in US Treasury yields. As a result, they dumped equities and commodities and ran for safer assets like the dollar. The rally in yields reflected expectations for interest rates. At the same time, it came after a poor debt auction in the US.
Recent US data shows that the Fed might have to keep interest rates higher for longer to tame inflation. Business activity was better than expected in the manufacturing and services sectors, and consumer confidence soared in May. If the economy remains robust, prices will stay high, and the Fed will hesitate to cut interest rates.
High borrowing costs negatively impact oil demand. Consequently, the prospect of higher rates for a longer period is bearish for oil. Notably, the US consumer confidence report showed lingering inflation worries, with many consumers expecting high interest rates over the next year. This outlook will be tested on Friday when the US releases its core PCE price index report. Economists expect inflation to remain steady from the previous month.
Meanwhile, crude inventories data showed robust demand in the last week, putting a floor on oil declines. According to American Petroleum Institute data, inventories fell by 6.49 million barrels compared to forecasts for a 1.9 million barrel drop. However, Energy Information Administration data was delayed due to the US holiday on Monday.
Elsewhere, analysts believe members will maintain production cuts at the OPEC+ meeting on Sunday. Any surprise changes in policy could cause significant market volatility.
The International Monetary Fund upgraded its forecast for China’s economic growth this year from 4.6% to 5% after a solid Q1. This is bullish for oil, as a stronger economy could increase China’s fuel consumption.
In the Middle East, tensions continued as Israel raided Rafah and said the war would go on all year. This means that the risk of an escalation will remain, keeping traders cautious.
