Oil heads for weekly decline after BoE rate hike adds to global growth concerns; check key triggers
Oil prices have fallen for a second day after the Bank of England raised interest rates to a 15-year high, leading to concerns over economic growth. The bank raised rates in an attempt to combat UK inflation, which remains high at 8.7%.
Oil prices dropped for a second day on June 23 and was heading for a weekly decline, after Bank of England (BoE) lifted its key interest rate to 15-year high which added to concerns over economic growth. This outweighed the impact of lower US crude stocks and other signs of tighter supplies on oil prices. BoE beat Street estimates and hiked rates for the 13th time in a row to combat UK inflation, which is still stubbornly high at 8.7 per cent.
Both crude benchmarks had dropped about $3 in the previous session after BoE announced the interest rate hike. Brent crude slipped 91 cents, or 1.2 per cent, to $73.23 a barrel, while US West Texas Intermediate (WTI) crude was down $1.22, or 1.8 per cent, at $68.29.
Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a July 19 expiry, were last trading lower by at 1.68 per cent at ₹5,609 per bbl, having swung between ₹5,546 and ₹5,685 per bbl during the session, compared to their previous close of ₹5,705 per bbl.
Also Read: Oil declines over bearish impact from rate hikes, crude inventories in focus; what lies ahead?
Rate hikes, US dollar, and more: Key triggers for oil prices
Higher interest rates increase borrowing costs for businesses and consumers, which could slow economic growth and dim the oil demand outlook for the rest of the year. Along with the BoE, central banks in Norway and Switzerland have also recently hiked interest rates.
Moreover, the prospect of more US interest rate hikes added to headwinds. US Federal Reserve Chair Jerome Powell said this week two more rate hikes of 25 basis points each by the end of the year was “a pretty good guess.”
Gains in the dollar, drawing support from the hawkish comments from global central banks also weighed on oil prices. A strong dollar makes oil more expensive for other currency holders and can hit demand and indicate higher risk aversion among investors.
The recession and demand concerns outweighed the signs of supply-side tightness. This week's US inventory report showed crude stocks posted a surprise decline of 3.8 million barrels, according to Reuters.
In addition, Saudi Arabia's production cut of 1 million barrels per day in July is also set to tighten the market. The Organization of the Petroleum Exporting Countries and its allies led by Russia, or OPEC+ reached a deal earlier this month on output policy and decided to reduce overall production targets from 2024 by a further total of 1.4 million barrels per day (bpd).
What analysts say
"After yesterday's central banks' action, anxiety has palpably grown. Due to strengthening economic headwinds caused by recession fears, only conspicuous stock depletion will herald a protracted change in the currently ominous outlook,'' Tamas Varga of oil broker PVM told news agency Reuters.
Back home, analysts expect that correction in international commodity prices may not lead to significant correction in domestic markets but could sustain earnings growth on a quarterly basis.
‘’In the global context, central banks worldwide are currently focused on addressing inflation and have reiterated their commitment to achieving their target levels. This is reflected in the hawkish commentary from the Fed Chair and the rate hikes by the central banks,'' said Vinod Nair, Head of Research at Geojit Financial services.
‘’Conversely, the decision of Chinese central banks to cut rates after a 10-month pause has raised concerns about the health of the Chinese economy. Despite these global concerns, the domestic market is not anticipated to undergo a significant correction. This is due to favourable domestic economic indicators and a correction in international commodity prices, which are expected to sustain earnings growth on a QoQ basis,'' added Nair.
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