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Business News/ Markets / Commodities/  Oil remains range-bound as rate cut hopes fade away: Here's how US Fed policy decision affects prices
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Oil remains range-bound as rate cut hopes fade away: Here's how US Fed policy decision affects prices

US Fed policymakers are now expected to wait longer before cutting interest rates. This could dampen economic growth and oil demand, and boosted the dollar to three-month peaks.

OPEC stuck to its forecast for relatively strong growth in global oil demand in 2024 and 2025Premium
OPEC stuck to its forecast for relatively strong growth in global oil demand in 2024 and 2025

After gaining around six per cent last week due to the Middle East conflict, oil prices have largely remained range-bound this week as rate cut hopes from the US Federal Reserve have faded away. Geopolitical factors also influenced oil markets, including conflicts in the Red Sea and Russia-Ukraine along with high US crude inventories.

The US Federal Reserve announced its interest rate decision on January 31, after a two-day Federal Open Market Committee (FOMC) meeting, leaving the benchmark interest rates unchanged at 5.25 per cent - 5.50 per cent for the fourth straight meeting, in line with Street estimates.

The US central bank ended its first policy-setting meeting of the year and unanimously voted to hold the policy rate at the 23-year high mark, but said it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two per cent."

Also Read: Bulls tighten grip over OMCs after 15,000 crore capex infusion; IOC, BPCL, HPCL hit 6-9% upper circuit

What is US Fed decide in its last meeting?

The rate-setting panel also said the “risks to achieving its employment and inflation goals are moving into better balance," ending roughly two years in which its bias has been to moving rates higher and the risks seen as tilted towards those posed by escalating prices.

"Inflation has eased over the past year, but remains elevated," Fed said in the statement, restating that officials "remain highly attentive to inflation risks."

The Fed's prior statement, issued in December 2023, had laid out the conditions under which it would consider "any additional policy firming," language that excluded any consideration of rate cuts. The language was a blow to investors who have been expecting rate cuts to start as early as March.

After raising the policy rate by 5.25 percentage points since March of 2022 in one of the swiftest Fed reactions to rising price pressures, the central bank has now kept the policy rate on hold since July as inflation edges closer to its target.

How does US Fed rate action impact crude oil prices?

US Fed policymakers are now expected to wait longer before cutting interest rates. This could dampen economic growth and oil demand, and it also boosted the dollar to three-month peaks, which reduces demand for oil among buyers paying in other currencies.

Also Read: ‘Oil markets well supplied’, says IEA as it raises 2024 global demand forecast; projects lower than OPEC

Also, crude oil is a major economic input, so a rise in oil prices contributes to inflation, which measures the overall rate of price increases across the economy. Higher oil prices contribute to inflation directly and by increasing the cost of inputs. Oil's potential to stoke inflation has declined as the US economy has become less dependent on it.

The Organization of the Petroleum Exporting Countries, in a monthly report, said world oil demand will rise by 2.25 million barrels per day (bpd) in 2024 and by 1.85 million bpd in 2025. Both forecasts were unchanged from last month.

OPEC on Tuesday stuck to its forecast for relatively strong growth in global oil demand in 2024 and 2025 and raised its economic growth forecasts for both years saying there was further upside potential.

Meanwhile, US crude oil inventories rose last week, while fuel stockpiles fell, according to American Petroleum Institute (API) figures. The API data showed crude stocks rose 8.52 million barrels in the week ended February 9, the sources said on condition of anonymity. Gasoline inventories fell 7.23 million barrels, and distillate stocks fell by 4.02 million barrels.

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Published: 14 Feb 2024, 10:09 PM IST
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