Oil futures: Crude slump continues ahead of Fed rate decision

Quantum Commodity Intelligence – Crude oil futures were again sharply lower Wednesday, hitting fresh six-week troughs as expected interest rate hikes in the US and Europe continued to weigh on sentiment.

Jul23 ICE Brent futures were trading at $72.60/b (1750 GMT), compared to the day's range of $71.70-75.58/b and Tuesday's settle of $75.32/b, having tumbled around 5% in the previous session.

At the same time, Jun23 NYMEX WTI was trading $68.83/b versus Tuesday's close of $71.66/b, but up from the day's low of $67.95/b.

Saxo bank said in its latest client note the Federal Reserve is expected to lift rates by 25 basis points at the FOMC meeting later Wednesday, although noted the market is centering on how willing the Fed is to confirm market expectations that this will be the last rate hike for the cycle, at least for now.

"Indeed, despite Fed pushback, the market continues to price that the economy will weaken sufficiently in the coming six months to see the Fed cutting rates as soon as September, with more than 50 basis points of easing priced through the December FOMC meeting," said Saxo

Recessionary fears continue to overwhelm oil fundamentals, with OPEC cuts largely sidelined.

"By all appearances, recession fears are the key factor currently dictating the direction of crude oil prices. Hence, downward price pressure could persist until it becomes clear that a significant recession will be avoided and growth in global oil demand won't be stunted," said Stephen Innes, managing partner SPI Asset Management.

The FOMC decision was scheduled for 2pm Eastern time, followed by a press conference at 2.30pm.

Europe

Analysts also expect the European Central Bank (ECB) to hike rates by another 25 bps at this Thursday's meeting, although a 50 bps increase has not been ruled out.

"Both a 25-basis point and a 50-basis point rate hike seem to be on the table," said ING economist Carsten Brzeski, adding there was a growing debate between "hawks" and "doves" about the impacts of tightening.

Eurozone inflation spiked to 7% in April, reversing the trend of five straight months of declines, in turn raising the likelihood of higher rates.

Oil prices barely reacted to American Petroleum Institute (API) data released late Tuesday, which showed a drop in US commercial crude inventories of nearly 4 million barrels last week, versus expectations of 1 million barrels, although this was in part offset by a 700,000 barrel increase at the Cushing delivery hub.

API figures also showed gasoline increased by 400,000 barrels, while distillate stocks posted a 1-million-barrel draw.

Prices also showed a similar muted reaction after data from the Energy Information Administration released Wednesday revealed a 1.3 million barrel draw in crude stocks.